Container Corporation of India - Land license fees remain an overhang - ICICI Securities

Container Corporation of India (Concor) reported higher than expected numbers for Q2FY21, with EBITDA at Rs3.13bn against our expectation of ~Rs2.5bn. However, demand letters for land license fee (LLF) from Ministry of Railways (MoR) remains the key negative. While H1FY21 EBITDA was Rs4.7bn, LLF demand is Rs12.76bn p.a., that too for only 13 terminals. Concor's envisaged EBITDA reduces materially, which precludes any constructive view on earnings, if MoR's demand for LLF is to be factored. Also, any differential policy on LLF, vis-à-vis existing private sector players, may be difficult to implement. With continued uncertainty on earnings, we maintain our HOLD rating as we reduce the target price to Rs424/share from Rs458 earlier.

- LLF demand continues to cast an overhang. Concor has received demand letters for Rs12.75bn (including GST) from the ministry of railways (MoR) as the annual LLF for FY21 for the company's 13 terminals. Concor has estimated and provided Rs2.33bn as per extant policy of IR for H1FY21 as LLF for all the terminals on IR land. In Q1FY21, Concor had received demand letters from MoR for Rs7.8bn LLF for Concor's Tughlakabad and Okhla terminals.

- Q2FY21 numbers surprised on resurgence of EXIM margins. EXIM EBIT/teu doubled QoQ driven by ~6% QoQ increase in realisations. This more than offset the ~10% YoY drop in handling volumes. Domestic volumes have largely recovered to pre-Covid levels with 1.6% YoY decline. We have increased our volume estimates for FY21E and subsequent years factoring-in the H1FY21 volume performance. We have also assumed an average LLF at mid-point of what Concor has been accounting for and what the possible demand can be in our view (given the demand for Rs 12.8bn for 13 terminals).

- Market rate of LLF for Concor - implications for the sector. Unless a differential policy is implemented, the lower LLF charged vis-à-vis market rate (assuming MoR calculations) explains the bulk of Concor's current EBITDA. This implies that the current service offering is not optimally priced. However, despite such 'low priced' offerings, volume growth in Concor's rail freight container business has been far from aggressive. Hence, either Concor is charged LLF under a different policy, or pricing in the industry rebases up. In the later case, the argument for freight shift from road to rail would warrant a rethink - even with DFC in place. It is becoming increasingly clear now that, in the presence of constant cost headwinds and a muted volume growth environment, the strategy eventually has to be modified to achieve better pricing.

- Maintain HOLD with a revised target price of Rs 424/share. Concor appears to be faring better in volume performance against its earlier guidance of 20% YoY decline. Resolution of the LLF issue with a reduction of the same for Concor is the key risk to our call.

Shares of CONTAINER CORPORATION OF INDIA LTD. was last trading in BSE at Rs.406.85 as compared to the previous close of Rs. 397.6. The total number of shares traded during the day was 43680 in over 1892 trades.

The stock hit an intraday high of Rs. 409 and intraday low of 398.2. The net turnover during the day was Rs. 17677427.

Source : Equity Bulls

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