CCRI rating: Downgrade to ‘hold’, target price lowered to Rs 480

By: |
August 12, 2020 8:43 AM

In the notes to accounts to its Q1FY21 results, CCRI highlighted that it had received a demand of Rs 7.8bn from MoR as LLF for FY21 for just 2 terminals in Delhi (Okhla and Tughlakabad) which is significantly higher than Rs 4.5bn LLF as guided by CCRI management based on “its own assessment” for all 29 terminals.

CCRI rating, CCRI target price, LLF calculation, Dedicated Freight Corridor, LLF costs. latest news on CCRI ratingThe method of LLF calculation recently changed (from 1 April 2020) and is now based on land value.

Significant differences between ministry of railways and CCRI on valuation of leased land create a major headwind Q1 was a mixed bag: beat on revenue, miss on profitability Downgrade to Hold; lower TP to Rs 480 (was Rs 500). CCRI pays LLF to Indian Railways for terminals which are built on land leased from Indian Railways (29 terminals).

The method of LLF calculation recently changed (from 1 April 2020) and is now based on land value. In the notes to accounts to its Q1FY21 results, CCRI highlighted that it had received a demand of Rs 7.8bn from MoR as LLF for FY21 for just 2 terminals in Delhi (Okhla and Tughlakabad) which is significantly higher than Rs 4.5bn LLF as guided by CCRI management based on “its own assessment” for all 29 terminals.

With limited pricing power, we think materially higher LLF than assumed will impact earnings and valuations. For 2x higher LLF than currently assumed, required increase in pricing for same earnings is 6-7% over FY21-25e and fair valuation could decline ~40%.

While we like the prospects of a dominant public player becoming a private company, particularly when the industry outlook is likely to turn positive with the commissioning of the Dedicated Freight Corridor (DFC), we think current valuation (30x FY22e) fairly values this outlook given the overhang of uncertainty on likely LLF costs.

We keep our revenue estimates unchanged in this report; though we lower profitability forecasts following lower than expected margins in Q1. This has resulted in c4% cut in our EPS forecasts over FY21-23e.

We continue to value CCRI using a DCF methodology on a WACC of 10.0% (unchanged). While we have rolled over valuation from June 2020 to September 2020, it has been more than offset by cuts in earnings and higher inflation assumptions in LLF (7% vs 5%), resulting in 4% reduction in our target price to Rs 480. The shares are trading at 30x FY22e PE while our target price implies a FY22e PE of 32x.

Risks are significantly higher than currently assumed LLF is the key downside risk while stronger and much more profitable growth post DFC commissioning is the key upside risk.

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