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Margins expand 200bps QoQ to 17.3%

TCI Express (TCIE) reported higher than expected PAT on the back of better than expected margins. EBITDA margins have again expanded ~200bps QoQ to reach 17.3% vs 12.8% YoY. Volumes are still down 3% YoY while realisations are up only 0.8% YoY. 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 1109/share (Rs 1040/share earlier).

* Topline at Rs2.63bn was down 2.2% YoY. This was mainly due to 3% decline in volume, while TCIE could increase realisation by 1% YoY. The price increases undertaken paved the way for gross margin to expand. Gross margin increased 281bps YoY to 32.2% (maintained QoQ). Sustained gross margins QoQ, allowed expansion in EBITDA margins with increase in topline (operating leverage and cost control).

* EBITDA margins at 17.3%, up ~200bps QoQ and ~450bpsYoY. While sectoral volumes failed to recover fully in Q3FY21, margins reflect the extent of cost control and operational efficiencies that TCIE could garner, apart from pricing advantage with the truckers. Apart from expansion in gross margins, TCIE has also ensured to reduce costs meaningfully – employee costs reduced by 8% YoY, other expenses reduced by 16% YoY. Costs effort has resulted in better EBITDA margin.

* FCF over 9MFY21 stood at Rs444mn. Rs 410mn of capex was incurred on 9MFY21 on expansion of sorting centre and IT infrastructures. Pune sorting centre construction is complete and is expected to be operational by Q4FY21. Also, 20 new branches were opened in 9MFY21 (10 in Q3FY21) in the metro cities. Given a sharp contraction in YoY volumes over 9MFY21, the profitability of the branches as and when achieved will lead to a non-linear impact on profitability – perhaps in FY22E.

* Maintain BUY. We continue to highlight two trends in the sector– increasing share of rails even in EXIM container trade and relatively better positioning of stronger balance sheet organised sector road transporters i.e. players like TCIE. Both the trends are structural and will accentuate with the advent of DFC and determine our rating rationale on TCIE.

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