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Concor: Margin pressure - Views on News from Equitymaster

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Concor: Margin pressure
Apr 30, 2007

Performance Summary
Container Corporation of India (Concor) has announced decent set of numbers for the fourth quarter and the year ended March 2007. For the quarter, while the topline grew by 20% YoY, the growth in bottomline was higher at 24%, aided primarily by lower depreciation and tax expense. A similar trend was visible in the full year results, with bottomline outpacing the topline growth, albeit due to expansion in operating margins. The operating margins for the quarter, however, contracted from 29.1% in 4QFY06 to 27.3%.

Financial snapshot - Standalone numbers
Particulars (Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Net Sales 6,755 8,081 19.6% 24,332 30,460 25.2%
Expenditure 4,788 5,879 22.8% 17,355 21,351 23.0%
Operating Profit (EBIDTA) 1,966 2,202 12.0% 6,976 9,109 30.6%
EBITDA margin (%) 29.1% 27.3%   28.7% 29.9% -
Other income 162 148 -8.2% 560 684 22.2%
Depreciation 242 223 -8.1% 833 919 10.4%
Profit before tax 1,886 2,128 12.8% 6,704 8,874 32.4%
Tax 524 434 -17.1% 1,466 1,965 34.0%
Profit after tax 1,362 1,694 24.3% 5,238 6,909 31.9%
Prior period items 0 1 1200.0% 21 4 -81.8%
Net profit 1,362 1,692 24.3% 5,259 6,906 31.3%
Net profit margin (%) 20.2% 20.9% - 21.6% 22.7% -
No. of Shares (m)         65.0  
Diluted earnings per share (Rs)         106.3  
Price to earnings ratio (x)         19.0  

What is the company’s business?
Concor is a near monopoly as far as container train operations in India are concerned. Besides transportation, Concor provides a number of value added services like warehousing (both transit as well as bonded), less than container load (LCL) consolidation, custom clearance, factory stuffing and destuffing, container maintenance, and reefer services (for perishable cargo). Over the past few years, the company has significantly ramped up its fleet of high-speed wagons. As of March 2006, the company had a total base of 7,762 wagons (including wagons leased from the Indian Railways) and a network of 56 rail-linked terminals.

What has driven the performance in FY07?
Particulars FY06 FY07 Change
Volumes (TEUs)
EXIM 1,556,714 1,715,661 10.2%
Domestic 373,848 389,605 4.2%
Total 1,930,562 2,105,266 9.0%
Realisations (Rs/TEU)
EXIM 12,245 14,253 16.4%
Domestic 14,094 15,419 9.4%
Total 12,603 14,468 14.8%
EXIM business drives topline: Concor has reported a 20% YoY and 25% YoY growth in topline for 4QFY07 and FY07 respectively. The growth in topline in FY07 was primarily on account of the robust performance in the EXIM segment (involves handling and transportation of export-import container), which accounted for 80% of the revenues. EXIM business for the fiscal grew by 28% YoY, on the back of a 10% YoY increase in throughput, coupled with a 16% YoY improvement in realistaion. The prospects of this business hinges on the growth in international container traffic. On the other hand, the domestic business registered a growth of 14% YoY, on the back of a 4% YoY increase in volumes and 9% YoY increase in realisations. In FY07, the company achieved a throughput of 2.1 m TEUs (twenty equivalent foot units), compared to 1.9 m TEUs in FY06, an increase of 9% YoY.

Cost break-up
(as a % of net sales) 4QFY06 4QFY07 FY06 FY07
Staff cost 1.2% 1.2% 1.2% 1.2%
Railway Freight expenses 54.1% 58.7% 52.6% 56.8%
Other expenses 15.6% 12.8% 17.5% 12.2%
Mixed performance at operating levels: On the back of higher operating margins for the fiscal (29.9% in FY07, compared to 28.7% in FY06), operating profits managed to outpace the growth in topline. The expansion in operating margins was primarily on account of decline in other expenses, which as a percentage of sales, decreased from 17.5% in FY06 to 12.2% in FY07. However, the benefit of the same was arrested to a large extent by the increase in rail freight expenses (paid by the company to Indian railways for using its track and signaling system), which as a percentage of sales increased by 410 basis points YoY to 56.8%. It should however, be noted that the Exim business has higher margins (30%) as compared to the domestic business (17%) and hence, any change in revenue mix in favour of EXIM business will have a favourable impact on margins. The margin expansion for the fiscal should be viewed in this context. Operating margins for the quarter however witnessed a contraction of 190 basis points on a YoY basis to 27.3%. Though the contribution of EXIM business to the overall revenues improved on a YoY basis (form 76% in 4QFY06 to 80% in 4QFY07), the sharp decline in margins in the domestic business (PBIT margins declined from 22.4% to 13.5% on a YoY basis), led to an overall drop in operating margins for the quarter.

Segmental performance
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
EXIM
Revenue 5,127 6,464 26.1% 19,063 24,453 28.3%
% share 75.9% 80.0%   78.3% 80.3%  
PBIT 1,417 1,827 28.9% 5,562 7,439 33.8%
PBIT margin 27.6% 28.3%   29.2% 30.4%  
Domestic
Revenue 1,628 1,618 -0.6% 5,269 6,007 14.0%
% share 24.1% 20.0%   21.7% 19.7%  
PBIT 365 219 -40.0% 996 1,034 3.9%
PBIT margin 22.4% 13.5%   18.9% 17.2%  
Total
Revenue 6,755 8,081 19.6% 24,332 30,460 25.2%
PBIT 1,782 2,046 14.8% 6,557 8,473 29.2%
PBIT margin 26.4% 25.3%   26.9% 27.8%  

Lower depreciation and taxes aid bottomline growth: Despite a slower growth in operating levels, the bottomline growth outpaced the topline growth on account of lower depreciation and tax expenses. While depreciation for the quarter recorded a decline of 8% YoY, tax was lower by 17% YoY. As a result, net margins for the quarter improved by 70 basis points to 20.9% YoY. The growth in bottomline for the year was stronger at 31% YoY.

What to expect?
At Rs 2,020, the stock is trading at a price to earnings multiple of 19 times its FY07 earnings. The absorption of the rail freight expenses to a large extent by Concor, instead of passing it on to the customers, clearly points to its focus on capturing volumes. To counter the competition from road segment, the company has been offering discounts on some of the key sectors of NCR-JNPT and NCR-Mundra. However, the recent increase in road freight by truck operators may prompt it to increase the freight rates and thereby result in better margins. Going forward, the increase in volumes for Concor will mainly come from the ramp-up of container traffic at the third container terminal of JNPT. The terminal currently handles around 634,134 TEUs, against the capacity to handle 1.3 m TEUs. With the ministry of shipping envisaging a 13% CAGR in container traffic till FY12 and a strong terminal network possessed by Concor, we remain positive on the company’s medium-term prospects.

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