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Divestment can unlock value

Container Corporation of India (Concor) reported a higher than expected Q1FY22 driven by better margins across EXIM and Domestic segment. Domestic EBIT/teu of Rs2,658 appears all time high. Domestic (handling) volumes are up 26% over Q1FY20 and EXIM originating volumes up 4% over Q1FY20 (has further room for improvement as market share loses stabilise).

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 maintain HOLD on Concor with a revised target of Rs603/share (Rs563 earlier).

* Margins are higher than expected. EXIM and domestic EBIT/teu witnessed a significant improvement, and the trajectory has outperformed peers. It was partly expected as i) Increase of TKD price got implemented from Apr,’1 ii) increase in volumes leading to operating leverage and iii) Concor offered 50% discount on the empty movement from ports to ICDs and this resulted in 266% additional movement of empties in the first 45 days of Q1FY22 (disclosed in Q4FY21 conference call).

* Resolution of land license fee has removed 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. Rs1137.8mn has been provided as LLF in Q1FY22. The assessment is post handing over of 17 railway terminals. Also management, in the last concall, has guided for signing a long term lease agreement ( for 35 years) with Indian railways for 24 terminals which are still operating on railway land (2 terminals are scheduled to be handed over to IR over the course of FY22/23E). The upfront payment at 99% of the current market value of the land under consideration has been assumed (by us) at ~ Rs70bn. With this upfront payment no further LLF needs to be paid for the next 35 years.

* 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.

* Maintain HOLD. 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 maintain HOLD with a revised target of Rs 603/share.

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