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Margins continue to expand

TCI Express (TCIE) reported higher than expected EBITDA and PAT on the back of better than expected margins. EBITDA margins have again expanded ~260bps QoQ/960bps YoY to reach 19.6%. Q4FY21 volumes were up 15% YoY, while blended realisations including the pass-through for diesel price hike was 2.3%. This is not akin to runaway price hikes that we see in air-express as belly cargo stays off the curb. Margin salience in road express has been more driven by i) cost control ii) asset light nature of business and better bargaining power over truckers as rail keeps on pressurizing road freight. Increase in pricing with improvement in domestic manufacturing can be added optionality for operationally efficient players like TCIE with proper business moat. In addition, none of the margin buoyancy is driven by ecommerce bulge. Maintain BUY with a revised target price of Rs 1306/share (Rs 1109/share earlier).

Topline at Rs2.8bn was up 18% YoY.

This was mainly due to 15% increase in volume, while TCIE could increase realisation by 2.3% YoY. The price increases undertaken paved the way for gross margin to expand. Gross margin increased 90bps QoQ to 33.2% (up 320bps YoY). Management is confident that with expectant increase in volumes over FY22/23E both annual gross margins and EBITDA margins can expand significantly from here on.

Strong guidance.

Management guided for a doubling of topline and quadrupling of profit in four years. FY22E should see a 25% increase in revenue and 30%+ increase in profit. Management expects to witness continued expansion in margins and is targeting 20% EBITDA margins in the next couple of years.

Targeted capex to augment capacity, maintaining high FCF; FY21 FCF at Rs621mn.

Capex incurred during FY21 was primarily towards setting up sorting centres at Gurgaon and Pune – Gurgaon is operational while Pune construction is complete and regulatory approvals are awaited. Rs 500mn will be spent towards automation. Management intends to spend Rs1bn on capex each on FY22/23E. The current spending is part of 5 year capex plan of Rs4bn, of which Rs 2bn has been spend in the last 4 years. The expected payback for the capex is 4.5-5 years.

Introduction of new product lines to further augment topline and margins

What impresses most is the introduction of two new product lines i) Cold Chain Express Service, an asset light model and use existing hub and spoke network to meet the growing demand for Cold Chain logistics and ii) customer-to-customer C2C express service – inducting both fast trucking connecting a set of locations and milk run i.e single/multiple point pickup and single/multipoint delivery. These are premium services introduced to capture high margin business lines with a meaningful revenue potential – management expects C2C can contribute Rs5bn in the next 5 years.

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