Published on 13/02/2020 12:24:53 PM | Source: SKP Securities Ltd

Hold TCI Express Ltd Target Rs. 973 - SKP Securities

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Company Background

TCI Express (TCIEXP), originally established in 1996 as a division of Transport Corporation of India Ltd (TCI), came into existence after its demerger from TCI in 2016, promoted by Mr. D.P. Agarwal, Chairman and Mr. Chander Agarwal, Managing Director. It has emerged as amongst the fastest growing surface express logistics company, offering customised solutions. It enjoys ~5% market share with pan-India network comprising of 28 sorting centres (8 owned and 20 leased), 800+ branches, servicing 40,000+ pickup and delivery points through 5,000+ containerized vehicles, covering more than 95% of PIN codes in India. TCIEXP also specializes in international air express serving 202 countries.


Investment Rationale

Robust outlook: Topline to grow at ~10% over FY19-22E

* During Q3FY20, TCIEXP reported net sales of Rs 2,683.8 mn, registering a muted growth of 2% y-o-y driven by higher contribution from SME customers inspite of weak macroeconomic environment impacting major sectors of the economy. The Company expanded its geographical presence and opened 10 new branches during the quarter (57 in 9MFY20). The strategy is to penetrate more into metro cities and tap SME customers where realisations and margins are high. The Company witnessed topline of Rs 7,940.2 mn during 9MFY20.

* Going forward, with expectations of revival in the economy followed by Governments’ emphasis on logistics sector; national logistics portal and development of industrial corridors, we expect the Company’s sales to grow at a CAGR of ~10% during FY19-22E. The top-line growth will be backed by enhancement of capacities of sorting centres of the Company.


Margins are expected to improve

* EBIDTA margins during the quarter improved by 100 bps y-o-y to 12.8%, on account of cost control measures undertaken by the Company and increase in capacities in select existing vehicles (which has resulted in higher capacity utilization and better operational efficiencies). Operating Expenditure, as percentage to sales, reduced by 320 bps at 70.6%, however, other expenditure increased by 14% at ~Rs 194 mn due to increase in rent charges led by increase in number of branches during the quarter. EBIDTA margin improved by 70 bps to 11.9% in 9MFY20. Going forward, we expect EBIDTA margins to remain in the vicinity of ~13.2%.

* PAT margin during the quarter, increased by 240 bps y-o-y to 9.5% mainly due to reduction in interest cost and income tax by 85.4% and 27.9% respectively. The decrease in interest cost is on account of debt free status since Q1FY20. Going forward, we expect PAT margins to remain in the vicinity of 9.4% by FY22E.


Construction of Gurgaon and Pune based sorting centres on track

*TCIEXP has envisaged a capex plan of Rs 4 bn to be spent over FY19-23E, funded through internal accruals. Out of Rs 4 bn, the Company plans to spend Rs 3.5 bn for building up its own sorting centres, thereby doubling total sorting centres space from 2 mn sq. ft to 4 mn sq. ft. Currently, the Company has 28 sorting centres (8 owned and 20 leased).

* During the last quarter, TCIEXP held a ground-breaking ceremony for its two new sorting centres at Gurgaon and Pune with the capacity of 2 lakh sq.ft and 1.5 lakh sq.ft., respectively. Construction of Gurgaon sorting centre was at halt due to NGT order, during the quarter which is now back on track. Both the sorting centres are expected to be completed and commence commercial operations from Q2FY21 onwards. These sorting centres will be 18% mechanised which will be first of its kind in India, for hub and spoke model. The total capex planned for FY20 is ~Rs 500 mn of which the Company incurred capex of Rs 230 mn during 9MFY20.

* Two more sorting centres at Nagpur and Indore are also in the pipeline, construction of which will start in Q1FY21.

* The Company‟s objective is to invest in automation and implementation of business intelligence tools to reduce the turnaround time and have enhanced operational efficiencies in long run by reduction of direct cost.



* TCIEXP, being fastest growing ground service provider, is likely to benefit from GST implementation in the logistics industry, over a period of time. It is well positioned to capitalize on the growing market opportunities due to its asset-light model, focus on B2B segment with pan India presence, improving operating efficiencies led by capex funded through internal accruals and strong balance sheet.

* We have valued TCIEXP on PE basis, assigning a multiple of 29x to FY22 EPS of Rs 33.5. This PE multiple is at ~33% discount to last three years average PE multiple of 43x on account of slowing economy and subdued market conditions. Recently, the stock has rallied to 52 week high of Rs 909 which caps it‟s near term upside. Pending triggers for fresh rerating and stronger conviction, we recommend to „hold‟ the stock with the target price of Rs 973 (with an upside of ~10%).


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