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Company Background

Transport Corporation of India Limited (TCI), promoted by Mr. D.P. Agarwal & family, managed under the leadership of 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

Robust y-o-y topline growth on back of good traction witnessed in all the segments

* During Q2FY22, TCI reported consolidated net sales of Rs 8,251.4 mn, registering a growth of 18.4% y-o-y on the back of broad based recovery in the economy post Covid-19 second wave and encouraging vaccination drive. The Company witnessed better realisation during the quarter vis-à-vis corresponding period last year. The Company witnessed ~38% growth in topline at Rs 15,212.7 mn during H1FY22. Container movement declined from 67,048 TEUs in H1FY21 to 61,790 TEUs in H1FY22 between TCI Freight, TCI CONCOR and TCI Seaways division mainly due to conversion of short distance contracts to long distance contracts, though revenues remain unchanged.

* Consolidated revenues from TCI Freight grew by ~16% y-o-y backed by rise in volumes and freight rates. Freight rates rose by 5-10% during the quarter. An increase in demand for Less than Truck Load (LTL) services witnessed during past many years, continued during the quarter and contributed 33% to the total TCI Freight revenue. Growth was largely driven by movement of pharmaceuticals, agriculture and e-commerce. TCI CONCOR reported de-growth of ~7% at~ Rs 735 mn y-o-y during the quarter.

* TCI SCS grew by ~12% y-o-y at Rs 2,843.3 mn amidst mixed trends witnessed in automotive, FMCG and retail segments. Slowdown has been witnessed in the auto segment on back of a shortage of semi-conductors, loss of which Company has mitigated by providing yard services and diversifying in other segments of automotive sector such as two-wheelers, electric vehicles, farm equipments (tractors, earth moving equipments etc.). 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 144 mn vis-à-vis Rs 73 mn corresponding period last year.

* TCI Seaways grew by ~44% y-o-y at Rs 1,342.2 mn on the back of high value return cargo from Myanmar on the Eastern coast. Increasing freight rates in Western Coast has also facilitated growth in the segment. Ship went for dry dock during Q2FY22 returned in October. Two more ships are expected to go for dry docking, one each in Q3FY22 and Q4FY22 respectively.

* TCI is well positioned to drive growth in the coming years. We have built in a revenue growth of ~17%, 13.5% and ~14% for FY22E, FY23E and FY24E respectively in view of TCI’s robust track record with multimodal capabilities and expectation of rise in economic activities going forward.

EBITDA Margins are expected to remain in the vicinity of ~11%

* Consolidated EBITDA margins increased by 370 bps y-o-y and 180 bps q-o-q at 12.7% during Q2YF22. EBIT margins from TCI Freight and TCI Seaways improved by 60 bps and 192 bps at 3.9% and 35.8% respectively whereas margins from TCI SCS decreased by 70 bps at 5.8%. However, high margin of TCI Seaways division is not sustainable in long-run. With the normalisation of TCI Seaways margins we expect overall EBITDA margin of the Company to remain in the vicinity of ~11% through FY24E.

* During the quarter, Consolidated PAT margin improved by 390 bps at 9.1% y-o-y mainly on the back of improved operating margins and reduction in interest cost. Going forward, we expect PAT margins to remain in the vicinity of ~7.7% by FY24E.

Planned capex of Rs 500-1,000 mn for FY22E:

* TCI has planned capex of Rs 500-1,000 mn during FY22E, to be spent on hub centres, small warehouses, trucks, and rakes. Ship acquisition has been delayed due to substantial cost run-up and is expected to be acquired in FY23E. TCI buys a new ship every 12-18 months. The Company has spent Rs 144 mn as capex during H1FY22.

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 to ‘accumulate’ the stock with a target price of Rs 770 in 18 months (upside of ~12%).

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