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Container Corporation of India rating: Buy; Scale of correction is unwarranted

For the strategic buyer, we estimate up to Rs 53 bn in synergies without considering any tax benefits.

Container Corporation of India’s (CCRI) release has highlighted that potentially Rs 8.61 bn of SEIS export incentive receivables have been deemed ineligible on an initial assessment by the Directorate General of Foreign Trade (DGFT). In our opinion, this is a key reason for the significant ~7% correction in CCRI’s stock price on 7 October vs 0.4% decline for Nifty 50, after its significant rally from levels of Rs 500 in recent weeks following the announcement that the Central government will seek to divest 30% or controlling stake in FY20.

We estimate Rs 8.6 bn one-time receivable write-off or ~Rs 14/sh: Previously we did not incorporate Service Exports from India Scheme (SEIS) income into our FY20/21F projections. We believed that SEIS incentives should not be considered in earnings estimates, hence the news has no impact on our FY20/21F estimates. However, we now think old SEIS incentives of Rs 10.44 bn at end-FY19 will likely be written down by Rs 8.6 bn (~2% of EV). Thus, a ~7% correction in stock price is unwarranted, in our view.

We estimate that port companies can extract Rs 53 bn of cost synergies; valuation up to Rs 725 for a strategic buyer: We estimate that large West Coast ports can extract Rs 53 bn of direct synergies in the event of a controlling stake sale. These synergies could add to the stock’s implied upside.

Trading at 18x FY21F EV/Ebitda; Target Price raised to Rs 670

We value CCRI at 18x 1Y fwd EV/Ebitda (roll forward to Sep-21 from Jun-21 Ebitda previously) and to that add Rs 1.83 bn in SEIS receivables as estimated by CCRI management following the DGFT assessment, to arrive at our new, increased TP of Rs 670, implying 17% upside. We raise our multiple to 18x from 17x earlier to account for higher ROE (almost rising 120bp to ~20% in a steady state), which results from tax rate estimate reducing to 25.17% from 30% assumed. Our FY20F/21F Ebitda forecasts are 17%/6% lower than consensus. Thus, our FY20F/21F EPS estimates are 27%/15% lower than consensus. The non-inclusion of SEIS incentives on a recurring basis is the key reason for our lower FY20F/21F Ebitda/EPS projections.Loss of market share to trucking and delay in commissioning of the Western Dedicated Freight Corridor (WDFC) are key downside risks.

With a 30% controlling stake sale, we estimate significant upside (up to 25%) for premium for strategic buyer

On October 1, the GoI announced that it had cleared the sale of a 30% equity stake in CCRI. CCRI, with its leading market share in the rail container trade (~70%+ over the past five years), could be potentially viewed as an attractive acquisition. For the strategic buyer, we estimate up to Rs 53 bn in synergies without considering any tax benefits. Based on our assumptions, we believe CCRI is at the cusp of multi-year growth, driven by an increase in rail share from 26% in FY19 in the Western region to at least 40% by FY23/24F driven by the commissioning of the WDFC till Palanpur in Gujarat. In addition, considering its investment in multi-modal logistics parks (MMLPs) and terminals, we think CCRI is best placed relative to competitors to benefit from WDFC commissioning till Gujarat.

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Source: Financial Express