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Container Corp: Higher depreciation drags profits
Nov 5, 2014 | Updated on Nov 6, 2014

Container Corporation of India Ltd (Concor) has announced its results for the quarter ended September 2014 (2QFY15). The company has reported 8.0% year on year (YoY) increase in the topline and 20.9% YoY decline in the bottomline for the quarter. Here is our analysis of the results.

Performance summary
  • Revenues were up 8.0% YoY during the quarter, mainly driven by higher volumes in EXIM segment.
  • The operating profits for the quarter registered a 12.3% YoY growth with margins at 23.1% versus 22.2% in 2QFY14.
  • The reported net profits for the quarter declined by 20.9% YoY with margins at 14.2%, down from 19.4% in 2QFY14.
  • The company paid a final dividend for FY 14 of Rs 5.3 per equity share during the period.
  • The depreciation for the quarter increased by Rs 984.8 m on account of a revision in the depreciation policy.

Rs m 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Sales 12,540 13,548 8.0% 24,485 26,245 7.2%
Expenditure 9,756 10,421 6.8% 18,987 20,133 6.0%
Operating profit (EBDITA) 2,784 3,127 12.3% 5,498 6,112 11.2%
EBDITA margin (%) 22.2% 23.1%   22.5% 23.3%  
Other income 785 920 17.3% 1,684 1,749 3.8%
Interest (net) 0 0   0 0  
Depreciation 466 1,486 219.1% 926 1,979 113.8%
Profit before tax 3,103 2,562 -17.4% 6,257 5,882 -6.0%
Pretax margin (%) 24.7% 18.9%   25.6% 22.4%  
Tax 676 643 -4.9% 1365 1344 -1.6%
Effective tax rate (%) 21.8% 25.1%   21.8% 22.9%  
Profit after tax/(loss) 2,427 1,919 -20.9% 4,892 4,538 -7.2%
Net profit margin (%) 19.4% 14.2%   20.0% 17.3%  
No. of shares (m)         195  
Diluted earnings per share (Rs)*         48.7  
Price to earnings ratio (x)*         27.2  

What has driven performance in 2QFY15?
  • The company reported an 8.0% YoY growth in the revenues for the quarter, mainly driven by higher volumes in the EXIM (up 12.2% YoY) while growth in the domestic segment volumes came in at 1.3% YoY. The total handling volume growth was higher by 10% YoY during the quarter. The slowdown in the domestic segment was because company diverted rakes from domestic to EXIM segment to meet the demand in international segment which got boost from exchange rate normalization. The revenue growth for the EXIM and domestic segment stood at 9.2% YoY and 3.6% YoY respectively.

    Segment-wise breakup
    (Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
    EXIM
    Revenue 9,970 10,885 9.2% 19,385 20,673 6.6%
    Operating Profits (EBIT)  2,394 1,791 -25.2% 4,661 4,110 -11.8%
    Operating profit margins (EBITM %)  24.0% 16.5%   24.0% 19.9%  
    Domestic
    Revenue 2,571 2,663 3.6% 5,100 5,572 9.3%
    Operating Profits (EBIT)  136 103 -23.7% 322 415 28.7%
    Operating profit margins (EBITM %)  5.3% 3.9%   6.3% 7.4%  

  • The operating profit for the quarter grew 12.3% YoY, with margins at 23.1%, up from 22.2% in the corresponding quarter last year. However, on a sequential basis, the margins declined by 40 basis points. Employee costs for the quarter increased 67% YoY due to revision of payscales and arrears. However, this was more than offset by decline in the rail freight expenses (as a % of sales). Segment-wise, the EBIT margins for EXIM and domestic segment stood at 16.5% (down from 24.0% in 2QFY14) and 3.9% (down from 5.3% in 2QFY14) respectively. The empty running costs witnessed an improvement of around Rs 120 m during the quarter.

    Cost breakup
    gd(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
    Rail freight expenses 7,459 7,756 4.0% 14,605 15,186 4.0%
    as a % of sales 59.5% 57.3%   59.6% 57.9%  
    Employee costs 283 474 67.3% 564 797 41.2%
    as a % of sales 2.3% 3.5%   2.3% 3.0%  
    Other expenses 2,014 2,191 8.8% 3,818 4,151 8.7%
    as a % of sales 16.1% 16.2%   15.6% 15.8%  
    Total expenses 9,756 10,421 6.8% 18,987 20,133 6.0%
    as a % of sales 77.8% 76.9%   77.5% 76.7%  

  • The net profit for the quarter declined by 21% YoY. This was mainly because of the change in the depreciation policy (lowering the life of assets), leading to an increase of Rs 984.8 m in the depreciation expense. Also, the company wrote down some of the value assets and transferred it to retained earnings (one time change). But for these changes, the net profits would have been higher by around Rs 300 m as per the management.
What to expect?
The management has given a guidance of around 12% YoY growth in the EXIM segment and 15% growth in the domestic segment (overall growth guidance of 12.7% YoY). However, the management has also stated that this would be subject to the pace of the economic growth. Currently, the level of containerization in India is low as compared to global average and a huge growth opportunity exists in this area. And Concor being the market leader and with a strong balance sheet is likely to benefit from the same. However, the stock is currently trading at a trailing twelve months price to earnings ratio of around 27 times which we believe incorporates the growth expectations. Hence, we recommend investors not to buy the stock at current price levels.

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