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Weak volumes, especially from SME customers, continue to hurt margin and profitability

* TCI Express (TCIE)’s 3QFY25 revenue decreased 5% YoY to ~INR3b (10% below our estimate), while volumes declined 3% YoY. Volumes were hit by slower growth in the manufacturing, automobiles, and consumer durables sectors. The quarter also saw several challenges, including higher costs from multimodal enhancements and the impact of high inflation on customers.

* Volumes stood at 0.24m tons (-3% YoY), while realization was INR12,226 per ton (down 2% YoY). EBITDA came in at INR289m, with a margin of 9.8% (vs. our estimate of 12.1%). TCIE faced cost pressures in its Air Express division along with slower growth in key sectors, thereby adversely impacting the business. In line with weak operating performance, TCIE’s APAT dipped 40% YoY to INR192m (our est. at INR268m).

* During 9MFY25, revenue stood at INR9b (-4% YoY), EBITDA at INR 984m (-31% YoY), EBITDA margin came in at 10.9%, and APAT was INR667m (-33% YoY).

* The company expanded its Rail Express services and automated sorting centers to improve efficiency. Despite industry challenges, Jan’25 witnessed a volume recovery. TCIE plans to expand its branch network and invest INR5b in automation and infrastructure by FY27. The multimodal express segment is expected to contribute 20-22% of revenue, with long-term growth outpacing real GDP.

* Weak volume growth, particularly from MSME customers, coupled with higher costs, contributed to a weak performance in 3Q. Near-term challenges include slow volume growth and the inability to pass on price hikes to SME customers. We cut our EBITDA/PAT estimates for FY25 by 14% each to incorporate the weak 9M FY25 performance. We also reduce our EBITDA/PAT estimates for FY26 by 17% each and for FY27 by 14% each, given the industry headwinds. We expect TCIE to clock a 4% volume CAGR and 6%/4% revenue/EBITDA CAGR over FY24-27. We reiterate our Neutral stance on the stock with a revised TP of INR785 (based on 22x Sep-26E EPS).

Highlights from the management commentary

* Volumes in 3QFY25 stood at 0.24m tons (down 3% YoY). Lower-than-expected demand in key sectors such as automobiles and consumer goods contributed to softer volumes. The rise in transportation costs, driven by increased expenses for labor, tolls, insurance, and driver shortages, further impacted profitability.

* While branch network expansion has been relatively moderate due to subdued SME demand, TCIE plans to add 50-75 branches in FY26 and 75-100 new branches in FY27 to support future growth. The company’s overall service contribution currently stands at 17-18% from new services, while Surface Express remains the primary revenue driver.

* The multimodal express segment is expected to contribute 20-22% of total revenue over the next 2-3 years, enhancing the company's overall competitiveness.

Valuation and view

* Volume growth has been muted in 9MFY25 due to slower growth in the manufacturing, automobiles, and consumer durables sectors. Management remains cautious on future growth owing to the industry-level weakness.

* We expect TCIE to clock a 4% volume CAGR and 6%/4% revenue/EBITDA CAGR over FY24-27. TCIE has struggled to generate volumes, which has adversely affected growth and margins. Volume growth is likely to remain muted in the near to medium term. We reiterate the stock to Neutral with a revised TP of INR785 (based on 22x Sep-26 EPS).

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