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Divestment can unlock value

Large non cash provisions booked by Container Corporation of India (Concor) in Q4FY21 leads to a miss, reported EBITDA at Rs1.9bn EBITDA was down 60% YoY and ~50% QoQ. Adjusted for the higher LLF expense and employee costs, we estimate EBITDA to be flat QoQ – still a miss when compared to peer performance, given the external margin triggers. Rs5.17bn of LLF sets up for a prospective FY22.

Valuations have largely shaken off the possibility for higher LLF incidence, while acknowledging higher probability of divestment as well. From here on real progress towards divestment and execution/profitability will drive performance. We downgrade Concor to HOLD from Add with a revised target of Rs563/share (Rs510 earlier).

* Margins muted. Even adjusting for non-cash provisions, a flat EBITDA QoQ, given 10% QoQ increase in origination volumes bears disappointment. Margin performance for Q4FY21 was constructively shaped given peer performance on the back of i) reduction in imbalance ii) increase in volumes leading to operating leverage, and iii) Indian railways offered rebate of 5% and 25% on laden and empty haulage charges. Providing for past disputed expenses, which looks like a plausible reason for muted EBITDA performance can lead to better visibility for divestment.

* Resolution of land license fee removes a key overhang. While Q4FY21 has witnessed high incidence related to LLF, as Concor clears out past dues of IR (including service tax demand and LLF demand on empty running), FY21 (core) LLF has been recorded at Rs5.17bn. While we await final communication on LLF from the Ministry of railways, the provision for FY21 shows the possible range of LLF incidence. The relative clarity on LLF removes a key cost overhang.

* DFC commissioning will be disproportionately beneficial for Concor. As DFC commissions, Concor is expected to witness i) Market share gains given the largest network of terminals along DFC without any meaningful incremental investment and ii) get all the tailwinds associated with the increasing rail share ( vis-à-vis road) – glimpses of which hare visible in the pandemic.

* Downgrade to HOLD from Add. There are obvious operating benefits for Concor with commissioning of DFC, and perhaps post divestment profitability/market share can be better balanced towards further stakeholder value creation. The valuation overhang involving LLF seems to have cleared. From here on ‘real’ progress towards divestment and execution/profitability will drive stock performance. We downgrade the stock to HOLD from Add with a revised target of Rs 563/share, post the recent outperformance.

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