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Industry headwinds continue to impact volumes; near-term outlook remains weak

* We downgraded TCI Express (TCIE) to Neutral (from BUY) in Oct’24 after 2QFY25 results, due to concerns over volumes and profitability. TCIE’s business performance and volume growth have been impacted by additional cost pressures in the Air Express division, increased competition, and slower growth in key sectors such as manufacturing, automobiles, and textiles.

* As per our channel check, volume growth was muted in Oct-Nov’24, which could lead to a weak performance in 3QFY25 as well for TCIE. Allcargo Gati, an express logistics peer of TCIE, reported 13% MoM decline in volumes in Nov’24 (2% growth YoY). During Oct-Nov’24, Gati reported just a 3% YoY growth in volumes, signaling subdued demand in 3QFY25 so far. While the festive season in 3Q brought some QoQ volume growth for express logistics companies, their YoY performance remains weak, and this trend is expected to persist through the rest of FY25.

* While the long-term outlook for surface express services remains positive, near-to medium-term headwinds such as heightened competition, weak rural demand, a consumption slowdown, and elevated inflation are likely to weigh on volumes.

* Weak demand from MSME customers and rising costs continue to hinder operational efficiency. Management has adopted a cautious stance on volume growth and expects mid-single-digit volume growth in 2HFY25, constrained by weak demand at the industry level. It also does not expect to hike prices in the current scenario. We expect TCIE to deliver a CAGR of 8%/10%/11%/10% in volume/revenue/EBITDA/PAT over FY24-27. TCIE is looking to incur a capex of INR5b over the next five years to set up its own sorting centers. It intends to have its own sorting centers in 11 cities by FY26. We reiterate our Neutral rating with a revised TP of INR940, based on 22x Sep’26E EPS.

Branch expansion on track; allows TCIE to extend its services to a wider geographic area, thereby enhancing its market presence

* In order to facilitate its business growth, TCIE has successfully opened more than 500 new branches in the last five years and its customer count has increased to more than 0.225m as of Sep’24 from 0.16m in Mar’17. Looking ahead, TCIE plans to open 50-75 branches annually, capitalizing on the upcoming manufacturing facilities and clusters of SMEs to further expand its presence.

* With its expansion, TCIE seeks to expand its footprint in emerging markets in order to meet the increasing demands of SME customers more effectively. This strategic move enables TCIE to offer customized logistics solutions tailored to the unique requirements of SMEs.

Asset-light model helps in minimizing idle capacity during any downturns

* TCIE does not have any fleet on its books. In the absence of any owned fleet, the business relies on ~5,500 containerized vehicles from attached business vendors and associates to meet its customer requirements.

* By relying on a model that minimizes asset ownership, TCIE can flexibly adjust its operations and adapt to changing market conditions. This flexibility enables the company to maintain healthy profitability margins even in challenging times.

New value-added service offerings to augment growth

* In the past two years, TCIE introduced Rail Express, Pharma Cold Chain, and C2C Express services as part of its strategic efforts to enhance its value proposition while adhering to an asset-light approach. These services have received significant attention and have contributed to the expansion of TCIE's customer base.

* Among newly launched services, the Rail Express offering is getting good traction from customers, and the company has successfully expanded its customer base from 250 to 5,000+ and presence from 10 routes to 150 routes since inception. These high-margin offerings are expected to contribute materially in the next few years.

Targets INR20b revenues in next few years

* TCIE aims to focus on expanding its customer base, aided by doubling its branch network, ramping up new value-added services (Cold Chain Express, C2C express, Rail Express and Air express) to 25% of revenues (~18% contribution in FY23), and by owning sorting centers in major metro cities of India. With this, it expects to achieve revenues of INR20b in the next few years.

* TCIE’s large sorting centers in Chennai, Nagpur, Kolkata, and Mumbai are expected to streamline hub-to-hub movement and automation, improving operating efficiencies.

Valuation and view

* Volume growth has been muted in YTDFY25 due to slower growth in manufacturing, automobiles, and textile sectors. Management remains cautious about the growth outlook owing to the industry-level weakness.

* We expect TCIE to clock a CAGR of 8% in volume and 10%/11% in revenue/EBITDA over FY24-27. TCIE has struggled to grow volumes, which affected its growth and margins. Volume growth is likely to remain muted in the near to medium term. We reiterate our Neutral rating with a revised TP of INR940 (based on 22x Sep’26E EPS).

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