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Company Background

TCI Express (TCIEXP) promoted by Mr. D.P. Agarwal & family, managed under the leadership of Mr. D.P. Agarwal, Chairman and Mr. Chander Agarwal, Managing Director, 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 (10 owned and 18 leased), 900+ branches, servicing 50,000 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

Topline grew by ~30% with uptick in economic activity

* During Q1FY23, TCIEXP reported net sales of Rs 2,904.4 mn, registering a robust growth of ~30% y-o-y on the back of a continued uptick in the economic activity and pickup in industrial production which was subdued in corresponding period last year due to second wave of Covid. Demand was well supported by both corporates and SMEs which contributed equally to total volumes. During the quarter, the Company witnessed volume growth of ~31% y-o-y at 230,000 MT with capacity utilisation at ~84.5%. Realisation during Q1FY23, remained muted y-o-y at ~Rs 12,628/MT.

* During Q4FY21, the Company launched two additional value-added services named Cold Chain Express and C2C Express (which are high margin businesses with EBIDTA margins of 20%+) to expand its service offering and create a niche for itself in new segments. In Cold Chain Express, the Company is catering to the growing demand from pharmaceuticals and frozen food packaging companies. Under C2C business, the Company is following multi-location pickup and delivery, bypassing sorting centres, thereby, reducing truck transit time and adding value to customers. TCIEXP has launched another value added service of Rail Express, with an objective to provide an alternate to the expensive air express services, at low cost (1/3rd of air freight) and will cater to B2B segment, in line with TCIEXP`s asset light model. This is also a high ~20% EBIDTA margin business. All new offerings are getting good traction among customers. The Company has expanded its customer base from 250 to 1,000 and its presence from 10 routes to 60 routes in just one year.

* During Q1FY23, the Company added 10 new branches in the Western and Northern regions to deepen its presence in key business geographies and has targeted to add another 40 branches during rest of FY23.  With clear strategic direction, the Company is well positioned to drive growth in the coming years. We have built in a revenue growth of ~20% and ~18% each in FY23E and FY24E respectively keeping in view robust track record of TCIEXP and rise in economic activities, going forward.

EBIDTA Margin to remain in the vicinity of ~18%

* During Q1FY23, EBITDA increased by ~33% y-o-y, at Rs 427.9 mn, whereas EBIDTA margin remained stable at 14.7% y-o-y. However, it declined q-o-q by 210 bps on back of an increase in employee cost as the Company is building a dedicated team for its newly launched businesses. Low growth from Eastern and Southern regions also contributed to low q-o-q EBIDTA margins.

* With expected robust growth in sales volume and pick up in utilisation level, going forward, we expect EBIDTA margin to be maintained in the vicinity of 18% in FY24E.

Land purchase in Kolkata to construct new owned sorting center

* The Company has incurred capex of Rs 330 mn primarily towards purchase of land in Kolkata for setting up a new automated sorting center; spread over 2 lakh square feet. The Company is expected to incur Rs 1 bn on capex for FY23E, primarily to be spent on construction of new sorting centres.

* The Company has budgeted another round of capex worth Rs 5 bn, to be spent between FY23- FY28 with the target of automating the remaining sorting centres (with an estimated cost of Rs 2-3 bn) and adding more owned sorting centres replacing the leased ones. During last capex cycle of five years, the Company incurred capex of Rs 3.2 bn, of the budgeted capex of Rs 5 bn.

* Company`s objective is to invest in automation and implementation of business intelligence tools to reduce turnaround time and enhance operational efficiencies in the long run by reduction of direct cost.

Land purchase in Kolkata to construct new owned sorting center

* The Company has incurred capex of Rs 330 mn primarily towards purchase of land in Kolkata for setting up a new automated sorting center; spread over 2 lakh square feet. The Company is expected to incur Rs 1 bn on capex for FY23E, primarily to be spent on construction of new sorting centres.

* The Company has budgeted another round of capex worth Rs 5 bn, to be spent between FY23- FY28 with the target of automating the remaining sorting centres (with an estimated cost of Rs 2-3 bn) and adding more owned sorting centres replacing the leased ones. During last capex cycle of five years, the Company incurred capex of Rs 3.2 bn, of the budgeted capex of Rs 5 bn.

* Company`s objective is to invest in automation and implementation of business intelligence tools to reduce turnaround time and enhance operational efficiencies in the long run by reduction of direct cost.

Update on recently commissioned Gurgaon and Pune Sorting center:

* The Company recently commissioned India's first and largest automated B2B sorting center in Gurgaon, spread over a 2 lakh-square-feet area, equipped with 600 meters of fully automated loop sorting system, which is now operational 24x7. The sorting center processed ~18% of the total tonnage in June 2022, which reflects its scale and capability. It is expected that Gurgaon sorting center will reduce turnaround time for TCIEXP and enhance operational efficiencies in the long run resulting in a reduction in direct cost.

* Pune Sorting center is currently working at 40% CU which is expected to improve gradually

VALUATION

* We expect TCIEXP to emerge as a strong player due to its asset-light model, focus on B2B segment with pan India presence and improving operating efficiencies led by cost rationalisation, capex funded through internal accruals, its venturing into new value-added verticals and strong balance sheet.

* We have valued TCIEXP on PE basis, assigning a multiple of 38x to FY24E EPS of Rs 52.1. After rallying to an all-time high of Rs 2,570, the stock is currently trading at Rs 1,662. We retain our recommendation to „Buy` the stock with a target price of Rs 1,984 in 18 months (upside of ~19%).

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