Foreign Trade Regulator Disallows Over 80% Of Container Corp.’s Export Benefit Claims

Container Corporation of India Ltd. said the foreign trade regulator has disallowed more than 80 percent of its export benefit claims.

The Directorate General of Foreign Trade disallowed Rs 861 crore of the total claims worth Rs 1,044 crore, stating that the services provided by the unit of Indian Railways towards customs transit of sealed containers by rail transport to and from inland container depots are not eligible under the Service Exports from India Scheme, Concor said in an exchange filing on Oct. 4.

The export incentive scheme was introduced in 2015 as part of the new Foreign Trade Policy 2015-2020. As part of the programme, the government incentivises exporters—all types of service providers—in India irrespective of the nature of organisation with a 3-5 percent benefit. The reward is mainly duty-free credit scrips and is valid for five years—from 2015 to 2020.

The monopoly operator of container trains in India with 70 percent market share—that booked a total export benefit of Rs 1,044 crore for financial years ended March 2016-2019—said it will contest the DGFT’s decision. Before the DGFT’s clarification, Concor’s income from the scheme accounted for one-fifth of its profit before tax over the last four fiscals.

Citi Research said the disallowed amount may have to be written-off on exceptional basis, which can have an impact of about Rs 10.2 per share on a post-tax basis.

For 2018-19, Concor had an earnings per share of Rs 20.1 and it expects to report an EPS of Rs 21.1 in the ongoing financial year, according to Bloomberg data.

Citi Research, however, said the impact is “manageable” due to its market leadership and potential benefits due to dedicated freight corridor commissioning over the next two years.

But Morgan Stanley downgraded the stock to equal-weight from overweight citing the recent surge in stock price and disallowance of export benefit claim. The brokerage lowered its earnings per share estimates for FY20-22 by 12-14 percent to factor in the disallowance of SEIS income, marginally offset by lower corporate tax rate.

To be sure, independent auditors of the state-owned company had raised concerns about the income under the export incentive scheme in their audit report for 2018-19. Concor had recognised this as income receivable under the scheme. But the claims filed by the company had, so far, not been approved by the department concerned in the Government of India.

The auditor had raised concerns regarding the fair value of the amount receivable, as it was factored in the balance sheet of the company as a recognised income. But no amount had been realised till March 31, 2019.

In their key audit matters, the auditors Arun K Agarwal & Associates had said, “Given the involvement of management judgement and estimate, any variation may have consequential impact on the recognised revenue.”