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Guiding for a 5 year earnings CAGR of 25%

TCI Express (TCIE) Q1FY22 performance is slightly below expectations on margins (EBITDA margin at 14.4%; I-Sec 15.7%). This was due to higher employee costs at 11.5% of topline (annual appraisal). Volumes have been muted (Covid second wave impact, down 22% QoQ) while realisations are up 2.5% QoQ.

Management continues to underline the strategic vision to double topline in 5 years, through new product offerings (projected to be 25% of topline), addition of branches (200+ in next two years), while scaling up EBITDA/te to 22%. Capex in own sorting centres (Gurgaon and Pune to start with) along with Rs500mn currently being spend on automation to improve turnaround from the two centres will act as revenue and margin trigger. Significant run-up in stock price (74% in the last 4 months) leads us to be a bit conservative. Downgrade to ADD from Buy with a revised target of Rs1732/share (earlier Rs1306/share).

* EBITDA margins declined sequentially but remained close to full year FY21 margins, due to lower capacity utilization of 83.5% in Q1 FY22 as compared to 86.5% in Q4FY21 primarily due to different lockdown timing and restrictions in different states. Also, higher employee costs (annual appraisal bonus) impacted margins – which should normalise in the coming quarters.

* Strategic priorities for next five years. Management has been able to lay down a clear roadmap. TCIE plans to double revenue in next 5 years, expects to double number of branches during the same time (~200-250 branches over the next two years) while owning sorting centres in major metros. New value added services is expected to contribute 25% of topline. This includes cold chain express, C2C express and air express respectively. The planned capex stands stable at Rs4bn for 5 years of which Rs2.15bn has been spend in last 4.5 years, with investments in sorting centres, automation and enhancing technological capabilities. Management aims to maintain high dividend payout ratios and continue to aim for industry leading return ratios.

* Capex incurred during FY21 was primarily toward setting up owned Sorting Centre at Gurgaon and Pune. TCIE expects to spend Rs500mn to be spent towards automation. Pune sorting centre of 0.15mn sq. ft. is operational since June, ’21, while the Gurgaon sorting centre (0.2mn sq. ft) will be operational from Q3FY22. As these (owned) sorting centres ramp up we can see definite margin triggers through i) inhouse ERP and automation (first automation will be instituted in Guragon in FY23) ii) Shorter turnaround time and iii) higher capacity utilisation. Next targets Chennai, Nagpur, Kolkata, Mumbai etc. Rental costs for FY21 were Rs350mn, and will be same in FY22E

* Downgrade to ADD from Buy. We value TCIE at 35x FY23E. We believe in the management assessment of earnings compounding at 25%+, given the underlying strength of business model. Given the stock price run-up, we downgrade to ADD.

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