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Buy Container Corporation of India Ltd For Target Rs.2,948 - HDFC Securities

Our Take:

CONCOR is a “Navratna” company with 54.80% GoI holding. The company has carried 43.50 million tons of containerized cargo by rail representing 72.09% of total market size. It has two division - EXIM and domestic terminals. CONCOR is focused on expanding its facilities in coming years which will support volume growth. By focusing on providing complete logistics package to clients, CONCOR can command higher realization.

We expect that Covid-19 led lockdown and slowdown in the economy will lead to degrowth in revenue for FY21E. Volume degrowth will lead to degrowth in revenue and EBIDTA.

Also, Land License Fees (LLF) demanded from April 01, 2020 is much higher than the expectation of CONCOR. This will pressurize profitability going forward if LLF not get revised to downward. Government is working on reducing LLF but still it has no certainty.

Valuations and Recommendations:

We expect that the company will get benefits from the strong market share, leadership position, strong balance sheet but Covid-19 led lockdown will adversely impact with lower revenue growth, fall in volume; and probable increase in land license fees (LLF) would lead to 10% CAGR in top-line and 2% EPS CAGR over FY20-23E. Any policy decision on LLF is a key variable in the near future and can impact the stock price and divestment timeline. CONCOR remains a structural growth story that will play a pivotal role in the changing Indian logistics landscape (DFC, cargo containerisation). Until clarity on LLF emerges, the stock price will be driven by news flow around the same. Also the fact that LLF could be changed, if there is change in ownership can be a dampener for divestment as the bidder would like to have a clarity on the outgo for some years.

The freight charges have to rise anywhere between 10-14% in case the Railways demand for LLF is met. Also, if Railways raise demand for the balance 15 terminals, then the rates have to be raised further, which in current competitive scenario seems difficult. Also, the 7% annual hike demanded by the Railways seems to be on the higher side given the fact that realization per TEU have risen by 0% over the past 6 years and alternative modes of transport also need to raise freight rates year after year so as to allow CONCOR to raise rates by atleast 3-4% p.a. to offset the 7% annual hike by Railways. All this can be mitigated if the traffic post DFC rises sharply.

The stock is currently traded at 24.3x FY22E P/E, 13.4xFY22E EV/EBITDA. We feel the base case fair value of the stock is Rs.393 (24.3x FY22E P/E, 13.4xFY22E EV/EBITDA ) and Bull case the fair value of the stock is Rs.435 (26.9x FY22E P/E, 15.1xFY22E EV/EBITDA). Investors willing to take some risk can look to buy the stock on falls to Rs.353-355 band (21.9x FY22E P/E, 11.9xFY22E EV/EBITDA) and add more on dips to Rs.319-321 band (19.8x FY22E P/E, 10.5xFY22E EV/EBITDA).

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