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Concor: No containing
Jul 25, 2006

Performance summary
Container Corporation of India (Concor) announced good set of numbers for the first quarter ended June 2006. While the topline grew by 34% YoY, the growth in bottomline was much more robust at 55% YoY, driven by margin expansion at the operating levels accompanied by higher other income.

Performance Snapshot
(Rs m) 1QFY06 1QFY07 Change
Net Sales 5,369 7,213 34.3%
Expenditure 3,817 5,053 32.4%
Operating Profit (EBDITA) 1,553 2,161 39.2%
EBITDA margin (%) 28.9% 30.0%  
Other income 104 163 56.0%
Interest 1 - -
Depreciation 192 223 16.1%
Profit before tax 1,464 2,101 43.4%
Tax 390 437 12.1%
Net profit 1,075 1,664 54.8%
Net profit margin (%) 20.0% 23.1%  
No. of Shares (m) 65 65  
Diluted earnings per share (Rs)   86.4  
Price to earnings ratio (x)   16.9  

What is the company’s business?
Established in 1988, Concor is India’s largest container transportation service provider, achieving a throughput of 1.9 m TEUs (twenty equivalent foot units) in FY06. Though rail is the mainstay of its transportation business, Concor also provides road transportation services (mostly supplementary to its rail business). It operates around 55 terminals (ICDs and CFSs), located at prime locations across the length and breadth of the country. Services provided by Concor at its terminal include warehousing (both transit as well as bonded), less than container load (LCL) consolidation, custom clearance and container maintenance. During the period between FY01 and FY06, Concor increased its throughput at a compounded rate of 13.2%.

Higher international container traffic: Concor continues to benefit from the boom witnessed in the international container traffic in India. This is due to the fact that Concor derives 80% of its revenues from its export-import (exim) business, which primarily involves handling and transportation of export-import containers. Containerized cargo traffic, which currently accounts for 15% of the total cargo traffic handled in India, grew at an annual rate of 14.4% during the FY00 to FY06 period. The international container traffic handled in and out of India is currently estimated at 5 m TEUs, with JNPT and Chennai being the major container handling ports in India (together they handle around 70% of the total traffic). The company is, however, unable to fully capitalize on this opportunity due to capacity constraints (in terms of inadequate wagons and tracks).

Segment-wise performance…
(Rs m) 1QFY06 1QFY07 Change
EXIM  
Revenue 4,224 5,780 36.9%
% share 78.7% 80.1%  
PBIT margin 29.7% 30.6%  
Domestic  
Revenue 1,145 1,433 25.1%
% share 21.3% 19.9%  
PBIT margin 16.1% 17.1%  
Total  
Revenue 5,369 7,213 34.3%
PBIT margin 26.8% 27.9%  

(as a % of net sales) 1QFY06 1QFY07
Staff cost 1.3% 1.1%
Railway Freight expenses 53.2% 56.6%
Other expenses 16.6% 12.3%
Total Expenses 71.2% 70.0%
Margin expansion boost operating profits: On the back of higher operating margins (30% in 1QFY07 as compared to 28.9% in 1QFY06), operating profits managed to outpace the growth in topline. The expansion in operating margins was primarily on account of decline in other expanses, which as a percentage of sales, fell by 430 basis points (or 4.3%) to 12.3% in 1QFY07 (YoY). However, railway freight expenses, which Concor pays to Indian railways for using its track and signaling system, increased from 53.2% in 1QFY06 to 56.6% in 1QFY07. Since the hike in freight expenses charged by the railways has been random and frequent in the recent years, Concor has not been able to pass on the same to its customers, despite the demand-supply dynamics being in its favour. It should also be noted that exim business has higher margins (30%) as compared to the domestic business (17%) and hence, any change in revenue mix in the favour of exim business will have a favourable impact on margins. The margin expansion in 1QFY07 has to be viewed in this context. Both the business segments - exim as well as domestic - have witnessed margin expansion for the quarter.

All boils down to the bottomline: Higher operating profits coupled with higher other income and lower tax outgo lead to a 54% YoY increase at the net profit levels. Whereas other income grew by 56%, tax rate (calculated as a percentage of PBT) decreased from 26.6% in 1QFY06 to 20.8% in 1QFY07. Depreciation for the quarter increased by 16.1% in YoY in view of Concor’s capex plans. Net margins expanded by 310 basis points (YoY) to 20.8% during the quarter.

Over the past few quarters
  1QFY06 2QFY06 3QFY06 4QFY06
Sales growth (YoY) 19.6% 19.3% 24.8% 24.6%
Operating profit margin 28.8% 29.9% 27.8% 28.9%
Net profit growth (YoY) 10.5% 8.3% 34.6% 6.6%
Net profit margin 20.0% 20.8% 21.5% 20.0%

What to expect?
At Rs 1,460, the stock is trading at a price to earnings multiple of 16.9 times on a trailing twelve month basis. With the growth in international container traffic likely to continue going forward (expected to touch 15 m TEUs by 2014), we expect Concor do well in future. Though, it recently lost its monopoly status in operating container trains, we believe that it will be a while before private players catch up with this PSU major, considering the shortage of rolling-stocks (wagons) in the country as well as lack of terminal facilities available with private players. But once competition intensifies (atleast two years away), we expect realizations (revenues derived from moving containers between ports and ICDs) to come down from the present levels. But again, container transportation is volume-driven, which is expected to grow at a robust pace considering the growing India’s international trade.

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