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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), 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

Topline grew by 6.6% due to slowdown witnessed in January

* During Q4FY22, TCIEXP reported net sales of Rs 2,981.8 mn, registering a marginal growth of 6.6% y-o-y on the back of operating constraints in January due to Covid led regional restrictions. However, these constraints were offset with subsequent recovery in February and March and strong demand from SMEs. During the quarter, the Company witnessed volume growth of ~2% y-o-y at 235,000 MT with capacity utilisation at 85%. Realisation during Q4FY22, increased by ~4.3% y-o-y at ~Rs 12,688.5/MT. The Company witnessed topline growth of ~28% at Rs 10,814.7 mn during FY22 (lower base of FY21) and took a price hike of 2.5%.

* 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 the 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.

* During Q4FY22, the Company has added 10 new branches mainly in Metro Cities, primarily in Northern and Western regions to deepen its presence in key business geographies.  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 TCIEXP robust track record and rise in economic activities going forward.

EBIDTA Margin to remain in the vicinity of ~18.5%

During Q4FY22, EBITDA decreased by ~7.7% y-o-y, at Rs 502 mn, majorly due to significant rise in staff cost and other expenses by ~26% each at Rs 292.8 mn and Rs 192.8 mn respectively. The Company recruited additional staff to provide new value added services during the quarter. EBIDTA margin declined by 260 bps at 16.8% during the quarter. The Company witnessed EBIDTA margin of 16.2% during FY22. With expected robust growth in sales volume, going forward, we expect EBIDTA margin to be maintained in the vicinity of 18.5% in FY24E.

Successful commissioning of India’s largest B2B sorting center at Gurgaon

* The Company has successfully commissioned India's first and largest automated B2B sorting center in Gurgaon, spread over a 2 lakh-square-foot area, equipped with 600 meters of fully automated loop sorting system. The Company incurred capex of Rs 800 mn during FY22 and is expected to incur another Rs 1 bn on capex for FY23E, primarily to be spent on construction of two new sorting centres in Chennai and Nagpur and automation of Pune sorting centre.

* Management has budgeted another round of capex worth Rs 5 bn, spanning 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.

Proposed Buy Back of Rs 750 mn through open market route

* The TCIEXP management has approved the buyback of equity shares to the maximum of 365,853 shares amounting ~Rs. 750 mn, through an open offer, at an indicative price of Rs. 2,050 per share. The Buyback is subject to the approval of the members of the Company by way of a special resolution and requisite regulatory authorities. The Management will not participate in the above buyback.

* The board has also recommended a dividend of Rs 2 per share for Q4FY22, taking total dividend to Rs 8 per share in FY22, representing a payout of 400% on the face value.

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 53.8. After rallying to an all-time high of Rs 2,570, the stock is currently trading at Rs 1,644. We recommend to ‘Buy’ the stock with a target price of Rs 2,045 in 18 months (upside of ~24%).

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