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Mark to Market | Slowing growth to weigh on Concor’s valuations

One of the main concerns has been the weakness in the company’s domestic business
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First Published: Mon, Sep 24 2012. 06 19 PM IST
The company’s domestic business is expected to be relatively better because Indian Railways has rolled back the increase in haulage charges on sponge iron and pig iron. Photo: Ramesh Pathania/Mint
The company’s domestic business is expected to be relatively better because Indian Railways has rolled back the increase in haulage charges on sponge iron and pig iron. Photo: Ramesh Pathania/Mint
Updated: Mon, Sep 24 2012. 08 32 PM IST
Since the beginning of this month, Container Corp. of India Ltd’s (Concor’s) stock has gone up by 3% compared with the 7% increase in the benchmark Sensex.
The underperformance is explained by the company’s challenging operating environment. One of the main concerns with Concor has been the weakness in its domestic business. Domestic revenue year-on-year growth last quarter was flat, while it increased by just 2% in the March quarter. The domestic business continues to be affected on account of a rise in haulage charges.
Sure, the domestic business contributes far less to the overall revenue than the export-import (exim) business. Last fiscal, domestic business revenue accounted for one-fifth of the total and the remaining came from the exim business. This offset the underperformance of the domestic business to some extent. Still, it’s not as if the exim business is growing at a fantastic rate. Exim revenue increased by 9% in fiscal year 2012 (FY12) and by 11% in the June quarter. Earnings before interest and tax (Ebit) growth for FY12 and the June quarter have been below 5%.
True, in the future, the environment for the domestic business is expected to be relatively better. That’s because Indian Railways has rolled back the increase in haulage charges on sponge iron and pig iron, which augurs well for Concor’s domestic business. But prospects for the exim business are muted. Analysts expect competition to be a key threat for the exim business. Concor’s return on equity (RoE) is expected to be under pressure in the days to come. “With volume growth likely to remain muted given competitive headwinds in the exim segment, we expect earnings to grow at 8.5% CAGR (compounded annual growth rate) over FY12-15 (estimates). As a result, core RoE should continue to decline going forward, from 29% in FY12 to 24% in FY15, a trend unchanged since FY07,” wrote Avi Mehta of IIFL Institutional Equities in a recent note to clients.
At Rs.966, the stock trades at 12.7 times estimated earnings for this fiscal year. Sure, a strong balance sheet with cash and cash equivalents of about Rs.2,800 crore as on 31 March are plus points. But the weak operating environment is likely to keep sentiment muted for the stock in the near future.
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First Published: Mon, Sep 24 2012. 06 19 PM IST
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