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Concor: Competition on the anvil

Apr 20, 2006

Performance Summary
Container Corporation of India (Concor) reported a 6.6% YoY increase in its net profit for the fourth quarter ended 31st March 2006. During the same period, the topline grew by a healthy 24.6% YoY. The slower growth in bottomline was largely on account on higher tax outgo, which doubled in 4QFY06. However, for the full year ended March 2006, Concor's net sales grew by 22% YoY.

(Rs m) 4QFY05 4FY06 Change FY05 FY06 Change
Net Sales 5,464 6,806 24.6% 20,035 24,408 21.8%
Expenditure 3,851 4,839 25.7% 13,752 17,372 26.3%
Operating Profit (EBDITA) 1,613 1,967 21.9% 6,283 7,036 12.0%
EBITDA margin (%) 29.5% 28.9% 31.4% 28.8%
Other income 100 162 62.0% 482 542 12.4%
Interest 1 - - 2 3 26.1%
Depreciation 170 242 42.4% 666 849 27.5%
Profit before tax 1,542 1,887 22.4% 6,097 6,726 10.3%
Tax 262 524 100.0% 1,807 1,699 -6.0%
Profit after Tax before prior period items 1,280 1,363 6.5% 4,290 5,027 17.2%
Prior period items (1) - - (3) (1) -
Net profit after prior period items 1,279 1,363 6.6% 4,287 5,026 17.2%
Net profit margin (%) 23.4% 20.0% 21.4% 20.6%
No. of Shares (m) 65.0 65.0 65.0 65.0
Diluted earnings per share (Rs) 77.3
Price to earnings ratio (x) 18.5

What is the company's business?
Established in 1988, Concor is the monopoly in containerized rail transportation in India (the sector has been opened for private sector competition recently and therefore, the company will lose its dominant status). Besides, it also provides services like warehousing (both transit as well as bonded), less than container load consolidation (LCL), custom clearance, container maintenance and air cargo clearance. In 2004-05, Concor handled a total of 1.73 m TEUs of container traffic (the latest numbers are unavailable). The company operates around 55 terminals (ICDs and CFSs), located at prime locations all across the country. Concor also has its own fleet of wagons (4,606 high speed wagons and 1,357 flat wagons) and containers (10,874 TEUs).

What has driven the performance in FY06?
External trade kicker to revenues: Concor derives almost 80% of its revenue from Exim Business (import and export of goods) with the rest contributed by domestic container business. With India's total exports growing at over 20% in FY06, needless to say that Concor has benefited from the same. The total container traffic handled in and out of India is currently estimated at around 4.5 million TEUs and the same is expected to reach 10 million TEUs by 2010. The company however, was unable to take full advantage of this opportunity over the past few years owing to supply constraints (shortage of rolling stocks in particular and lack of adequate infrastructure facilities in general).

(as a % of net sales) 4QFY05 4FY06 FY05 FY06
Staff cost 1.4% 1.2% 1.4% 1.2%
Railway Freight expenses 48.4% 53.7% 49.2% 52.2%
Other expenses 20.7% 16.2% 18.1% 17.8%
Total Expenses 70.5% 71.1% 68.6% 71.2%
Margins under pressure: EBITDA margins for FY06 eroded by 260 basis points (or 2.6%) to 28.8%, whereas in 4QFY06, it fell by 60 basis points to 28.9%. This could be attributed to higher rail freight expenses, as Concor absorbed some of the increase in haulage charges charged by the Indian Railways. (Concor pays haulage charges to the railways for using its track and signaling system). As can be seen in the table, rail freight expenses increased from 49.2% (as a % of net sales) in FY05 to 52.2% in FY06. Other expenses, however, reduced marginally to 17.8% of sales from 18.1% last year. Operating margins are higher in the exim business (at around 30% levels) as compared to the domestic container business (20% margins). Any shift in the revenues mix in the favour of domestic business can have a subdue overall margins.

Over the last few quarters: As can be seen from the graphs, while the domestic business has witnessed margin expansion (at the PBIT level) in the last four quarters, the Exim business has seen contraction. In our view, with the railways bringing Exim and domestic haulage charges at par with effect from April 2006 (domestic haulage charges were lower till now), we expect domestic margins to come under pressure. Even as the EBDITA margins of the company have remained more or less the same in the last four quarters, net margins have declined at a higher rate. This is on account of higher effective tax rate and depreciation charges (in light of the capex plan).

What to expect?
At Rs 1,434, the stock is trading at a price to earnings multiple of 18.5 times FY06 earnings. Going forward, the company is likely to benefit from the robustness in domestic and international container traffic. With only 30% to 35% of the total container traffic in India transported by rail, the potential is huge. We believe that investment in infrastructure (wagons as well as dedicated freight corridors) is the key for logistics companies in future. With the entry of new players in the railway container transportation, freight rates will be determined by market forces and competition (in this context, Concor may have to lower its charges to sustain market share). However, this will take some time, as the new players will face problems in procuring rolling stocks.

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Nov 30, 2021 (Close)


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