Hold and cut TP to Rs 570 (from Rs 600) as we revise down FY20/21e EPS 18%/13% to factor in a weak FY20 and the Ind AS 116 impact.
Container Corporation of India’s (Concor’s) Q2FY20 numbers were weak (adjusted for the Rs 8.6-bn one-off related to SEIS income) with adjusted PAT falling 14% y-o-y. We highlight two key points: (i) H1FY20 volume has been flat y-o-y & management has finally realigned FY20 guidance to flat (from 10-12% growth), implying soft outlook; and (ii) 6% market share loss in H1FY20 due to reluctance to do short hauls. While this tack is aiding margin now, investors will be curious about Concor’s strategy once the Dedicated Freight Corridor (DFC) is implemented.
Though DFC is an important industry catalyst in coming years, we believe Concor’s re-rating is still five-six quarters away. Retain Hold and cut TP to Rs 570 (from Rs 600) as we revise down FY20/21e EPS 18%/13% to factor in a weak FY20 and the Ind AS 116 impact. We value Concor’s existing business at PE of 18x and DFC cash flow post FY21e.
Earnings performance sombre
Concor reported net loss of Rs 3.2 bn in Q2FY20 as it wrote-off Rs 8.6 bn—an amount that DGFT has termed ineligible for claiming SEIS income. Adjusted for this, though PAT fell 14%, this was primarily due to an abnormally good Q2FY19. Concor’s volumes slipped
2% y-o-y; this, coupled with flat realisation y-o-y, led to weak performance. Key takeaway for H1FY20 is the company’s reluctance to do short hauls, which has led to 6% market share loss. While margin has held up, Concor’s long-term story rests on volume growth from DFC implementation and market share loss at a juncture when DFC is to be commissioned raises concerns.
Balance FY20 likely to be soft as well
Management has finally realigned its guidance to flat volumes (10-12% growth earlier), given that H1FY20 volumes were flat. Overall, logistics movement has slowed over the past year and we expect rest of the year to be soft as well.
Outlook: Re-rating some time away
While DFC is an important industry catalyst in coming years, we believe Concor’s re-rating is still five-six quarters away. We retain ‘HOLD’ and revise our TP down to `570 to factor in a potentially weak FY20. We value Concor’s existing business at PE of 18x and DFC cash flow post FY21e on a cash flow valuation basis.