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Q3FY23 review: Bumpy ride; shimmer of hope for a few

Q3FY23 was a challenging quarter for logistics companies under our coverage. Key highlights: 1) Festive season was bleaker than expected with lower than expected ecommerce volume; 2) lower EXIM volumes owing to adverse global macros impacted earnings of container companies; 3) margins got impacted due to higher cost; 4) consensus estimates and target price post earnings have been slashed for all the companies; and 5) management commentary was cautious for Q4FY23 for most companies with upcoming price hikes and cost efficiencies in middle-mile, the key focus area. Going ahead, we believe margin improvement is likely for surface express players such as TCI Express and Gati; however, CONCOR’s margin is likely to remain tepid owing to higher decline in EXIM volumes. We continue to maintain TCI Express (TP: Rs2,000; BUY) as our preferred pick mainly due to the upcoming cost efficiencies from automated sorting centres and astute focus on B2B business. We also prefer VRL Logistics (TP: Rs775; BUY) and Gati (TP: Rs175; BUY) as their performance is expected to improve progressively. We continue to maintain SELL on CONCOR (TP: Rs575) as we expect further margin contraction from current levels.

* Q3FY23 performance was lacklustre for most: EBITDA of all the companies under our coverage missed street estimates and stock reaction post results was negative for all except VRL Logistics. Sequentially as well, all the companies (except VRL Logistics) reported lower EBITDA. Key points: 1) Shipments increased for surface express companies; however, fell for CONCOR mainly due to lower EXIM volumes (QoQ); 2) profitability fell for all the companies except Gateway Distriparks and VRL Logistics; 3) focus of surface companies is on increasing middle-mile efficiency by progressively operating more super-hubs/automated sorting centres; 4) companies are looking at increasing the prices from Jan-23/Apr-23, in order to pass-on the increased cost; and 5) domestic volume growth is expected by most companies in Q4FY23. Going ahead, we believe challenging times are likely to persist for Concor as EXIM volumes are expected to remain lacklustre. In case of surface express/air express companies, revival in e-commerce volume, branch addition and sorting centres roll-out is critical, Besides, we will keep a tab on price hike rollout for Blue Dart Express and Gati.

* Consensus estimates and TPs cut for all the companies: Post Q3FY23 earnings, consensus FY23E EBITDA has been cut by 5% on average with maximum cut being made for TCI Express and Gati at 9% and 7.7%, respectively. Our FY23E EBITDA is 6.7% on an average lower compared to consensus. Going by the ask-rate for Q4FY23, we believe CONCOR and Gati are likely to miss consensus FY23E EBITDA. Similarly, consensus TPs have been reduced by 9% on an average for all the companies post Q3FY23. Maximum decline is for Gati, whose TP has been revised by 29% (by the street). Our TPs for Blue Dart and CONCOR are 22-23% lower than the street while the ones for VRL Logistics and TCI Express are 13% and 4% higher, respectively

* Outlook- Margins likely to improve for surface express companies: We believe Q4FY23 is likely to see margin improvement for surface express companies. In Q3FY23 post earnings call, TCI Express’ management had guided for double digit volume growth and ~18% EBITDA level in Q4FY23. That said, we believe CONCOR’s margin is likely to contract further owing to a decline in EXIM volumes. We maintain TCIE as our preferred pick in the logistics space with TP of Rs2,000 and BUY rating. We have an anti-consensus SELL on CONCOR with TP of Rs575.

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