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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

Muted y-o-y topline growth on back of subdued TCI Freight and TCI SCS division

* During Q3FY22, TCI reported consolidated net sales of Rs 8,376.8 mn, registering a marginal growth of 3.8% y-o-y on the back of muted and negative growth witnessed in TCI Freight and TCI SCS respectively. The Company witnessed ~23.5% growth in topline at Rs 23,589.5 mn during 9MFY22. Container movement declined from 115,700 TEUs in 9MFY21 to 92,900 TEUs in 9MFY22 between TCI Freight, TCI CONCOR and TCI Seaways division.

* During Q3FY22, consolidated revenues from TCI Freight grew marginally by ~4.2%. Q3FY21 was a very strong quarter due to high pent up demand and restocking by dealers in various industries due to opening up of the economy after first phase of COVID lockdown. The division was also impacted by the moderation of freight rates at the end of the quarter. The Company has maintained the LTL (33%) and FTL (67%) split during the quarter and management expects contribution from LTL to touch 34% by the end of FY22. TCI CONCOR reported de-growth of 10% at ~Rs 783.3 mn y-o-y during the quarter.

* During the quarter, TCI SCS de-grew by 7.4% y-o-y at Rs 2,787.9 mn amidst a slowdown in automotive segment due to semi-conductor crisis which is expected to continue in Q4FY22 as well. Also, Q3FY21 numbers includes strong pent-up demand. The management expects the situation to ease out from Q1FY23 onwards with the supply of semi-conductor and expects high pent up demand. The Company is also cautious while signing long-term supply chain contracts to maintain margins. All these factors together contributed to the negative growth in the division. 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 robust 75% revenue growth from its subsidiary ‘TCI Cold Chain Solutions’ to ~Rs 144.3 mn vis-à-vis ~Rs 82.3 mn corresponding period last year.

* TCI Seaways grew significantly by ~43% y-o-y at Rs 1,479.2 mn on back of high value return cargo from Myanmar on the Eastern coast, which is allowed by GoI till March 31, 2022. Freight rates in Western Coast have increased by 20-22% which has also facilitated growth during the quarter. Two ships went for dry dock during Q3FY22 and two more ships are expected to go for dry dock, during Q4FY22.

* TCI is well positioned to drive growth in the coming years. We have built in a revenue growth of ~18.5% for FY22E and ~15% each in 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 11.5%

* During Q3FY22, consolidated EBITDA margins increased by 320 bps y-o-y and 40 bps qo-q at 13%. EBIT margins from TCI Seaways improved significantly by 1,380 bps at 36.5% whereas margins from TCI Freight remained stable at 4.3% y-o-y. Margins from TCI SCS decreased by 70 bps at 6%. Though, 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 ~11.5% through FY24E.

* During the quarter, Consolidated PAT margin improved by 460 bps at 9.8% 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 8.3% by FY24E.

Deferments of capex due to exceptionally high costs:

* TCI has budgeted capex of Rs 2,250 mn during FY22E, to be spent on hub centres, small warehouses, trucks, ship and rakes which has been partially deferred on the back of exceptionally high container and ship cost. Now the Company expect to acquire same in FY23E. The Company has spent Rs 190 mn as capex during 9MFY22. TCI is likely to end the year with capex of Rs 500-600 mn.

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 ‘Buy’ the stock with a target price of Rs 857 in 18 months (upside of ~20%).

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