Brokerages Expect Concor’s Land Lease Settlement To Pave Way For Divestment
Most analysts reiterated their bullish investment recommendation for Container Corporation of India Ltd., hoping that clarity over the state-owned company’s land lease settlement would pave the way for its divestment.
Till 2019-20, Concor has been paying land licence fee to the railways on the railway land leased to it on the basis of number of twenty foot equivalent units handled. But the Ministry of Railways, Government of India, has said the fee applicable on the railway land leased to Concor should now be charged at 6% of the value of land, which will be further increased 7% annually, according to an exchange filing.
Accordingly, the company has accounted land licence fees for all terminals on railway land to the tune of Rs 517.39 crore in FY21.
Concor will be entering into a 35-year lease for 24 terminals by paying 99% of the land value upfront to the railways. This, the brokerages including Credit Suisse and Kotak Securities said, takes away policy change uncertainty on land value and the annual 7% escalation, and is a positive for the company in the long run.
India has been trying to privatise Concor, along with two other entities, since 2019-20, aiming to meet its divestment target.
Meanwhile, the company saw its consolidated revenue rise 11% over the preceding quarter to Rs 1,956.69 crore in the January-March period. Its profit, however, tumbled 89% to Rs 25.64 crore. Ebitda, too, fell 48% sequentially to Rs 195.68 crore during the period. The operating profit, according to Jefferies, was impacted by one-offs like prior period land licence fee payment of Rs 130 crore and a medical benefit contribution of Rs 17.7 crore.
Morgan Stanley said Concor reported handling volumes up 13% over the year earlier, driven by 11% growth in its export-import business.
Shares of Concor were trading flat around Rs 669 apiece, a day after they touched a new 52-week high. 18 analysts who track the company recommend a 'buy', while 12 recommend 'hold', according to Bloomberg data. The remaining six analysts have a 'sell' rating on the stock. The 12-month consensus target price of Rs 646 implies a downside of 3% from current level.
Here’s what brokerages have to say about Concor...
Reiterates ‘buy’ with an increased target price of Rs 750 apiece, implying an 18% upside.
Management intention of surrendering two more terminals (over and above 16 terminals surrendered up to FY21) and additional land in FY22 is estimated to lead the LLF levels to fall further to Rs 450 crore.
Management statement that the LLF issue has now been finally settled removes the biggest immediate hurdle to divestment.
The proposal to take 24 terminals on long-term lease is largely valuation neutral but removes any residual LLF uncertainty.
Long-term leases provide higher certainty on fixed costs. The debt incurred for leasing is estimated to be repaid within two-three years.
With clearance of pending dues (like past LLF/service tax), the path to stake sale is further cleared.
After the publication of expression of interest, investors are expected to start assigning synergy premiums of a potential acquirer which can lead to the stock trading in the Rs 870-900 range.
Upgrades FY23 EPS by 19% and retains ‘buy’ with a revised target price of Rs 850 apiece (from Rs 700).
Lack of an auditor qualification in 4Q separately mentioning railways demand (seen in Q1-Q3 results’ notes) lends credibility to the issue being resolved.
Concor has the largest network of 62 inland container depots/container freight stations in India.
The company informing the exchange about Rs 3,500 crore borrowings will lead to a net debt to equity ratio of 0.4x in FY23 and operational cash flows should enable the company to comfortably repay loans by FY25-26.
A 35-year lease could make privatisation bidders more comfortable with their assumptions for Concor’s valuations.
However, if LLF was paid instead then further value could have been created if the private player gave up leased terminals and shifted volumes to owned terminals.
Dedicated freight corridor linked 22% volume CAGR and 38% profit CAGR in FY21-25E to drive upside.
Second wave of Covid related delays lower FY22 volume assumption to 18% YoY growth at 44 lakh TEU (twenty-foot equivalent unit) vs 47 lakh earlier.
Disinvestment is an additional upside for Concor.
Maintains ‘outperform’ with a target price of Rs 750 apiece.
Borrowing for land leasing would solve capital allocation problem.
Revised EPS by 37%/22% for FY22/23.
Roughly estimates its business/market share to become 1.4-1.5x in two-three years on higher market share of rail.
Divestment led capex cut with reorientation on sweating rather than building assets, improving utilisation.
Incremental upside can be driven by broader economic and manufacturing pickup and progress on DFCC driven market share gains and strategic sale.
Risks relate to extant government ownership, market share loss to private competitors, low return on equity (10%/13% in FY 23/24 including partial DFCC upside) and event dependence.
Suggests ‘sell’ with a target price of Rs 540 apiece.
Upcoming positive externalities may support price action in the near term.
But the potential upside does not compensate on the potential business downside as the endgame on externalities materialises.
Gross profit lower 18% on a YoY basis, reflecting mix effects (higher share of empties) and competitive pressures in the key NCR market (losing share at JNPT).
Expected a gross margin expansion given the recent price increase taken by the key Tughlakabad terminal.
With the overhang of LLF gone, path to company’s privatisation is clearer.
Start of commissioning of dedicated freight corridor would also boost the market’s expectations of business growth for Concor.
Increased target price to Rs 540 from Rs 455 on account of — lower LLF (+3%); increase in multiple back to 15x FY2023 EV/Ebitda from 14x earlier (+7%); benefits of upfront payment of LLF versus earlier 7% inflation model (+5%); and roll-forward to June 2023 (+3%).
The upside case on earnings does not provide any meaningful returns from here.
Noted that downside risks that may take time to play out in FY2023.
A more realistic assessment of gains from DFC from the management during 4QFY21 results call noted — business upside being limited to volume gains from a faster turnaround time and margin to remain steady.