Q1 show, lower licence fee, work on Western Corridor drive gains in Concor

Most brokerages upgraded the stock on hopes of margin improvement in FY22

The stock of the largest container train operator, Container Corporation of India is up over 11 per cent in the last few trading sessions. The gains are on expectations of lower land licence fee (LLF), progress on the Western Dedicated Freight Corridor (WDFC) and margin gains on improving product mix/volumes. Most brokerages upgraded the earnings estimates for FY22 by over 3 per cent to reflect the improvement in margin profile.

Its June quarter revenues which were up 52 per cent YoY came in better than expectations on the back of higher volumes and realisations. Segment margins for domestic and exports improved on sequential and Yoy basis due to lower land licence fee, higher double stacking and turnaround efficiencies. While operating profit margins came in at 24 per cent, analysts expect this to move up by at least 100 basis points going ahead.

“We estimate that as imports revive to pre-pandemic levels coupled with cost benefits of WDFC (Western Dedicated Freight Corridor) linkage in the second half of FY22, post-linkage of its Kathuwas terminal on July 29 2021, operating profit margins will improve further. Consequently, we estimate that this metric would be above 25 per cent in the last quarter of FY22,” say analysts at Nomura Research. The company is focussing on the imports segment and plans to offer value added services and derisk its margin profile.

The quantum of LLF to be charged by the railways, which has been a key headwind for the stock, is expected to be lower in FY22 at Rs 375 crore as compared to earlier guidance of Rs 450 crore. For the long term lease of 35 years, the outgo is expected to be between Rs 6,000 crore to Rs 7,000 crore. A deal  with the railways outlining the final terms would be positive for the stock.

An additional trigger is the commissioning of the WDFC which is expected to help the company gain market share given its network of terminals along the route. Higher share of the railways in freight traffic as compared to the roads segment will also improve its volumes. Investors should await the LLF closure, progress on divestment and margin trend before considering the stock.