Published on 5/08/2020 10:42:02 AM | Source: ICICI Securities Ltd

Buy TCI Express Ltd For Target Rs.891 - ICICI Securities

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Branch economics, cost levers as margin tailwinds

Our analysis of TCI Express’ (TCIE) annual report highlights: i) possible improvement in revenue per branch going forward given the 12% decline witnessed in FY20. While number of branches increased by ~100 YoY to reach 800 in FY20, we look at the possibility of the number crossing 1,200 in the medium term. ii) Higher employee costs and higher other expenses mainly on account of significantly increased rentals impacted the margin trajectory in FY20. TCIE has been able to slightly increase the EBITDA margin YoY despite these cost headwinds, on the back of 210bps increase in gross margins. While revenue growth will ensure that the ratio of employee costs to revenues gets normalised, the current pandemic offers an opportunity to reverse the trend of increasing rentals. iii) Analysis of receivables shows a judicial customer mix. iv) Relatedparty transactions stay limited. Maintain BUY.

* Added ~100 branches in FY20; revenue per branch declined by 12%. The number of branches increased to 800 from 700 YoY while lack of commensurate revenue growth led to a reduction in revenue per branch (back to FY16 levels). This should improve as the situation normalises and will be the key driver of revenue growth in FY22E. We believe, the number of branches can cross 1,200 in the medium term, implying significant structural upside to current revenues.

* Net cash and cash equivalents reached Rs372mn in FY20. This was made possible by Rs618mn of FCF generated while capex was controlled at Rs 190mn. Rs 270mn out of Rs1,674mn of receivables stretch beyond 90 days. Only Rs45.3mn (3%) is stretching beyond 180 days where the expected loss ratio is high at 19%.

* Employee costs increase to 10% of topline from 8% YoY. While the number of employees has increased 2.5% YoY, per-employee cost has increased 16% YoY. Annual report justifies this as mainly an incremental cost to attract top talent and retain existing performers. As business environment normalises, TCIE would do well to revert to the old normal of employee costs/revenues.

* Rent inflation should abate post Covid-19 and from move towards owned spaces. Inflation in rental expenses is much higher than initially expected, with approximately a third of the rentals going to related parties. Also, rent per sqft of leased space per month, which was Rs18 in FY18, has increased to Rs29 in FY20. Hopefully there will be a reset on account of the pandemic. The increase has been driving growth in other expenses, which rose from 5.6% of the topline in FY18 to 7.43% in FY20. The strategy of ownership of warehousing spaces vs the headwinds on rentals allows an interesting decision matrix for TCIE.


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