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Steady execution and strong commentary   

TCI Express’ (TCIE) Q1FY23 EBITDA has come as a positive surprise. Mediumand long-term revenue and margin guidance remain intact. Company aims at >Rs20bn in revenue and 20% EBIDTA margin by FY25, which is double its FY22 revenue and 3x PAT. Calibrated capex is guided to increase the number of sorting centres and improve efficiency through process automation. Management is confident of increasing EBITDA margin by 100bps p.a. and is yet to see any meaningful competition in its core areas of operation. To further expand its presence among SME customers, TCIE added 10 new branches during Q1FY23 in the west and north regions. It intends to add around 50 branches during FY23. Maintain BUY with a revised target price of Rs2,050/share (based on 36x FY24E EPS). TCIE remains our preferred pick in the logistics sector. We acknowledge the risks to volumes and margins in FY23E and FY24E (we assume volume growth at 25/20% for the two years, EBITDA margin at 18/19%)

* EBITDA margin improved 30bps YoY in Q1FY23. EBIDTA margin improved ~30bps YoY backed by higher capacity utilisation and operational efficiencies – gross margin expanded by 110bps YoY. Gross margin is always the weakest in Q1 and gets stronger in Q2 with Q3 even better. This trend is going on for the past five years. Growth in the business in the west region and decline in east and south have resulted in a marginal drop in utilisation (to ~84.5%) in Q1FY23. TCIE expects a utilisation rate of ~85.5% , which will act as a further margin lever.

* Strong cashflow deployed towards capex to improve operational efficiency. Capex of Rs330mn was incurred during Q1FY23 primarily towards land purchase in Kolkata for setting up an automated sorting centre. TCIE successfully commissioned India's first and largest automated B2B sorting centre in Gurgaon in Mar’22 reducing parcel handling time and vehicle halting time. In Jun’22, ~18% of total volumes were processed at the new centre.

* Investment in sorting centres to improve turnaround times. Management expects improvement in turnaround time (reduce halting time by 40%) through installation of a conveyor system in the Gurgaon sorting centre. As operations stabilise, the system will be replicated in Pune, Mumbai and Nagpur in FY23 as new sorting centres commission. This will be an incremental margin lever, along with introduction of new capacities at the sorting centres. Management remains calibrated in implementing capex to unlock operational efficiencies. Once the current round of capex (Rs5bn) ends in FY23, TCIE will try to follow-through with another calibrated round to improve capacity and efficiency with constant focus to enhance profitability.

* Aims at Rs20bn in revenue and 20% EBIDTA margin by FY25. In FY23, the company targets to achieve volume growth of ~14-15% and revenue growth of 18- 19%. Ultimately, it targets >Rs20bn in revenue and 20% EBIDTA margin by FY25. This implies EBITDA margin expansion by >100bps each year.

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