ThinkStock PhotosEdelweiss Securities has given a 'hold' rating on Container Corporation of India with a target price of Rs 570.
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% YoY, 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 1,800km), we believe a meaningful re-rating for Concor is likely four to six quarters away.
INVESTMENT RATIONALE
Overall container rail volume growth slipped in to negative zone in August (down 3% YoY), 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, the brokerage said. Looking at the near term, Q2FY20 looks another weak quarter in the offing, with July-August volume growth flat so far.
First 600km 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," the brokerage said.
The brokerage value Concor’s existing business at PE of 18 times and DFC cash flow post FY21E on a cash flow valuation basis.
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% YoY, 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 1,800km), we believe a meaningful re-rating for Concor is likely four to six quarters away.
INVESTMENT RATIONALE
Overall container rail volume growth slipped in to negative zone in August (down 3% YoY), 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, the brokerage said. 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 but baked in
First 600km 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," the brokerage said.
The brokerage value Concor’s existing business at PE of 18 times and DFC cash flow post FY21E on a cash flow valuation basis.
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Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.
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