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Company Background

Transport Corporation of India Limited (TCI), promoted by Mr. D.P. Agarwal, Chairman and Mr. Vineet Agarwal, Managing Director is India’s leading integrated multimodal logistics service provider. The Company offers services like handling and movement of cargo, end-to-end supply chain management and coastal shipping through its three business verticals namely TCI Freight, TCI Supply Chain Services (TCI SCS) and TCI Seaways with extensive network of Company owned offices, ~12,000 trucks in operation, 12 mn sq. ft. of warehousing space and six maritime carriers.

Investment Rationale

Muted q-o-q topline growth impacted by Second Wave of COVID

* During Q1FY22, TCI reported consolidated net sales of Rs 6,961.3 mn, registering a growth of ~72% y-o-y on lower base (national lockdown during Q1FY21) and de-growth of ~22% q-o-q due to regional lockdowns during April and May, impacting demand. However, the Company witnessed good pickup in business, in all the three divisions, post relaxation in lockdowns.

* Consolidated revenues from TCI Freight grew by ~58% y-o-y. Increase in demand for Less than Truck Load (LTL) services witnessed during past many years, continued during the quarter. Growth was largely driven by movement of chemicals, pharmaceuticals, food grain and e-commerce. However, the division de-grew ~24% q-o-q. TCI CONCOR reported flat sales of Rs 725 mn y-o-y during the quarter.

* TCI SCS grew by ~102% y-o-y at Rs 2,262.6 mn backed by automotive demand and growth in FMCG. The pandemic increased opportunities for ‘cold supply chain services’ resulting in enhanced demand for transportation in reefer vehicles, temperature-controlled warehousing, and other areas. This has resulted in doubling of revenues from its subsidiary ‘TCI Cold Chain Solutions’ to Rs 125 mn vis-à-vis Rs 66 mn corresponding period last year.

The Company is also delivering vaccines, medicines, essentials & food grains, oxygen concentrators amongst other items to most needed locations around the country. Also, customer driven changes have been witnessed by TCI due to COVID viz. shifting of customers from ‘just in time’ inventory management to ‘just in case’ inventory management creating higher demand for warehouses. The Company also witnessed inquiries for 4PL solutions from large customers.

* TCI Seaways grew by ~69% y-o-y at Rs 1,149.7 mn on the back of high volume growth on the East Coast, including return cargo from Myanmar (recently, the Government allowed import of pulses from Myanmar). However, demand from West Coast during the quarter was subdued. ~98% of the division’s business comprises of domestic cargo. Dry docking of ships for maintenance will start Q2FY22 onwards.

* TCI is well positioned to drive growth in the coming years. We have built in a revenue growth of ~16% and ~13.5% for FY22E and FY23E respectively in view of TCI’s robust track record with multimodal capabilities and expectation of rise in economic activities going forward. However our estimates are contingent upon the future uncertainties of COVID-19 disruptions which might impact our forecasts.

EBITDA Margins are expected to move beyond 10%

* Consolidated EBITDA margins increased by 330 bps y-o-y and 100 bps at 10.9% during Q1YF22. EBIT margins from TCI Freight, TCI SCS and TCI Seaways improved by 170 bps, 250 bps and 1960 bps at 3.5%, 5.3% and 25.5% respectively. We expect EBITDA margin of the Company to remain in the vicinity of ~10.4% through FY23E.

* During the quarter, Consolidated PAT margin improved by 570 bps at 6.7% y-o-y. The Company has tightened the receivable days and paid off high cost debt during the quarter resulting in lower interest outgo at Rs 47.1 mn during Q1FY22 against Rs 73.7 mn in Q1FY21 and Rs 60.9 mn in Q4FY21. Going forward, we expect PAT margins to remain in the vicinity of ~7% by FY23E.

Planned capex of Rs 2.25 bn for FY22E:

* TCI has planned capex of Rs 2.25 bn during FY22E, to be spent on hub centres, small warehouses, trucks, rakes and acquisition of a new ship. Ship acquisition has been delayed due to substantial cost run-up and is expected to be acquired by the end of Q4FY22, for Rs 800 mn (earlier estimated at Rs 400 mn). TCI buys a new ship every 12- 18 months. The Company has spent Rs 30 mn as capex during Q1FY22.

VALUATION

* We expect TCI to emerge as a strong player due to its presence & expertise in multimodal services (in India, TCI is the only logistics services provider having all three capabilities under one roof), better business mix because of its focus on value added business, leading to improvement in operating efficiencies, better margins and higher return ratios.

* We have valued TCI on a SOTP basis. We recommend a ‘Buy’ on the stock with a target price of Rs 560 in 18 months (upside of ~24%)

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