Lancer Containers Lines Ltd : Stock Analysis for December 2023

Company Introduction

Incorporated in 2011, Lancer Container Lines Limited (LCCL) offers ocean transport services for shipping containers to over 86 ports globally. It operates an asset-light model with a mix of 14,000 owned and leased containers. LCCL has a presence across 30 countries through 14 offices in India and 1 in Dubai. Over the last 5 years, it has clocked an impressive 96% CAGR in its stock price.

LCCL reported a subdued performance in the latest September 2023 quarter with a 27% YoY decline in sales at Rs.166 crore and 11% dip in net profit at Rs.14 crore. For FY23, it posted a 29% rise in sales to Rs.837 crore and 87% jump in net profit to Rs.54 crore compared to last fiscal.

As of Sep’23, LCCL had a market cap of Rs.1,951 crore, P/E ratio of 36.9x and ROE of 40.6%. Its balance sheet remains healthy with a debt to equity ratio of just 0.48 and cash & cash equivalents of Rs.39 crore. Promoter holding though has dropped 190 bps QoQ to 52.6%.

Should We Buy, Sell or Hold?

LCCL stock appears fairly valued at the current price of Rs.90 and does not offer a clear margin of safety for investors. Though revenue and profit growth over the past 3 years has been strong, the latest quarter results have been disappointing.

Moreover, working capital cycle has deteriorated with receivables position remaining stretched. Operating margins while decent at 13-15% levels, are showing signs of pressure in light of rising costs.

That said, the overall financial health and return ratios of LCCL remain robust. Further, global container shipping demand is expected to stay firm in the medium term aiding volume and realisation growth.

So while short term headwinds persist, the stock can still deliver healthy returns over a 3-5 year period. Hence, investors with above average risk appetite can consider buying the stock on 10-15% corrections for a long term perspective.

Vital Ratios and Comparison

LCCL has an attractive ROE of ~40% indicating efficient capital utilization. Its debt to equity ratio at 0.48x is better than the industry median of 0.59x highlighting a fairly lean balance sheet position.

Further, it enjoys negative working capital cycle driven by healthy payables position and low inventory holdings. However, receivables stretch remains a concern.

Compared to peers, LCCL tops in terms of ROCE and margins but lags in sales growth over the past 5 years. Its valuations appear largely in line based on P/E ratio. However, EV/EBITDA multiple is on the higher side at over 15x.

All key competitors namely Transport Corporation, Gateway Distriparks and Container Corporation have witnessed better profit growth over the last 12 months compared to LCCL’s subdued performance.

Going forward, LCCL would need to improve its sales momentum and tighten working capital cycle to retain its edge over peers. Maintaining margins in the face of input cost inflation would be crucial as well.

Is the Stock Over/Undervalued?

LCCL stock appears fairly valued as per different valuation parameters:

• P/E Ratio – At 36.9x TTM earnings, valuations seem elevated. But on average 3-year earnings, the P/E ratio falls to moderate levels of 24.6x.
• P/B Ratio – Stock is trading at 6x its book value per share. Compared to its 5-year average P/B of 13.3x, current valuations look reasonable.
• DCF Valuation – Intrinsic value as per conservative DCF model turns out to be Rs.128.5 which implies 42% upside from CMP. But given variability of assumptions, current market price seems aligned with DCF value.

Thus, while the stock’s current market price is not exactly cheap, it does offer fair value considering LCCL’s sound track record and financial muscle. Investors can look to take exposure on 10-15% dips.

Should We Buy and Why?

LCCL stock can be accumulated by investors with above average risk tolerance and investment horizon of over 3-5 years. The rationale for considering buying are:

• Asset-light business model providing flexibility to scale up global operations
• Leadership in specialized container shipping services segment
• Strong client relationships and network covering 30 countries
• Healthy balance sheet with robust return ratios
• Strong industry tailwinds – global container shipping projected to grow at ~5% CAGR till 2026

However, investors need to track margin evolution in light of rising costs and keep an eye on receivables position. Promoter shareholding dilution also needs monitoring.

Overall, LCCL is well placed to capitalize on buoyant industry dynamics. The company can sustain 20%+ earnings growth over the next 3 years, making the stock a good bet for long term investors.

Industry Growth Prospects

The global container shipping industry has strong growth prospects driven by increasing international trade flows and gradual recovery post COVID disruptions. As per estimates, demand for container shipping is projected to rise at a CAGR of 4-5% from 2022 to 2026.

Within India, the ocean freight industry is pegged to grow at an impressive rate of 10-12% annually during this period, aided by the government’s Make in India and export promotion initiatives.

Leading operators would benefit from fleet expansion by global liners and preference for outsourcing non-core shipping operations to specialized players like LCCL. Hence the outlook remains positive for consolidated players in this space.

Long Term Outlook

LCCL appears well positioned to deliver healthy growth and returns over the long run owing to:

• Leadership in attractive industry niche – Company enjoys dominant position in providing end-to-end NVOCC services
• Asset-light model offering flexibility to scale up global operations
• Strong customer captivity and network coverage across 30 countries
• Robust financial status with lean balance sheet – Provides fuel for expansion while keeping risk profile contained

Assuming LCCL sustains its double digit earnings growth run rate, ROE of 35-40% and reasonable dividend payout; the stock can potentially deliver 20%+ CAGR over the next 5 years.

However, any unexpected downturns in global trade environment, loss of competitive positioning or margin pressures due to rising costs would remain key monitorables.

Short Term Outlook

In the near term, LCCL’s prospects seem subdued given the demand/margin headwinds visible in the latest quarterly results:

• Volumes likely to remain soft over next 2 quarters with lingering impact of global slowdown
• Margins could stay under pressure owing to high bunker fuel costs and currency fluctuations
• Working capital cycle to remain stretched negatively impacting cash flows

However, the worst of cost inflation seems to be over and easing of crude prices could alleviate related pressures going ahead.

Overall, expect LCCL to register flattish growth and moderation in margins over next 2 quarters. Stock could remain rangebound in Rs.80-100 zone over next 6 months.

But healthy industry tailwinds over long run coupled with LCCL’s competitive strengths reaffirm our confidence in healthy double digit earnings growth resumption after near term blip.