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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

Muted volumes led to muted topline

* During Q3FY21, TCIEXP reported net sales of Rs 2,625 mn, registering de-growth of ~2.2% y-o-y. However, topline attained pre-COVID level during the quarter. Q3FY21 was a mixed quarter which saw pick-up in demand due to festive season but after recovery in October, core industries deteriorated in November. Index for Industrial Production for few key customer industries, such as pharmaceuticals declined by 0.8% y-o-y, textiles by 9.8% y-o-y, machinery and equipment by 5.4% y-o-y in November. The Company reported sales volumes of 215,000 MT vis-a-vis 225,000 MT in the corresponding period last year. SMEs contributed 52% to the total revenue of the Company (normally 50%). The Company also under took a rate hike of 2% across clients, during the quarter. Management said that demand started picking up again from December onwards. The Company witnessed de-growth of ~29% during 9MFY21 at Rs 5,641.9 mn.

* Historically, the express industry has grown at ~1.5-2x India’s GDP growth. In the light of subdued first half of FY21, we have built in a ~19% dip in FY21E topline and expect sustained recovery going forward, buoyed by a rise in economic activity. Going forward, we expect TCIEXP net sales to grow at ~29% and ~15% to ~Rs 10.8 bn and ~Rs 12.4 bn during FY22E and FY23E respectively

EBIDTA Margins at all-time high of 17.3%

* During Q3FY21, EBITDA margins reached all-time at 17.3% y-o-y registering an increase of 449 bps on the back of high capacity utilisation, prudent operating cost management and increase in realisations taken by the Company. Management said that with improved business sentiments, the Company has given salary increments to employees from October 1, 2020 onwards. EBIDTA margin increased by 225 bps at 14.2% during 9MFY21. With the recovery of sales volume to pre-COVID levels during the quarter, we expect EBIDTA margins to be maintained in the vicinity of ~17% FY23E.

* PAT Margin also improved by 330 bps at 12.8% y-o-y, largely due to increase in operating margins, and increase in other income. Going forward, we expect PAT margins to remain in the vicinity of ~13% during FY23E.

Construction of sorting centres in Gurugram and Pune

* TCIEXP has envisaged a capex plan of Rs 4 bn to be spent over five years, funded through internal accruals. Out of this, it 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.

* During the Q3FY21, TCIEXP held a ground-breaking ceremony for its two new sorting centres at Gurugram and Pune with capacity of 2 lakh sq.ft and 1.5 lakh sq.ft., respectively. Construction of Gurugram sorting centre is complete. However, due to delay in receiving regulatory approvals, it is expected to become operational by Q4FY21 onwards (earlier Q3FY21). Pune sorting centre is expected to get commissioned by Q1FY22. The Company incurred Rs 410 mn as capex during 9MFY21. Four more sorting centres at Nagpur, Indore, Chennai and Mumbai are also in the pipeline, construction of which will start soon.

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

VALUATION

* With revival in economy and business activities, we expect TCIEXP to emerge as a strong player due to its asset-light model, focus on B2B segment with pan India presence, improving operating efficiencies led by cost rationalisation, capex funded through internal accruals and strong balance sheet.

* We have valued TCIEXP on PE basis, assigning a multiple of 33x to FY23E EPS of Rs 40.8 and recommend a „Buy‟ on the stock with the target price of Rs 1,346 (~40%) in 18 months.

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