Improving volume is raising earnings expectations of Container Corp. of India Ltd (Concor). Jefferies India Pvt. Ltd revised the company’s fiscal 2016-17 to 2018-19 earnings estimates upwards by 2-3% after the container rail and logistics solutions provider reported a 7.8% growth in volume in tonnage terms for 2016-17. They had fallen in 2015-16. Exim (export-import) volume, its core business, is up 9.2%.
Of course, the earnings upgrade is moderate, and it is not yet clear if higher volume will translate into revenue.
Due to the fall in lead distance, the company’s revenue in the December quarter dropped about 5% from the year-ago quarter. But that should not bother investors much. The company’s steps to lower empty (container) running costs are bearing fruit. This factor, coupled with volume recovery, can help it extract better economies of scale, which should aid earnings.
“Volume-linked leverage clearly helps Concor, given the fixed-cost nature of the business. Also in 3Q, just between higher double stacking to 216 trains from 188 trains q-o-q (quarter-on-quarter) and lower rebates, ConCor’s EXIM EBIT margins improved to 17.1% from 15.7% q-o-q ," Jefferies adds. “Double stacking (of containers) benefits should also play out in 4QFY17E (fourth quarter FY17 estimates)."
Adding to the optimism is the improving volume outlook. Maersk Line, a container shipping line, says Exim container trade volume growth, which doubled in 2016 from 2015, can be maintained if the government keeps up policy action.
Sandeep Mathew, an analyst at SBICAP Securities Ltd, says the prospects of core Exim trade (excluding crude and oil products) are improving. This should improve Concor’s volume outlook, given its dominant position in the domestic Exim container market.
Further, the Indian Railways’ initiatives to strengthen its freight traffic business, focus on dedicated freight corridor construction, and government initiatives such as multi-modal logistics parks are expected to help improve rail container operators’ competitive positioning. JM Financial Institutional Securities Ltd expects the creation of a rail development authority and other initiatives to help rail container operators to regain freight market share from the road transport sector.
The optimism has driven up the stock 26% so far this calendar year. The BSE 500 index during the period is up less than 16%. While valuations at 26 times 2017-18 earnings estimate are not cheap, a sustained recovery in volumes will be crucial for continuation of the stock’s outperformance.