India’s largest rail freight operator put out a disappointing set of numbers on flat volumes, both on the domestic as well as export-import segments. Its results were impacted by the lower container traffic at key ports due to the ongoing global slowdown as well as a sluggish domestic economy.
Container traffic in the first five months in the country grew barely 2% due to poor performance of JNPT (Mumbai) and Chennai which account for 70% of overall container traffic.
The slowdown is impacting Concor where both the domestic and exim segments suffered a fall in demand in specific sectors leading to higher costs as the company has to run empty rakes in one direction impacting profitability.
While overall revenues grew only 6% to Rs 1,054 crore, expenditure was up 9% leading to a 2% fall in Ebidta at Rs 257 crore. The reason for high expenditure were rail freight expenses which as a percentage of sales were up 140 bps to 58%. Rail freight accounts for 75% of the operating costs. Though freight volumes fell 3.3% y-o-y for Concor, it managed to improve its realisations on the back of hikes in some routes.
The company posted a margin dip (70 bps to 6.9%) in the domestic freight business due to the slowdown in the steel and jute sectors. The lack of volumes in pig and sponge iron due to due to excess capacity (inventory) led to the fall in demand with one side of the trip running empty. On the exports front the margins squeeze was higher at 300 bps to 25%. Overall margins came in at 24.4% down 200 bps y-o-y. While the company saw healthy volume growth of 5% till August, rupee depreciation led to a 1.5% drop in import volume in September.
Given the slowdown, operational issues and competitive pressures, analysts have raised questions about the pace of growth of the company. Says Amit Agarwal of Kotak Securities, “Falling lead distance, higher haulage (margin pressure), competition, increased empty running and infrastructure bottlenecks of IR are jeopardizing the growth prospects of Concor.”
Net profit jumped 32% to Rs 232 crore due to a one off in the year ago quarter. Adjusted for MAT provision last year net profit grew just 5%. While the stock price was flat in Thursday’s trade (the company declared results post market hours on Wednesday), it is down 4% over the last week.
If volumes deteriorate further or if there is freight hike, there could be further pressure on the stock. At the current price, the stock is trading at Rs 1015, the stock is trading at 14 times its FY13 estimates. With results not up to expectations, most analysts have a reduce or underperform call and believe that derating of the stock will continue. Says Sanjaya Satapathy, research analyst, DSP Merrill Lynch, “Lack of growth coupled with sustained capex is likely to drive down ROCE to 12.7% by FY15e compared to 14.6% in FY12.
We expect the derating of the stock to continue till ROCE bottoms out and 13%+ growth phase return. Current valuation of the stock at FY14e PE of 13x, PB of 2x is expensive.