Despite this near-term pain, the Western DFC has the potential to double India’s container rail ecosystem, in our view.
Weak volumes cast a shadow on growth guidance:
Container Corp’s (Concor) FY20 volume growth guidance of 10-12% now looks even more difficult to achieve with August 2019 container rail volumes falling 3%. YTD, overall container rail volume is up mere 3% y-o-y, which poses risk to the company’s FY20/21E earnings. Moreover, Concor’s recent market share loss has added to investors’ concerns.
Despite this near-term pain, the Western DFC has the potential to double India’s container rail ecosystem, in our view. This long-term promise balances the near-term concerns, to an extent. However, as the DFC’s first full year of operations is likely to be FY23 (entire 1,800 km), we believe a meaningful re-rating for Concor is likely four to six quarters away. Retain ‘Hold’ with a target price of Rs 570.
Poor August volumes further challenge growth guidance:
Overall container rail volume growth slipped in to negative zone in August (down 3% y-o-y), which will add to Concor’s FY20 volume growth woes. India’s YTD container rail volume growth languishes at 3% given the current slowdown. This trend now strongly challenges Concor’s annual volume growth guidance of 10-12% (Q1 was down 5%) and has created room for disappointment.
Street’s FY20 volume growth estimates are lower than guidance, but still at 7-8%, which will be difficult to meet, in our view. Looking at the near term, Q2FY20 looks another weak quarter in the offing, with July-August volume growth flat so far. Near-term pain to persist;
long-term potential exists:
First 600-km stretch of the Western DFC is guided to be commissioned in March 2020. This implies that FY23 will be the first full year of Western DFC operations. Given this timeline (as highlighted in our previous notes), we continue to believe that a sharp re-rating for Concor is likely to be 4-6 four-six quarters away. Further, in the near term, there are risks to FY20/21 earnings estimates and investors’ concerns on Concor’s recent market share loss. Despite this near-term pain, we have a neutral stance as the container ecosystem can potentially double post DFC’s commissioning.