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Container Corp.: Facing multiple headwinds

May 28, 2012

Container Corporation of India Ltd. (CCIL) has announced its results for the quarter ending March 31, 2012 (4QFY12).The company has reported a 6.9% year on year (YoY) increase in the topline and 8.1% YoY decline in the bottomline respectively. Here is our analysis of the results.

Performance summary
  • Revenues were up 6.9% YoY during the quarter. For the full year, the topline was up 5.9% YoY.
  • Operating profits registered a growth of 3.5% YoY during the quarter with margins at 20.9% (as compared to 21.6% in the 4QFY11). For the full year, the operating profit was up 1.9% YoY, with margins at 25.2% (versus 26.2% last year).
  • Net profits for the quarter were down 8.1% YoY with net profit margins at 19.2%, lower than 22.9% in the corresponding quarter last year. For the full year, the bottomline was registered a flattish growth of 0.2% YoY with margins at 20.1% versus 21.7% in FY11.
  • The board has recommended a final dividend of Rs. 9.0 per share of face value of Rs. 10.0 each. This is in addition to an interim dividend of Rs 7.5 per share for the current fiscal year.

Standalone performance snapshot
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Sales 10,022 10,711 6.9% 38,334 40,609 5.9%
Expenditure 7,858 8,471 7.8% 28,286 30,372 7.4%
Operating profit (EBDITA) 2,164 2,240 3.5% 10,048 10,237 1.9%
EBDITA margin (%) 21.6% 20.9%   26.2% 25.2%  
Other income 769 1,127 46.7% 1,987 3,166 59.3%
Interest (net) 0.0 0.0   0.0 0.0  
Depreciation 401 397 -0.9% 1452 1585 9.1%
Profit before tax 2,532 2,970 17.3% 10,583 11,818 11.7%
Pretax margin (%) 23.5% 25.1%   26.2% 27.0%  
Tax 60 697 1059% 1823 3039 67%
Profit after tax/(loss) 2,472 2,272 -8.1% 8,759 8,779 0.2%
Net profit margin (%) 22.9% 19.2%   21.7% 20.1%  
No. of shares (m)         130  
Diluted earnings per share (Rs)*         67.5  
Price to earnings ratio (x)**         12.5  

What has driven performance in 4QFY12?
  • The 6.9% YoY growth in the revenues during the quarter was on account of an increase in contribution from value added services (VAS) that improved realizations. During the quarter, the company registered a 3.4% YoY growth in international handling (volumes) while domestic handling was down by 10.4% YoY, resulting in a overall throughput increase of 0.44% YoY. The topline for full year was up 5.9% YoY. For full year, the international handling was up 5.8% YoY while domestic handling declined by 13.9% YoY, resulting in an overall handling growth of 1.6% YoY (on a weighted average basis) for the year.

  • The company's overall market share stands at 73.28%. Out of this, it has around 70% share in Domestic segment and 75% share in International (EXIM) Segment. The EXIM segment registered a revenue growth of 8.3% YoY during the quarter while growth in domestic segment revenues stood at 2.0% YoY. For full year, the EXIM segment registered 9.1% YoY growth. On the other hand, the revenues for domestic segment slipped by 5.3% YoY.

  • In the domestic segment, the lead distances stood at 1428 km for loaded and 694 km for empty this year (versus 1446 Km for loaded and 643 km for empty last year). For EXIM segment, the lead distances stood at 1,039 Km for loaded and 669 km for empty (versus 1,109 Km for loaded and 779 Km for empty last year). Thus, in EXIM segment, both empty and loaded lead distances have fallen. In domestic, while loaded leads have fallen, empty lead distances have gone up. Going forward, fall in lead distances should be marginal but as Vallarpadam and Krishnapatnam ports come more into picture, lead distances will be lowered.

  • The year FY12 witnessed a significant shift in port traffic .Out of total EXIM, the traffic through JNPT fell to 54.7% versus 64.2% last year. Pipavav, Mundra and Chennai Port shared 15.8%, (versus 11.4% last year), 11.9% (versus 9.6% last year) and 11.2% (versus 9.8% last year) respectively. Hence, the major shift was seen at JNPT port - a loss of 10%, around 4% of which shifted to Pipavav, 3% to Mundra and 3% to Chennai.

    Segmentwise performance summary
    (Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
    EXIM revenues 7,788 8,433 8.3% 29,939 32,656 9.1%
    EXIM EBIT 1,862 1,970 5.8% 8,282 8,630 4.2%
    EXIM EBIT Margins (%) 23.9% 23.4%   27.7% 26.4%  
    Domestic revenues 2,234 2,278 2.0% 8,395 7,954 -5.3%
    Domestic EBIT 87 159 83.5% 802 665 -17.0%
    Domestic EBIT Margins (%) 3.9% 7.0%   9.5% 8.4%  
    * Excluding inter-segment adjustments

  • The operating profits for the quarter registered a modest increase of 3.5% YoY. Sequentially, it is down 19% but this is mainly due to year end discounts, the effect of which gets reflected in the last quarter. The overall operating margins for the quarter stood at 20.9% versus 21.6% in 4QFY11 and 26.5% in 3QFY12. During the quarter, EBIT margins for EXIM and domestic segment stood at 23.4% and 7.0% respectively (versus 26.7% and 11.0% respectively in 3QFY12). For full year, the operating margins stood at 25.2% , down from 26.2% last year. Segment wise, the EBIT margins for EXIM and Domestic segment during the year stood at 26.4% and 8.4% respectively (versus 27.7% and 9.5% respectively in FY11). The fall in margins was mainly due to increase in empty running costs and slowdown in Domestic segment.

  • The empty running costs for the year stood at Rs 1.8 bn as compared to Rs 1.6 bn last year. Volumes in domestic segment are up 19% YoY and have improved sequentially, but margins are lower due to higher empty running. The inclusion of sponge and pig iron in notified commodities has led to lot of empty running from East (Pig iron and Sponge iron earlier used for return cargo) thus affecting business viability in that region. Also, lead distances for empty movement has gone up from 643 Km to 694 km (for domestic segment). So, the company is paying extra for 50 km on empty running (higher haulages). At the same time, the company has not been able to raise freight charges in domestic segment due to high competition. Regarding volumes, 4% QoQ increase was seen in domestic segment due to cement loading for one and a half month, but now the permission has been taken away.

    Cost break up
    (Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
    Rail freight expenses 5,859 6,161 5.2% 21,856 23,166 6.0%
    as a % of sales 58.5% 57.5%   57.0% 57.0%  
    Staff costs 269 293 8.9% 874 999 14.3%
    as a % of sales 2.7% 2.7%   2.3% 2.5%  
    Other expenditure 1,730 2,018 16.6% 5,555 6,207 11.7%
    as a % of sales 17.3% 18.8%   14.5% 15.3%  
    Total expenditure 7,858 8,471 7.8% 28,286 30,372 7.4%
    as a % of sales 78.4% 79.1%   73.8% 74.8%  
    * Excluding inter-segment adjustments

  • The net profits during the quarter declined by 8.1% YoY with margins slipping to 19.2% from 22.9% last year. This was despite a 46.7% YoY increase in the other income, offset by an increase in the tax liability . Without this, the net profit was higher in this quarter on a YoY basis. For full year, bottomline was up marginally by 0.2% YoY while margins slipped to 20.1% from 21.7% in FY11. A 59.1% YoY increase in the other income was offset by 9.1% YoY increase in depreciation expenses and an increase in tax liability.

What to expect?
The management has given guidance of 8%-9% volume growth in International segment in FY13. However, there is no clarity on volumes in domestic segment due to change in commodity grouping by Railways which still remains an unsettled issue. Earlier, the company had forecasted 15% growth for domestic segment, but railway rulings have not come yet .Still, the management is hopeful to achieve a 12%-13% growth if all suggestions made are followed. Another concern is that container freight rates may increase, especially considering the poor state of railway finances, expected increases in diesel prices and depreciation in rupee. This will increase costs of operation for the company and impact margins adversely.

The company expects historical CAGR (average annual growth rate) of 13%-14% in International segment to show up in future. It has reduced dependence on rail freight down from 78% to 75% (3% has shifted to terminal service charges) and plans to bring it down lower to 72%. Further rupee depreciation may adversely affect imports and business prospects for Concor.

Regarding capex, the management has plans to spend more than Rs 16 bn this year. Out of this Rs 7 bn will be for land acquisition for future logistic park. The rest will be used to buy 30 rakes, equipments, containers (3000) to replace old fleet (normal life 10-12 Years, as of now some of the fleet is 18-20 years old). The company is open to take rakes on lease if the situation demands .In FY12, the company spent Rs 4 bn versus a planned expenditure of Rs 6.3 bn as the company went slow on acquiring wagons - 7 acquired versus 20 planned.

As per the management, the work regarding DMIC (Delhi Mumbai Industrial Coridor ) is on track as land has been successfully acquired for the same. It is expected to be ready by 2016-17.

Fresh and Healthy Enterprises's Ltd.'s (FHEL-Concor's wholly owned subsidiary) business suffered this year as it saw one of the worst crop production in last 10 years. The company procured crop at high costs and faced oversupply from Chinese crop. Hence, the company made loss of Rs 1.2 bn (Rs 1.1 bn for depreciation and interest liability).The company has decided to subscribe for more equity and retire debt so that interest burden gets off the books. It is also looking for a strategic partner that can put in resources so that company has better liquidity (working capital requirement especially regarding inventory costs is very high). The management expects to bounce back in the current year in FHEL business.

To conclude, the company faces challenges of slower growth in EXIM segment, the key headwinds to which are loss of traffic at ports and increasing competition. In the domestic segment, the issue of recent classification of commodities still remains unsettled and has adversely impacted the viability of business. At the current price, the stock trades at a P/E (Price to earnings) multiple of 12.5x. We will soon incorporate the results and guidance in our model and update our subscribers regarding valuations.

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