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Concor: Consolidating domestic presence - Views on News from Equitymaster
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Concor: Consolidating domestic presence
Oct 12, 2007

Performance summary
  • Topline grows by a modest 7% YoY during 2QFY08. Continued weakness in export-import (EXIM) business impacts growth. However, domestic segment grows by an impressive 26% YoY.

  • Operating margins contract by a sharp 670 basis points (6.7%) on account of higher rail freight expenses, leading to a 15% YoY fall in operating profits.

  • Helped by higher other income, decline in net profits arrested at 8% YoY for the quarter..

Performance Snapshot
Particulars (Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net Sales 7,676 8,188 6.7% 14,872 15,947 7.2%
Expenditure 5,171 6,065 17.3% 10,224 11,543 12.9%
Operating Profit (EBIDTA) 2,505 2,123 -15.3% 4,648 4,404 -5.2%
EBITDA margin (%) 32.6% 25.9%   31.3% 27.6%  
Other income 186 325 74.6% 366 675 84.6%
Depreciation 232 260 12.0% 455 519 13.9%
Profit before tax 2,458 2,187 -11.0% 4,558 4,561 0.0%
Tax 563 445 -21.0% 1,000 948 -5.2%
Profit after tax 1,895 1,742 -8.1% 3,558 3,613 1.5%
Prior period items (2) (1)   (2) (1)  
Net profit 1,894 1,741 -8.1% 3,556 3,612 1.6%
Net profit margin (%) 24.7% 21.3%   23.9% 22.6%  
No. of Shares (m)       65.0 65.0  
Diluted earnings per share* (Rs)         109.0  
Price to earnings ratio* (x)         18.5  
* Trailing twelve months

What is the company’s business?
Container Corporation of India (Concor) is a near monopoly as far as container train operations in India is 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 2007, it had a total base of 8,300 wagons (including wagons leased from the Indian Railways) and a network of 58 rail-linked terminals.

What has driven the performance in FY07?
EXIM business dampens topline: Concor reported a moderate 7% YoY growth in topline for 2QFY08. This subdued performance was mainly due to a mere 3% YoY growth in the EXIM segment. This business accounts for nearly 80% of the total revenues, and hence its weak performance has had a dampening effect on the overall performance. The various initiatives undertaken by Concor to attract the piece-meal cargo in the domestic segment seem to be paying off. In 2QFY08, domestic business grew by an impressive 26% YoY, compared to an average growth of 8% between FY02 to FY07.

Cost break-up
(as a % of net sales) 2QFY07 2QFY08 1HFY07 1HFY08
Staff cost 1.1% 1.3% 1.1% 1.4%
Railway Freight expenses 55.2% 60.4% 56.0% 58.6%
Other expenses 11.0% 12.3% 11.6% 12.4%
Sharp contraction in operating margins impact operating profits: Operating margins during the quarter contracted by 6.7% to 25.9%, which led to 15% YoY drop in operating profits. The contraction in margins was due to the increase in rail freight expenses (charges paid to the Indian railways for using its infrastructure facilities such as tracks, signaling systems and locomotives to haul the flat wagons and containers). As a percentage of sales, rail freight expenses increased to 60.4% in 2QFY08 as compared to 55.2% in 2QFY07. Rail freight expenses (paid by the Concor to Indian Railways for using its tracks and signaling system), however remained stable. As far as segmental margins are concerned, EXIM business witnessed a decline of 7%, while the same for domestic business witnessed a contraction of 3.6%.

Segmental performance

(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Revenue 6,383 6,559 2.8% 12,146 12,662 4.3%
% share 83.2% 80.1%   81.7% 79.4%  
PBIT 2,155 1,759 -18.4% 3,905 3,552 -9.0%
PBIT margin 33.8% 26.8%   32.1% 28.1%  
Revenue 1,293 1,629 26.0% 2,726 3,285 20.5%
% share 16.8% 19.9%   18.3% 20.6%  
PBIT 187 177 -5.7% 432 503 16.5%
PBIT margin 14.5% 10.9%   15.8% 15.3%  
Revenue 7,676 8,188 6.7% 14,872 15,947 7.2%
PBIT 2,342 1,936 -17.4% 4,336 4,055 -6.5%
PBIT margin 30.5% 23.6%   29.2% 25.4%  

Higher other income rescues bottomline: Due to a higher other income, Concor’s 2QFY08 bottomline saw a decline of only 8%, compared to a 15% YoY fall in operating profits. Other income increased from Rs 186 m to Rs 325 m in 2QFY08, a 75% YoY growth.

What to expect?
At Rs 1,920, the stock is trading at a multiple of 18.5 times its trailing 12-month 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. Though this has put pressure on the short-term profitability of the company, we believe the long-term fundamentals are intact. In fact, net margins for 1QFY08 stood at 21.3%, which is in line with last 10 year average of 20.6%. The company has lined up a capex plan of Rs 32 bn to be invested over the next 5 years; around 80% of it will be towards acquisition of rolling stocks (wagons). Overall, we are positive on the company’s prospect from a long-term perspective.

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