Why Morgan Stanley has upgraded this PSU railway stock's rating

19 May , 2022 By : Kanchan Joshi

Global brokerage Morgan Stanley has upgraded Container Corporation of India shares' rating to equalweight on more favorable risk reward. Its upgrade is driven by rail continuing to gain share medium term on higher diesel prices, more reasonable valuations, expanding domestic container TAM.

The brokerage has an equalweight rating on the PSU rail stock with a target price of Rs628. Container Corporation of India Limited is under the ownership of Indian Railways, and the stock is down about 2% in 2022 (YTD) so far.

“Higher diesel prices should help rail gain share medium term; more reasonable valuations as 1-year fwd consensus P/E has corrected from 39x in May-21 to 27.7x in May-22; and expanding domestic container TAM (food grains, cement from F23)," Morgan Stanley said on the rationale behind the upgrade.

Though, the brokerage sees downside risks to consensus EBITDA and PAT CAGRs over F22-24e of 28% and 31% and Land license fee (LLF) is not yet a settled issue and is critical for government divestment and new bidder would need clarity on.

“We value Container Corporation using a probability-weighted DCF and continue to assign probability weights for base, bull and bear case of 75%/20%/5%. Our revised price target is Rs628 (up from Rs606). CCRI currently trades at 27.1x 1-year fwd P/E (in-line with the average since F12)," the note added.

The brokerage's bull case weighting reflects the possibility of lower pricing being charged by Indian Railways once DFC is operational, leading to higher market share gains for rail and also benign Land license fee (LLF) situation.