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On the cusp of a transformation

Initiating coverage with a positive outlook

* The Indian Logistics sector is set to witness a transformation, led by: 1) reforms like GST and e-way bill ushering in a sea change in transparency and consolidation; 2) development of support Infrastructure that improves connectivity and leads to a faster turnaround time; 3) change in the perception of Logistics being more than just Transportation and Warehousing, but as a specialized function; 4) evolving consumer demands, where the speed of delivery is of utmost importance; and 5) emergence of tech driven operators in this space, who are fast capturing market share.

* The Logistics market, pegged ~USD250b, is expected to grow at 10-12% CAGR, with a pickup in demand. The shift to organized from the unorganized sector (~90% currently) would be an additional kicker. The demand for value added services is on the rise.

* We expect the 3PL segment to witness a strong pick-up as more companies outsource a large part of their Logistics to 3PL operators. Express cargo would benefit from a pickup in Manufacturing and exponential growth in e-commerce. We expect the Rail Container operators to gain traction with the commissioning of the Dedicated Freight Corridor (DFC).

* In this sector initiation report, we set forth our views on six companies in India’s Logistics space: TCI Express (TCIE), Transport Corporation of India (TCI), VRL Logistics (VRL), Blue Dart Express (BDE), Mahindra Logistics (MLL), and Container Corporation of India (CCRI). We assign a Buy rating to TCIE, TCI, VRL, and CCRI, and a Neutral rating to BDE and MLL. TCI is our top pick in this space.

Reforms changing the face of the Logistics industry

The Logistics industry has seen a massive change in the last few years, with the introduction of reforms like GST and e-way bill. With the abolishment of state-level taxation through GST, the industry is heading towards consolidation and efficiency. Transportation is now much faster, and smaller inefficient warehouses have made way for larger centralized warehouses. e-way bill has improved transparency in the Road Freight industry, which has been traditionally dominated by the unorganized segment. These reforms are propelling higher growth and formalization.

Infra development takes center stage, to reduce Logistics costs

The high cost of Logistics in India has been due to an inefficient modal mix, driven by a relatively inefficient Road segment. While Road Infra has massively improved over the last few years, Rail and Waterways are catching up now. The Road segment has always benefited as it could provide last-mile connectivity. With a dedicated Rail network for freight getting operationalized in phases, the market share for Rail would increase in the modal mix, which would benefit companies like CCRI.

Value added services like 3PL and Express businesses are well placed

Increasing need for integrated Logistics solutions and higher adoption of 3PL by enduse sectors would usher strong demand for 3PL (to benefit companies like TCI and MLL). In Express, a pick-up in Manufacturing (B2B) and exponential growth in the ecommerce space (B2C) will benefit companies like TCIE and BDE. We expect 3PL and Express to grow at 16-18% CAGR over the next five years.

Emergence of new age tech and PE funded Logistics operators

Over the last decade, several new age tech and PE funded Logistics operators (Delhivery, Ecom Express, etc.) have made a strong penetration in this space, especially in the Express industry. Starting with B2C Express (driven by e-commerce), some are now attempting to capture market share in the B2B segment, led by Manufacturing. This has increased competition in selected areas for traditional operators. The massive usage of technology to save on costs and create efficiency is providing an edge to some of these players.

Initiate coverage with a positive outlook

The reforms undertaken in the Logistics space, along with a flurry of investments in infrastructure in the recent years, have created a solid base for sustainable growth. While traditional Logistics segments like FTL/LTL would grow well, driven by a pickup in overall economic activity, we expect the niche value added services segments like 3PL and Express to grow at a faster pace. With strong industry growth, coupled with a shift to the organized from the unorganized sector, the outlook for the organized players seems extremely bright. We initiate coverage on this space with a positive outlook.

* TCI Express (BUY) – Delivering with speed: TCIE is one of the better placed Express players, with: a) a robust position in the Express industry, b) higher contribution from B2B clients, and c) focus on the growing SME sector. We expect TCIE to clock a revenue/EBITDA/PAT CAGR of ~19%/26%/24% over FY21- 24E. We value TCIE at 38x FY24E EPS to arrive at our TP of INR1,900.

* Transport Corporation (BUY) – A multi-modal play: TCI is a long-term play, backed by: a) a diversified clientele base (with no reliance on anchor customers), b) improving share of high margin Less than Truck Load (LTL) business in the Road Freight division, and c) strong presence in the high growth 3PL segment. We expect the company to clock a revenue/EBITDA/PAT CAGR of ~17%/21%/26% over FY21-24E. We value TCI at 15x FY24E EPS to arrive at our TP of INR620.

* Blue Dart Express (Neutral) – In the Express lane: Key triggers include: a) expected pickup in the overall Express industry driven by e-commerce and the Manufacturing segment, b) increasing share of the high growth Ground Express business, and c) focus on new initiatives like tie-ups for distribution of certain packages via drones. We expect BDE to clock a revenue/EBITDA/PAT CAGR of ~15%/16%/28% over FY21-24E. We initiate coverage with a Neutral rating on the stock with a TP of INR7,010 (27x FY24E EV/EBITDA).

* Mahindra Logistics (Neutral) – Established player in the high growth 3PL space: Robust industry growth, asset light business model, and strong parentage of the Mahindra group are key triggers for MLL. We expect a revenue/EBITDA/PAT CAGR of ~18%/34%/63% over FY21-24E. We value MLL at 40x FY24E EPS to arrive at our TP of INR795 and assign a Neutral rating. At the CMP, most of the positives are priced in.

* VRL Logistics (BUY) – Asset ownership at play: We expect robust demand from the LTL segment over the next couple of years (driven by reforms like GST and eway bill), which would result in 16% revenue CAGR over FY21-24E. We expect the healthy margin profile to continue, leading to 15% EBITDA CAGR. With a low growth in depreciation due to the limited capex requirement, we expect 37% PAT CAGR over FY21-24E, with a RoE of ~17% in FY24E. We initiate coverage with a Buy rating on the stock with a TP of INR460 (35x FY24E EPS)

* Container Corporation of India (BUY) – Largest beneficiary of DFC: CCRI is the undisputed market leader in Rail freight Logistics, benefitting from the commissioning of DFCs, leading to higher margin and volume. We expect CCRI to clock a revenue/EBITDA/PAT CAGR of ~22%/37%/44% over FY21-24E. The stock trades at 13x FY24E EV/EBITDA. We derive a DCF-based TP of INR800 and assign a Buy rating on the stock.

* Delhivery (not rated) – Riding the e-commerce wave: Delhivery has become one of India’s leading supply chain service companies since its inception in CY11. It provides a range of services, which includes Express services, LTL and FTL freight, reverse Logistics, and B2B and B2C Warehousing, with B2C contributing ~65% of the business for Delhivery. It operates 20 automated sorting centers, over 67 fulfillment centers, and more than 68 hubs, catering to over 17,000 pin codes spread across more than 2,825 towns.

Key risks

* Players have managed to pass on the fuel cost increase, albeit with a lag. Any major increase in fuel costs may hurt the margins of Logistics operators, if they fail to pass on the same entirely.

* If there are any new transport restrictions imposed due to a fresh COVID wave, then it could have negative implications on the near term performance.

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