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Commissioning of DFCs – a key growth catalyst

In this report, we delve deep into Container Corporation of India (CONCOR)’s FY22 Annual Report and present the key takeaways below:

Strong growth in Domestic business; focusing on profitability aggressively

* During FY22, CONCOR handled 47.7 MT of containerized cargo by rail v/s 42 MT in FY21 (reporting 13.5% YoY growth). In terms of TEU’s, CONCOR achieved throughput of 4.1m TEUs in FY22 v/s 3.6m in FY21 (posting 11.8% growth). While EXIM volumes grew 8% YoY, domestic volumes spiked 32% YoY in FY22.

* Over the years, the company has developed its infrastructure, and it now operates 61 terminals across India of which six are pure EXIM terminals, 36 are combined container terminals and 17 are pure domestic terminals. CONCOR has also entered into two strategic tie-ups at various locations.

* The company is increasingly focusing on profitability and continues to operate more on long-lead profitable routes where it faces lower competition. CONCOR is also enhancing its value-added services and looking to generate higher margins from terminal handling and logistics solutions.

Strong growth despite a challenging economic environment; higher volumes and efficiency lead to earnings improvement

* Driven by strong volumes in the Domestic segment, CONCOR’s revenue grew 19% YoY to INR75.95b in FY22 from INR63.8b in FY21.

* The company generated 23% margin in FY22 (16% in FY21) underpinned by its strong focus on profitability and discontinuation of the low-margin shorter routes. ? CONCOR’s net profit more than doubled to INR10.6b in FY22 (INR 5.9b in FY21) propelled by its strong operating performance.

* The company incurred capex of ~INR6b in FY22 mainly because of terminal development/expansion, wagon acquisition and handling equipment.

* The Land License Fee (LLF) for FY22 stood at INR4.7b. The Union Cabinet recently approved the land license policy on long-term leasing of Railways Land (link). The new policy provides leasing of railway land for a period of 35 years @ 1.5% of market value of land per annum (currently, LLF is calculated @6% of market value of land). Existing entities, such as CONCOR, will have the option to switch to the new regime after a transparent and competitive bidding process. A comprehensive policy document will be framed and implemented within 90 days of cabinet approval.

Robust infrastructure allows efficient operations

* At end-FY22, total wagons operated by CONCOR (including leased wagons) stood at 16,679. Additionally, it also had 37,431 containers (owned and leased) as part of its operations. CONCOR has floated a tender for procuring 10,000 more containers.

* Further, the company owns 108 reach stackers, 14 gantry cranes and 31 reefer power packs of different capacity. This kind of infrastructure allows CONCOR to manage high volumes efficiently.

Government’s initiative to provide significant tailwind to the logistics sector

* The dedicated freight corridor (DFC) would be a big volume growth trigger beyond FY24 for CONCOR. Over the next two years, a large part of the Western DFC is likely to be commissioned that would lead to strong volume growth and margin improvement for large players like CONCOR.

* In the Union Budget 2022, emphasis has been laid on the development of multimodal Logistics Parks (MMLPs), Roads and Cargo Terminals. Work has started on the key pillars for infrastructure development i.e. National Infrastructure Pipeline (NIP), National Monetisation Pipeline (NMP) and PM Gati Shakti, which will go a long way for the sustainable development of the country.

* The government’s initiatives such as: a) ‘Aatmanirbhar Bharat', b) setting up a target of 25,000 km of new highways, c) Gati Shakti Masterplan for expressways, and d) 100 new cargo terminals with MMLPs will provide a big boost to logistics facilities.

Focus on ESG initiatives

* CONCOR has recently developed a complete ‘dust proof and moisture free’ solution for loading /unloading of bulk cement and fly ash into the silo and bulker through 20’ ISO standard containers. This bulk cement handling equipment is cost effective and environment friendly.

* CONCOR, in collaboration with Mahavir International, Delhi provided free of cost Covishield vaccine to ~9,200 stakeholders in Delhi-NCR area.

* The company was actively involved in: a) setting up of infrastructure and providing health equipment to Primary Health Centers in the Tribal Area in Asifabad, and b) supplying medical equipment to the hospitals and PHCs of Paderu Agency Area. ? The Board of Directors comprised four Executive Functional Directors, including a Chairman and Managing Director, two part-time Directors (Government Nominee) and five part-time Non-Official (Independent) Directors.

Valuation and view: Domestic volumes to drive growth further; retain BUY

* We expect volumes to pick up further with the phase-wise commissioning of DFCs, thereby leading to 18% revenue CAGR during FY22-24E. The LLF for FY23 is expected to be at INR3.7b, lower than the earlier guidance.

* Backed by lower LLF and efficiency improvement from DFC commissioning, we expect EBITDA margin to improve to ~24% levels, resulting in 23% EBITDA CAGR over FY22-24E for the company.

* We believe the company would be one of the biggest beneficiaries of DFC commissioning. Besides, we have not incorporated the possible cost savings that could materialize from the new land leasing policy as the comprehensive policy document would be available 90 days post cabinet approval. Any benefits arising due to this policy would be incremental to the financial performance and target price. We maintain our BUY rating on the stock with a DCF-based TP of INR870, implying an FY24E EV/EBITDA of 18x

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