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Strong push on domestic growth

Concor’s Q3FY22 earnings were below estimate due to higher empty running costs led by trade imbalance. PAT grew by 20.4% YoY to Rs2.9bn (estimate: Rs3.1bn). Revenue grew by 9.5% YoY to Rs19.2bn (estimate: Rs19.9bn). EBITDA grew by 22.5% YoY to Rs4.6bn with EBITDA margin of 23.7% (estimate: 24.8%). Management indicated that domestic business is on a strong growth trajectory led by incremental cargo in commodities led by Cement, foodgrains, industrial salts etc. Also, the company is seeing potential in increase in movement of containers by Rail led by DFC benefits and increase in transit assured operationsfrom 30-40% presently to 80-90% going forward. We value Concor at 18x average (FY23-24E) EBITDA with TP of Rs737. Maintain Buy.

PAT impacted due to higher empty handling; EXIM growth lags

Total originating volumes grew by 5.4% YoY to 647k TEUs. EXIM volume growth was muted at 2.4% YoY to 549k TEUs as imports remained weak. Domestic volume growth was robust at 26% YoY to 97k TEUs led by new business initiatives. EXIM realizations declined by 3.4% QoQ despite Rs1000/TEU tariff hike starting Oct-21 due to increase in empty containers handled in the import direction (Concor gives 50% discount on empty container charges). EBIT grew by 5% qoq to Rs5608/TEU (estimate: Rs5900/TEU) aided by higher double stacking (1000 trains in Q3 vs. 803 trains in Q2). Domestic realizations grew 4% qoq but EBIT declined sharply by 30% QoQ to Rs4205/TEU due to higher burden of empty running charges (Rs80-100m higher qoq; impact Rs1777/TEU on EBIT).

Strong push on domestic volumes led by incremental cargo from cement, foodgrains

Concor’s domestic business is on a strong growth trajectory led by incremental cargo in commodities like cement, foodgrains, industrial salts, etc. Concor guided for domestic volumes of 12mt for FY22 (9MFY22: 8.5mt). However, there is incremental potential to add 5-10mt from handling bulk cement in next few years. We expect domestic volumes to grow at 20% CAGR to 547k TEUs over FY22-24E. To support this growth, Concor is adding/upgrading to high payload rakes and increasing ownership of containers to 56k from 38k currently. Margins expansion however likely to be restricted.

Benefits of DFC and assured time to customers could drive road to rail shift

Rail coefficient at Mundra is 27.5% (26% earlier) which can increase by 500bps once certain bottlenecks in feeder network are resolved. Rail coefficient at JNPT remains at ~19% and is expected to increase once JNPT is connected to the DFC. Currently, Concor’s 30-40% operations run on transit assured basis which the company expects can increase to 80-90% over the next 6 months. This will be a huge boost for shift from road to rail.

Structural positives and growth resurgence support premium valuations; BUY

Concor’s robust cash flows continue to support its elevated capex spends, leading to a debt-free balance sheet. This puts it in a position of strength to benefit from an expected growth resurgence and to take advantage of emerging opportunities in the sector. A structural and positive change in Indian Railways’ approach towards freight and DFC-led growth resurgence support the stock’s premium valuations. We value Concor at 18x average (FY23-24E) EBITDA and arrive at TP of Rs737. Maintain Buy.

Valuations

We expect a growth resurgence for CTO/Concor, led by improved reliability and efficiency of rail transport post operationalization of the DFC. Indian Railways’ renewed approach of increasing its modal share in freight through capacity creation and targeted reductions in tariffs is a structural positive. We build in 14% CAGR in originating volumes for Concor over FY22-24, leading to 17%/18% revenue/earnings CAGR over the same period. Concor’s robust cash flows continue to support its elevated capex spends, leading to a debt- free balance sheet. The stock trades at 16.3x/13.9x FY23E/FY24E EBITDA and Concor’s premium valuations remain supported by its strong credentials and an expected growth resurgence. Maintain BUY with a price target of Rs737 based on 18x average of FY23-24E EBITDA.

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