TCI: More space to deliver returns

Thanks to the expectations in the last few months about the prospects of the GST Bill being passed, logistics companies, especially those with large warehouses, are in the spotlight.

For one, implementation of GST will lead to a shift from many small warehouses currently set up due to tax issues to larger warehouses. Also, transportation efficiencies would increase due to supply chain improvements.

Implementation of GST will benefit Transport Corporation of India (TCI), a multi-modal logistics and supply chain solutions provider. The company has a large fleet size — 9,000 owned and managed trucks and other vehicles. It also manages a sizeable warehousing space of 10.5 million sq ft. TCI’s large size, diversified revenue sources and operations across the country are positives. Besides, the company’s asset-light model and low leverage offer comfort.

The current stock price discounts the company’s 2014-15 earnings by 20 times. This is higher than its five-year historical band of 10-15 times, but is cheaper than global peers such as CH Robinson and Hub Group which are trading at 25 times trailing 12-months earnings.

TCI’s revenue and profit growth has averaged 7 per cent and 11 per cent in the last three years. Revenue and profit growth increased in 2014-15, growing by 8.5 per cent and 14 per cent, respectively. Earnings are expected to grow at over 15 per cent in the next few years aided by both revenue growth and margin expansion. Investors can buy the shares in the light of reasonable valuation and growth potential in its high-margin businesses, such as supply chain and express delivery.

Diversified revenue The company’s revenue growth to ₹2,417 crore in 2014-15 — a difficult year for the economy — has been thanks to its diversified presence in four main segments. The freight transportation division — which offers multimodal transport solutions for cargo — contributes around 37 per cent of the revenue.

The company has 51 per cent stake in a venture with State-owned railway freight operator Container Corporation to provide integrated rail and road cargo movement services. While the share of cargo transported by rail has been falling, the implementation of GST will likely reverse this, aiding revenue growth in this venture.

Freight transport is a low-margin operation, with margins in the 1-3 per cent range. However, contribution from this segment has fallen steadily from around half the revenue in 2009-10.

Also, higher efficiencies due to reduced check-post delays could boost margins, going forward.

Its supply chain division, accounting for 28 per cent of revenue, offers logistics services to various industries, such as FMCG, pharmaceuticals, and automobiles. The latter contributes nearly three-fourth of revenue in this segment. Under this division, TCI owns a fleet of 1,100 trucks, including 34 refrigerated trucks.

Revenue has been growing at a fast clip of around 12 per cent in the last five years and the expected recovery in the auto industry should help growth.

Additionally, increased warehouse demand from e-commerce companies and demand growth from other sectors, such as pharma for cold storage, should boost the segment’s prospects. The company is also setting up e-fulfilment centres to provide value-added service to e-commerce providers.

E-commerce only accounts for less than 5 per cent of the segment revenue currently, but these measures could aid growth.

About 30 per cent of TCI’s revenue comes from its express delivery division, which provides door-to-door express delivery of documents and parcels.

The company handles delivery of larger parcels (5-50kg) in 13,000 locations, by land and air. Its share of e-commerce deliveries consists of white goods, such as televisions and refrigerators. While sales growth in this category has slowed, given the low penetration for these items, demand is expected to pick up over the next few years.

The seaways segment provides coastal shipping services for container and bulk cargo in its four ships. Although small (about 5 per cent of revenue), this segment provides high margins of over 25 per cent.

Earnings growth in 2014-15 was 16 per cent, helped by revenue growth and margin expansion.

The expected growth in its high-margin segments should improve TCI’s operating margins from the historical range of 7-8 per cent. The high-margin seaway division is expected to grow at 15-20 per cent in the next few years. The company is starting operations in the west coast as well.

The supply chain and express delivery segments have margins of around 10 per cent. Investments in value-added services such as e-fulfilment and warehousing will aid revenue growth and margin expansion.

It is expected that the three high margin businesses will contribute 80 per cent of the revenue in the next five years, up from 63 per cent currently.

Asset-light operation Compared with peers in the industry, TCI has consistently delivered high returns of 14-15 per cent on the capital employed.

This is thanks to the company operating on an asset light model, through leasing rather than owning most of the fleet and warehouse space.

The company is on an expansion path, primarily in the warehousing space. Capital expenditure of ₹275 crore is planned for 2015-16. The company’s total debt was ₹307 crore as of March 2015 and its net debt to equity ratio was at a comfortable 0.54 times, providing cushion to fund expansions.

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