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Lower LLF provisioning drives EBITDA; volume growth set to improve

* Container Corporation (CCRI) reported volume growth of 8% YoY in 2QFY24. Revenues increased 11% YoY to INR21.9b in 2QFY24 (6% above our estimate). Total volumes increased 8% YoY to 1.23m TEUs with EXIM/Domestic volumes at 0.97m/0.26m TEUs (up 4%/up 26% YoY). Domestic volumes were 17% above our estimate, while EXIM volumes were largely in line with our estimate.

* Blended realization increased 3% YoY to INR17,797/TEU. EXIM/Domestic realization stood at INR14,888/INR28,605 per TEU (up 6%/down 9% YoY). ? EBITDA margin came in at 24.5% (vs. our estimate of 21.3%). Margin was down 80bp YoY. EBITDA increased ~8% YoY to INR5.4b (against our estimate of INR4.4b).

* Land License fee for 2QFY24 stood at INR850m (INR1.3b in 1QFY24). The LLF for 1HFY24 stands at INR 2.15b (compared to INR 1.91b in 1HFY23). Recently, one terminal was surrendered, and another will be partially surrendered in 3QFY24. Therefore, the LLF for FY24 and FY25 will be ~INR 4.5-4.6b. Strong operating performance led to growth of 18% YoY in PAT (31% above our estimate of INR 2.7b)

* Volumes are expected to register double-digit growth, driven by a) pick up in EXIM volumes b) continued momentum in domestic volumes and c) commissioning of the DFC from Mundra to Dadri. As EXIM volumes pick up, the margins are expected to remain strong ahead. Lower than previously estimated LLF provisioning of INR 4.5b for FY24 and FY25 would also support margins. We raise our EPS estimates for FY24/25 by ~12%/5%, factoring in higher volume growth and lower LLF provisioning. We reiterate our BUY rating with a revised DCF-based TP of INR840.

Highlights from the management commentary

* EXIM volumes increased due to the 1+1 scheme. Within EXIM volumes, imports continue to show strength and are expected to remain steady throughout the remainder of FY24, while exports are weaker due to geopolitical factors.

* For FMCG cargo, the company has ordered 1,000 containers with a height of 12 ft. (height of normal container is ~8.6 feet). Of these, 180 containers have already been received. The FMCG sector will be a key focus area, and trials have been conducted with certain clients. Increased FMCG share is expected to lead to improved domestic business, with a projected 25% YoY growth in domestic volumes for FY24.

* The DFC connecting Mundra to Dadri became operational in May’23. This development allowed the company to redirect a significant portion of its business from road to rail.

* CCRI’s market share at various ports in 1HFY24 stood as follows: JNPT - 60%, Mundra - 36%, Pipavav - 45%.

Valuation and view

* EXIM volumes are expected to improve, driven by higher imports ahead. The domestic volumes, on the other hand, are expected to continue growth momentum with overall market growing and newer commodities being transported via rail. These were earlier transported only by roads. The services offered by CCRI, including first-mile and last-mile connectivity, are also contributing significantly to gaining traction. Lastly, the Company is providing competitive pricing on certain routes to ensure volume growth momentum continues.

* We expect 12% volume CAGR over FY23-25. The EBITDA margins are expected to be in the 23-24% range in FY24 and FY25, while the LLF is expected to be about INR4.5b. The stock trades at 15.6x FY25E EV/EBITDA. We reiterate our BUY rating on CCRI with a DCF-based TP of INR840.

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