Concor: Forecast cut points to muted short-term outlook

Start of the Dedicated Freight Corridor remains key re-rating trigger

Container Corporation of India (Concor) has cut its forecast for the current financial year for volume and revenue growth. The lowered target comes on the back of muted global trade and delay in the recovery of domestic economy. For the first five months of FY16, major ports recorded a volume growth of 5.5 per cent. The Concor management has cut its FY16 volume forecast from 9-10 per cent earlier to seven-eight per cent now. Consequently, the revenue forecast has been reduced from the earlier 15 per cent to 11 per cent.

In addition to slowing export-import (Exim) volumes, what has impacted Concor has been the strike at JNPT port, the largest in the country for containers, and the disruptions caused at Mundra/Pipavav Ports due to heavy rains which damaged the tracks. While these disruptions might be temporary, the bigger worry is the weak macro data.

Analysts at JM Financial say the volume growth estimates given the current situation are optimistic and believe the company will be able to achieve Exim growth of four per cent.

Lower top line coupled with haulage tariff hikes by Indian Railways would not only impact margins, but also make it less competitive compared to the road players. The company has forecast for a fall in margins by 300 basis points year-on-year to 20-21 per cent in FY16.

Pricing, especially in the domestic segment, could be an issue as the road sector benefits given the sharp fall in diesel prices, surplus capacity and decline in interest rates.

Despite the lowered management forecast, the stock has not reacted much as most of the slowdown woes seem to have already been built into it. The Concor scrip is down 20 per cent from its mid-July highs of Rs 1,881, after touching a low (closing basis) of Rs 1,298.25 on September 7. While the recovery in near-term disruptions (JNPT, Pipavav Port) should help improve volumes, the biggest trigger for the company is start of the Dedicated Freight Corridor (DFC). Analysts at Nomura believe the commissioning of the corridor by 2018-19 will potentially lead to a 20 per cent annual revenue growth over a 10 year-period after operations resume.

The near term, however, is likely to see some earnings volatility, with JM Financial analysts cutting FY16-18 earnings estimates by six-nine per cent to reflect lower volumes and margins. However, most analysts have a ‘buy’ rating on the stock given its market leadership, unmatched assets and triggers in the form of the DFC.

Investors should look at further corrections in the stock before taking exposure. At the current price of Rs 1,504, the stock is trading at 25 times its FY17 earnings estimates.