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DFC commissioning to drive earnings growth

Clarity on LLF positive for earnings outlook

* CCRI’s 4QFY21 earnings were impacted by higher land license fee (LLF) provisioning, unaccounted liabilities, and higher employee costs, which resulted in a 57% miss to our EBITDA estimate. EBITDA declined 60% YoY to INR1.9b.

* Clarity on LLF payment (and the likelihood of a 35-year lease agreement with the railways) removes a key overhang on the stock.

* We maintain our FY22E/FY23E EBITDA estimate. We maintain our Buy rating on expected volume and margin benefits from the DFC.

Miss on EBITDA due to higher LLF and other provisions

* Revenue/EBITDA/PAT grew 24%/-60%/-68% YoY to INR19.4b/INR1.9b/INR1b and was 2%/57%/65% below our estimate due to higher LLF provisioning and one-time costs during 4QFY21.

* Blended realization improved 10% YoY to INR18,313/TEU (-2% v/s our estimate). EXIM/Domestic realization stood at INR16,117/INR27,722 per TEU, up 11%/5% YoY.

* Total volumes rose 13% YoY to 1,058,931 TEUs (in line), with EXIM/Domestic volumes at 858,544/200,387 TEUs (+11%/+21% YoY).

* LLF provisioning in 4QFY21 was higher at INR1.7b as full-year liability was settled at INR5.2b (against its guidance of INR4.5b). The company also provided for service tax and other liabilities not accounted for in the past (~INR1.3b). Moreover, it provided for INR0.7b towards post-retirement medical expenses of retired employees.

* Revenue/EBITDA/PAT stood at INR63.8b/INR10.3b/INR5.9b in FY21, down 1%/38%/42% YoY due to a volume decline of ~3% and an increase in LLF (INR5.2b v/s INR1.4b in FY20). OCF/capex/FCF stood at INR10.2b/INR4.6b/INR5.7b v/s INR42.7b/INR9.9b/INR32.8b in FY20.

* It also announced a dividend of INR2/share.

Highlights from the management commentary

* The management guided at 12%/100% YoY growth in FY22 revenue/PAT. Volumes are guided to improve by ~10% YoY.

* LLF liability would be limited to INR4.5b in FY22 at 6% of the market value of land. The company is also trying to enter into a 35-year lease arrangement for the terminals by paying an upfront 99% of the market value of land.

Valuation and view

* CCRI is a direct play on the upcoming large rail freight infrastructure (DFC).

* We expect ~40% CAGR in EBITDA over FY21-23E, led by healthy volume growth and margin improvement on operating leverage benefits.

* The stock trades at 16.7x FY23E EV/EBITDA. We derive a DCF-based TP of INR745/share based on a WACC of 11.5%.

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