Stock Review: Container Corporation Of India

The Concor scrip dipped nine per cent over the last week on results that were below expectations due to a fall in domestic volumes and over concerns of a margin squeeze. Analysts are worried that its margins on the back of competitive pressures and higher costs, especially in the domestic segment, are likely to fall. That apart, they also expect volume growth to remain low in the near-to-medium term.

Mukesh Saraf of Spark Capital believes the company is expected to report a 100 basis point fall in Ebitda margins from FY11-13 due to its inability to pass on cost increases, tepid volume growth and higher volume-driven discounts to shipping lines. One percentage point is 100 basis points.

Concor's realisations may also get impacted as trade traffic shifts from JNPT in the Mumbai to Gujarat-based ports. Since a significant chunk of Concor's EXIM trade is around the Mumbai-Delhi corridor a shift to Gujarat-based ports will reduce the lead distance for rail transport services, and will impact its topline, believe analysts. Despite the correction, stock valuations at 17.5 times its 2011-12 estimated earnings per share of `68 are not considered attractive given the volume growth, competition and margin concerns.

VOLUME CONCERNS

Concor is expected to record 810 per cent of growth annually in revenues over the next two years on the back of a similar growth of volumes in the EXIM (export-import) segment. The worry for the company is the domestic segment, which accounts for a quarter of Concor's revenues and volumes, where freight rates have been increased by 45-100 per cent since December. The freight rate rise coupled with social disturbances in Rajasthan led to an 8.5 per cent year-on-year drop in its domestic volumes. IDBI Capital's analyst, Chetan Kapoor, believes domestic volumes for 2011-12 are likely to remain flat.

REALISATIONS, MARGIN WORRIES

Concor's EXIM business could see average realisation fall on account of traffic moving towards Mundra and Pipavav ports, believe analysts. This shift is consequent to frequent congestion at JNPT port, thanks to insufficient capacity and inadequate infrastructure.

Average lead distances for Concor have already fallen six per cent year-on-year in 201011. Its share of EXIM traffic at JNPT has come down from 74 per cent in 2009-10 to 64 per cent in 2010-11. Thus, while volume growth in the EXIM segment was six per cent yearon-year in the March quarter, it was flat sequentially. While Ebidta margins grew 26 basis points year-on-year to 23.4 per cent in the quarter, they were down 548 basis points sequentially, as discounts to clients for the full year are recognised in the fourth quarter of the financial year. In addition, what hampered margin growth was the domestic business margins which saw a 769 basis point year-on-year dip (down 303 basis point sequentially) to 8.4 per cent, as the company was unable to pass on the rise due to severe competition.

OUTLOOK

A majority of analysts have a 'hold' or a 'sell' on the stock consequent to higher haulage charges and inability of the company to pass on the same due to competition from the road sector and other private container logistics players. Further, the capacity constraints at JNPT could hurt volume growth for Concor.

Despite the competitive edge on account of its mammoth infrastructure of wagons, container freight stations and inland container depots, the company has been unable to maintain pricing power. While the company believes it will be able to grow its revenues at 10 per cent and sustain Ebidta margins of 26 per cent, its strategy of higher volumes through discounts to maintain market share and secondly, higher competition could lead to a drop in profitability. These events are likely to keep Concor's stock under pressure, wherein valuations are not cheap.