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Misses estimates; downside likely to be limited

Container Corporation of India’s (CONCOR) Q4FY23 performance missed consensus estimates. Key points: 1) EBITDA margin declined further sequentially to 20.5% in Q4FY23 (vs 21.4% in Q3FY23); 2) EBITDA/teu rose slightly owing to better profitability of the domestic segment; 3) on origination basis, EXIM volumes fell 9.3% YoY while domestic volumes rose 9.5% YoY; 4) capex of Rs4.9bn was incurred in FY22 mainly for procuring rolling stock and opening new terminals; 5) Board has recommended the final dividend of Rs2/share, taking the FY23 dividend to Rs11/share.

Going ahead, management expects headwinds to persist in the (profitable) EXIM segment. That said, it expressed confidence that CONCOR would strive to recoup its lost market share and maintain EBITDA margin at FY23 levels. We estimate volume growth of 10% p.a. (FY23: 7.1% YoY) and EBITDA margin improvement to 21-22% (Q4FY23: 20.5%). We introduce FY25E numbers at this stage and roll over to FY25E EPS. We value the stock at 24x (corresponding to 1-SD above mean) FY25E EPS (earlier 26x). Our downward revision of multiple is due to headwinds persisting in EXIM. Our revised target price works out to Rs590 (earlier: Rs575) on 24x FY25E EPS. We upgrade the stock to REDUCE (from Sell) as we expect further downside to be limited owing to possible improvement in margins.

* Performance misses estimates. CONCOR reported EBITDA of Rs4.44bn (up 7.7% YoY, 4.3% QoQ) primarily on better realisation. Key points: 1) EXIM volumes (origination) declined 9.3% YoY to 484.5k-teu as external trade volumes were impacted by ongoing global trade distortions; 2) domestic volumes (origination) rose 9.5% YoY to 124k-teu as the company maintained its market share; 3) ‘other expenses’ increased significantly (~38.6% YoY, 73.1% QoQ) owing to one-off costs of Rs450mn; 5) operating margin was impacted by higher proportion of domestic volumes; 5) rail freight margin improved to ~26% (Q3FY23: 25.2%). Management mentioned that, going ahead, focus will be on regaining the lost market share in EXIM segment along with volume growth (~10% growth expected in FY24) while maintaining margins at existing levels.

* Headwinds persist though downside limited. The commencement of double-stack container trains from ICD Dadri to Mundra Port, and various schemes introduced to boost volumes, are likely to be earnings-accretive. However, we see the following risks: 1) EXIM volumes may remain subdued due to weak global environment; 2) domestic volumes typically fetch lower margins (18% vs 26% for EXIM); 3) EXIM market share continues to decline. Hence, in the near term, stock performance is likely to languish. That said, the current stock price reflects some of these risks, hence we expect the downside to be limited.

* Outlook: Margin decline is the key concern. We believe CONCOR’s EBITDA margin is likely to remain constrained between 21-22% through to FY25E amidst headwinds on the EXIM business. We introduce FY25E numbers at this stage and value the company at 24x FY25E EPS (earlier: 26x) resulting in a revised target price of Rs590 (earlier: Rs575). We upgrade the stock to REDUCE (from Sell).

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