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Asset-light with focus on high margin B2B space

* We reiterate our BUY rating on TCI Express Ltd (TCIE) with a TP of INR1,750. Our investment thesis on TCIE is premised on: a) its presence in the high margin B2B Express segment, b) expanding branch network in key markets, targeting the SME segment (the company added 73 branches between April’21 and Dec’22), c) incremental revenues from new services such as air express, rail express, cold chain express, C2C (~18% of revenues in 3QFY23), and d) addition of new automation sorting centers, which will potentially reduce turnaround time.

* TCIE is a well-established player in the Express Logistics segment, with a pan India presence. It has built a solid Hub and Spoke infrastructure with 925+ owned centers across India, servicing more than 50,000 locations across the country. Equipped with a well-diversified client base, the company focuses on the high margin B2B space (95% share). Approx. 50% of its revenue comes from SMEs, which we believe forms its loyal customer base.

* TCIE is expected to achieve revenue/EBITDA/PAT CAGR of ~11%/19%/19% over FY23- 25, aided by automation and the transition from rental sorting centers to an owned model, resulting in improved operating efficiencies. Management has guided for a capex of INR5b, over the next five years, toward setting up own sorting centers and corporate office in Gurugram, Haryana. The company intends to have its own sorting centers in over 11 cities by FY26.

* With strong earnings growth and no major capex, the company is expected to maintain strong return ratios (~24% RoE through FY23-25). We expect the company to clock a 9% volume CAGR over FY23-25, resulting in 11% revenue CAGR over the same period. We reiterate our BUY rating with a TP of INR1,750, based on 40x FY24 EPS.

New value-added service offerings to augment growth

* TCIE launched Rail Express, Pharma Cold Chain, and C2C Express in the last two years to enhance its value proposition, while maintaining an asset-light model. Having received a good amount of traction, these services have helped increase its customer base.

* The recently commenced rail express aims to gain market share from the air express industry by leveraging on its existing network. As of Dec’22, TCIE has expanded its customer base in the rail express segment to 1750 from 250 and its presence to 125 routes from 10 routes since inception.

Expanding branch network to increase client base

* To facilitate business growth, the company has opened 73 new branches between April’21 and Dec’22. TCI Express intends to establish ~100 new branches annually, leveraging on upcoming manufacturing facilities and clusters of SMEs.

* With the expansion, the company can reach into emerging markets to meet the increasing demands of SME customers.

Targets INR20b revenues in the next few years

* TCIE aims to focus on expanding its customer base, aided by doubling branches, ramping up new value-added services (Cold Chain Express, C2C express, Rail Express and Air express) to 25% of revenues (~18% contribution in 3Q FY23), and by owning sorting centers in major metro cities of India. With this, it expects to achieve revenues of INR 20b in the next few years.

* TCIE’s large sorting centers at Chennai, Nagpur, Kolkata, and Mumbai are expected to streamline hub-to-hub movement and automation, improving operating efficiencies.

* Additionally, TCIE aims to capitalize on increasing demand for professionally managed service providers over the unorganized players.

Valuation and view

* In the next five years, TCIE has planned a capex of INR 5b toward sorting centers and automation, as well as the development of technical capabilities to improve operational efficiency.

* A large part of the growth will be brought in by expanded branch network (management aims to add ~100 branches annually from FY24), incremental revenue contribution from new services including air express, rail express, cold chain express and C2C, increased utilization (from 85% currently to 90%), and better turnaround times with the addition of automated sorting centers.

* However, in the near term, TCIE could face macro headwinds and competitive intensity in the surface express industry, which could impact volume growth and realizations. We expect TCIE to clock a revenue/EBITDA/PAT CAGR of ~11%/19%/19% over FY23-25. We reiterate our BUY rating on the stock with a TP of INR1,750 (40x FY24E EPS).

TCI recently commissioned its first automated B2B sorting center

* TCIE successfully commissioned India’s first and largest automated B2B sorting center in Gurugram in March 2022. Named as ‘GIGA’, the center is spread over 0.2m sq. ft. area.

* The sorting center has been equipped with 0.6 km of fully automated loop sorting system with a throughput capacity of 15,000 parcels/packets per hour. Additionally, the system offers automatic loading and unloading of more than 140 containerized trucks in a single run, thus reducing the parcel handling time and vehicle halting time by ~40% and also increasing the fuel efficiency of trucks.

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