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Emerging leader in express logistics…
Express (TCIEL) reported revenues in line with I-direct estimates while EBITDA and PAT were higher than I-direct estimates. Revenue grew 2% YoY driven by 1% volume growth amid continued slowdown in economic activity. EBITDA margins increased 101 bps to 12.8% mainly due to lower operating expense to sales ratio (70.6% vs. 73.8% in Q3FY19). Subsequently, absolute EBITDA grew 11% YoY to | 34 crore. PAT grew 36% YoY to | 26 crore, mainly due to an improved operational performance and lower tax rate (22% vs. estimated 35%).
EBITDA margin improvement likely to sustain
Revenue growth in 9MFY20 was slower than usual at ~5% (FY17-19 CAGR of 17%) owing to slower economic growth leading to lower volumes. However, the company expects volume growth to pick up in the next few quarters driven by better traction from large customers and continued addition of new customers from the SME segment. The key positive has been improvement in margins in spite of a tough market scenario. For 9MFY20, the EBITDA margin has improved 70 bps YoY to 11.9%. We expect the company to report a revival in revenue growth from FY21 driven by new branch additions and expansion of clients in the SME segment. On the EBITDA margin front, we expect 100 bps improvement from 12.2% in FY20E to 13.2% in FY21E.
Capex to pick up in FY21 driven by investing in sorting centres
The company has spent ~| 23 crore on capex in 9MFY20, which is lower than the expected run rate owing to a delay in getting regulatory approvals for expansion of the planned sorting centres. TCIEL expects the two new sorting centres at Gurgaon and Pune to be operational by Q2FY21. Overall, the company has maintained the capex guidance of | 400 crore in five years (of which | 100 crore already spent in last two years). It would be utilised to expand its reach in Tier II, III cities (hub & spoke model - reach 1000 offices count), open new sorting centres, develop in-house analytics, etc. During Q3FY20, the company added 10 new branches (total branch network of 737 branches) to penetrate deeper into new geographies.
Valuation & Outlook
The express segment has been delivering robust earnings growth, primarily due to the benefits of reduced delivery time, growing preference for just-intime approach (reducing inventory costs) and minimisation of loss of sale opportunities. Low leverage, a robust growth trajectory and high core return ratios (FY22E RoCE at 34% and a ~3% FCF yield), position TCIEL as one of the preferred picks in the logistics space. We value TCIEL at 28x P/E with a target price of | 1020 and a BUY recommendation on the stock.
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