Wednesday, February 8, 2012

>CONTAINER CORP OF INDIA: Trade imbalance leads to decline in Exim profitability

Container Corporation of India’s (Concor) Q3FY12 result was marginally better than our expectations with standalone net profit at Rs2,414mn vs. our estimate of Rs2,306mn (variance of 4.6%). Operating profit at Rs2,774mn (down 1.1% YoY), and operating margin at 26.5% were in-line with our estimates at Rs2,713mn and 26.8% respectively. The domestic segment continued to underperform with volumes declining 17.4% YoY and EBIT plunging 10.3% YoY to Rs215mn in Q3. For the 9mFY12 domestic volumes fell by 15% led by IR policy related changes. The Exim segment’ EBIT declined 3.1% to Rs2,273mn despite volumes increasing 7.3% YoY mainly led by an increase in empty running costs. We have marginally tweaked our estimate to factor in slower domestic volume growth, higher other income and provision tax. We maintain Hold rating and target price of Rs1,015.

 Operational performance in-line with expectations: Concor’s Q3 standalone revenue increased 7.7% YoY to Rs10,462mn, 3.4% above our estimate. Operating profit at Rs2,774mn (down 1.1% YoY) was 2.3% above estimate, while operating margin at 26.5% was just 28bp higher than expectations.

 Volume growth continued to remain slower: While Exim volumes grew 7.3% YoY to 555,399 containers, the domestic segment continued with its poor performance with volumes declining 17.4% YoY to 120,108 containers.

 Higher realisations help increase revenues…: Concor’s combined volume grew just 1.9% YoY to 675,507 containers, while blended realisations increased 5.7% YoY to Rs15,488 per container. Average realisations increased 12.6% YoY to Rs16,227 per container in the domestic segment while it grew 4.1% YoY to Rs15,329 per container in the Exim segment.

 … but increase in empty running leads to decline in EBIT margins: Trade imbalance and change in port cargo mix (Export-import) led to a 64% YoY increase in empty flat running cost to Rs360mn (90% of this was in the Exim segment). This led to higher rail freight expenses and decline in profitability margins. Exim segment’s PBIT margins declined 411bp YoY to 26.7%, while it declined just 41bp YoY in the domestic segment to 11.0%. The average lead distance in the Exim segment declined ~30km YoY to 1,037kms while it was flat in domestic segment at 1,430kms.

 Maintain Hold with a TP of Rs1,015: At the CMP, the stock trades at 13.0x FY13E earnings and 7.9x FY13E EV/EBITDA and appears fully-valued. Given the lower profitability growth expected (6% CAGR over FY11-14E) and decline in RoE to 16.1% in FY14 from 18.9% in FY11, we continue to remain neutral on the stock. We maintain our Hold rating and target price of Rs1,015, valuing the stock at 14x FY13 earnings.