Higher employee expenses will pressurise near-term EBITDA margins: Concor has implemented 3rd Pay Commission-related wage hikes, which we expect will lead to an adverse impact of 70-80bps on a recurring basis.
Concor’s q3FY18 top-line adjusted for SEIS income was largely in line, as shrinking lead distances continue to impact realisations. We maintain Neutral, as the stronger EXIM outlook is offset by margin pressure on higher wages. Recovery in EXIM trade is positive for Concor volumes: EXIM trade growth at major ports has been robust, though Concor’s revenue growth has lagged as lead distance (average freight carried distance) has declined following higher growth rates at eastern ports. We expect the lead distances to stabilise eventually, leading to stronger sales growth. Higher employee expenses will pressurise near-term EBITDA margins: Concor has implemented 3rd Pay Commission-related wage hikes, which we expect will lead to an adverse impact of 70-80bps on a recurring basis.
Unfavourable GST regime vs roadways impacting volumes: The GST rate for container train operators is pegged at 12%, while that for roads is 5%. Further, with fuel not being part of the GST regime but still being the largest expense item, there is no input tax credit for Concor. Impact of reduced lead distance will continue to affect realisations, at least until the Western DFC (Dedicated Freight Corridor) project is completed.
Valuation: Our EPS estimates are largely flat over FY19/20F despite 4/5% increases in revenues, due to higher staff costs. We value the stock at 16x FY20F EV/EBITDA (from Dec ’19F earlier) to arrive at our revised TP of Rs 1,422, implying 1.3% downside. Key upside risks are improving rail market share and reversal of GST tax differential, while further loss of share to roadways and delay in the DFC are key downside risks.