TRANSPORT CORPORATION OF INDIA LTD : ON WAY AHEAD !!!

Scrip Code: 532349 / TCI

CMP:  Rs. 264.40; Market Cap: Rs. 1,937.35 Cr; 52 Week High/Low: Rs. 299.00 / Rs. 103.20

Total Shares: 7,32,73,500 shares; Promoters : 5,06,00,940 shares – 69.06 %; Total Public holding : 2,26,72,560 shares – 30.94 %; Book Value: Rs. 60.40; Face Value: Rs. 2.00; EPS: Rs. 9.91; Dividend: 65.00 % ; P/E: 26.68 times; Ind. P/E: 28.82; EV/EBITDA: 12.16.

Total Debt: Rs. 258.51 Cr; Enterprise Value: Rs. 2,177.99 Cr.

TRANSPORT CORPORATION OF INDIA LIMITED: Transport Corporation of India Ltd was founded in 1958 and is based in Gurgaon, India. It was formerly known as TCI Industries Limited and changed its name to Transport Corporation of India Ltd in October 1999. Transport Corporation of India Ltd was founded in 1958 and is based in Gurgaon, India. Transport Corporation of India Ltd provides integrated supply chain and logistics solutions primarily in India. TCI came with an IPO in May 1975 with 4,80,000 equity shares of face value of Rs. 10 each offered at a premium of Rs. 10 per share. The company’s Freight division offers surface transport solutions for full truck load, less than truck load, and small and over-dimensional cargo through road and rail. Its XPS division provides door-to-door express distribution services by air, surface, and rail. The company’s Supply Chain Solutions division offers services for Auto, Retail, Telecom, Electricals, Pharmaceuticals, FMCG, and Cold Chain sectors. Its Global division provides logistics services comprising freight forwarding, custom clearance, express and courier, warehousing, transportation, and supply chain consultancy services. The company’s Seaways division provides ship management, liner, charter, agency, project handling, multi-modal, and transportation services, including container and bulk cargos from islands and ports. TCI was the first to launch several solutions in the logistics field. Its product offering includes TCI Freight, TCI XPS, TCI Supply Chain Solutions, TCI Global, TCI Seaways and TCI Foundation. The company also has two JV’s - Transystem International Pvt Limited (TLI) a joint venture between TCI and Mitsui & Co Ltd which is the sole logistics partner for Toyota Kirloskar Motors Ltd. in India. TLI has been providing complete logistics solutions, from inbound transportation from suppliers across India and other countries to outbound transportation of complete built units (CBU) & spares. TCI’s second JV is Infinite Logistics Solutions Pvt Ltd (ILSPL) this JV is with CONCOR for bulk multi-modal logistics solutions by Rail and Road. TCI Limited is locally compared with Container Corporation of India Ltd, GATI India Ltd, Gateway Distriparks Ltd, Ruchi Infrastructure Ltd, Kesar Terminals & Infrastructure Ltd, Shreyas Shipping & Logistics Ltd, Blue Dart Express Ltd, Patel Integrated Logistics Ltd, Global Vectra Helicorp Ltd, SICAL Logistics Ltd and Globally compared with S Line Company Ltd of Japan, Keihin Co., Ltd of Japan, Okayamaken Freight Transportation Co., Ltd of Japan,  FedEx Corp of USA, Royal Mail Plc of London, Postal Services mail Plc of London, Deutsche Post AG of Germany, PostNL N.V. of Netherlands, Hanjin Transportation Co., Ltd of South Korea, Pos Malaysia Berhad of Malaysia, Singapore Post Ltd of Singapore, Yusen Logistics Co Ltd, Hyundai Glovis Co Ltd of Korea, Atlas Air Worldwide Holdings of USA, Bpost NV-SA Brussels, Belgium, Kintetsu World Express Inc of Japan, UPS – United parcel Service Inc of USA, Fedex Corp of USA, Air transport Services Group of Ohio, Hub Group Inc of Illinois, Xpo Logistics Inc of USA, Echo Global Logistics Inc of Illinois, Uti Worldwide Inc of British Virgin Islands,  Chichibu Railway Co., Ltd of Japan, Kobe Electric Railway Co., Ltd of Japan, Keifuku Electric Railroad Co., Ltd.

Investment Rationale:

Transport Corporation of India (TCI) is India’s leading integrated logistics and supply-chain solution provider, offering single-window integrated services, backed by strong multi-mode transport operations by road, rail, sea and air. The company operates in high growth segments such as express cargo & supply chain solutions. TCI has progressed from being a One Man, One Truck, One Office set up to an extensive setup of 1000 + IT enabled offices and having a fleet of 7,000 trucks, trailers, 4 cargo ships and has reefer vehicles with a skilled workforce of 6,500 with offices in 4 countries, with an managed warehouse space of 9.75 million sq. ft., and has an ability to make deliveries in 200 countries. Today, TCI moves 2.5 % of India’s GDP by value and is also a part of World Economic Forum’s Community of Global Growth Companies. The logistics sector presents an incredible arena of opportunity because nearly 90 % of the market is still controlled by the unorganized sector. The Indian logistics industry is expected to grow at 15 % to 20 % per annum, reaching revenues of $38,500 Cr by 2015. The demand for focused supply-chain services has been fuelled by industries with a high propensity to outsource: automobiles, consumer packaged goods, hi-tech, telecom and retail amongst others. The movement of basic commodities, domestically and globally, has led to an increase in multi modal and bulk transportation and to the emergence of many new ports and port-related services providers. It has generated employment for 4.5 Cr people. India currently spends 13 % of its GDP on logistics as compared to 8.50 % in USA and 18 % in China and around 9 % in developed economies. India bears 8.20 % as Transportation Cost of its GDP as compared to 5.30 % in USA and 9 % in China. India spends 3.80 % of its GDP on Warehousing as compared to 2.80 % in USA & 6 % in China. For the sectors moving physical products this percentage is much higher because 55 % of India’s GDP is generated by the service sector. In India Auto Components, Textile, Pharmaceuticals, Cement sector are the major Industries driving logistics sector as compared to USA its F&B, E commerce and in China its Metals, Cement, Textile, Electronics sector which drives the Logistics sector there. The industry as a whole is very fragmented and disorganized. India's logistics sector continues to be attractive for global investors and Investment in logistics in India is projected to grow annually at 10 per cent. According to ASSOCHAM and PWC, the Indian e-commerce industry’s market size is less than 10 % of USA and China’s market size (US$15,000 Cr) of ecommerce. However, over 2009-13, the e-commerce sector in India has grown at a CAGR of almost 35 % to an estimated US$12,600 Cr on back of rising internet and mobile phone penetration. In the domestic e-commerce industry, nearly 70 % of the transactions are accounted by online ticketing and about 10 % by e-retailing and online market place. However, e-retail in both its forms, ie online retail and market place, has become the fastest-growing segment, increasing its share from 10 % in 2009 to an estimated 19 % in 2014. As per an industry report, going forward, the e-retail market is expected to grow to around US$10-20bn by 2017-20 on account of increase in consumer-led purchases in durables and electronics, apparels and accessories etc. This will also be helped by the impending change in the Indian tax system from the current state-level Value Added Tax (VAT) to a national and uniform Goods and Services Tax (GST) which will help to create a national market for many goods and services. However, the implementation of GST is expected only by CY2016. The logistics sector is likely to respond the GST by making more use of the hub and spoke systems, large scale warehousing and specialized services. A gradual opening up of key sectors like retail, aviation, defense etc. will also help to boost this sector. The entry of multinational companies (MNCs) in sourcing, manufacturing and distributing could be the other growth drivers. TCIL over the years has increased its presence across the country. In a scenario, where GST gets rolled-out, TCIL is expected to be one of the few pan-India based Logistics players to get benefitted from any such development. The Supply Chain Solution segment of TCIL accounted for 27 % of total revenue in FY2014. In this segment 75 % of the business comes from the automobile sector and the balance from the FMCG (customers include Maruti, GM, Tata Motors, Hero, Bajaj, Hindustan Unilever, Samsung, VW Group etc) and other segments. In the automobile OEMs segment, the company provides supply chain solutions including inbound logistics, outbound logistics, and stocking vehicles at the warehouses. Further, in this segment, the company has a JV with Mitsui, Japan which manages the entire inbound logistics operations of Toyota Kirloskar Motors India since 1999. The company owns 49 % stake in this JV. Apart from this, the company also provides services in managing fulfilment centres and back-end operations for e-commerce business nationwide. TCIL has shifted its focus towards better margin segments like express and supply chains; it is believed that these segments will propel TCIL to place itself on a higher growth orbit. Thus, giving thrust to its stock price.

Outlook and Valuation:

TCIL has a global division which provides logistics services comprising freight forwarding, custom clearance, express and courier, warehousing, transportation, and supply chain consultancy services. It has a strong vertical integration and have been gaining market share because unorganised players find it difficult to operate due to high wage cost and other procedural hurdles. In the freight segment, the company is one of India’s premier organized freight services providers with a pan India presence. The company has around 7,000 trucks and trailers, both owned and leased, which provide freight movement services on a daily basis. It has a strong backing in terms of its extensive and strategically located branch network and trained work force. The Freight division contributed around 38 % to the total revenue in FY14. TCIL’s Freight division (Transport division) has been underperforming in the last few years due to slowdown in GDP growth, reflecting slowdown in overall industrial activity in the country. In 9MFY2015, the Freights division showed recovery in revenue growth, i.e. it posted a revenue growth of 5 % YOY mainly in the previous quarter, owing to an improving economic scenario. Further, the Management is also confident of posting a better performance, than in the previous few quarters, in the coming financial years. Considering momentum in policy reforms, fall in inflation, and anticipation of further rate cuts by the Reserve Bank of India (RBI), it is believed that the investment cycle and commercial activities in the country will get a boost this would lead to improvement in GDP growth in FY2016 and FY2017, which in turn will assist overall growth in the Freight division (Transport segment). Also, industry is expecting GST implementation in FY2016 which will further increase the growth prospects of this industry, and this will directly benefit the company as it being a dominant player in the industry. Considering the overall improvement in demand for the Freight division in 9MFY2015, increasing numbers of trucks in operation, and improving economy activities, it is expected that Freights division to report a healthy 9 % CAGR over FY2014-17E. TCIL’s Seaways has well equipped ships in its fleet and caters to the coastal cargo requirements for transporting container and bulk cargo from ports on the East coast of the country. Recently, the company has increased its fleet of ship from 4 ships in FY2014 to 5 ships during 9MFY2015; also, it has replaced one of its old ships. As a result the total capacity now has increased from 17,000 DWT to 27,800 DWT. Further, the company is also planning to diversify outside Port Blair sector and operate on the west coast as well. Now with the additional capacity of ships, the company can generate around Rs. 50 to 60 Cr in revenue with an EBITDA margin of 10-15 %, translating into a healthy return ratio. Going forward, it can be expected that the company to report a strong 9 % CAGR in revenue over FY2014-17E. TCIL is well positioned due to its Asset light business model where it owns 20 % of the total fleet and leases the remaining 80 %. The company has rapidly scaled its business model to 7,000 trucks, trailers, and reefer vehicles as of today. On the same lines, TCIL has been prudent in managing warehousing space, as a majority of its total 10mn sq. ft. of warehousing space is on lease basis. With its focus to invest less on building the asset base, the company has been able to generate healthy return ratios even in the worst phases of business cycles. Given the company’s unlevered business model, the long-term growth prospects of the company would not be impacted due to lack of capital availability. TCIL is one of the few companies in Surface Transportation & Logistics space, which has shown consistency & has enjoyed a healthy asset turnover ratio of 5.2 X in FY14 and ROE of 14.6 %. Given the strong matrices of the company, TCIL at any phase of the business cycle would be well positioned compared to its peers, as its peers have majorly levered business models and have lower ROEs. On Financial side, TCIL, on bottom line is expected to report 25 % CAGR over FY2014-17E on account of healthy top-line growth in the higher margin business due to change in revenue mix. An improvement in operating margin of up to 0.60 % to 0.70 % in the Freight segment can be seen due to pick up in volumes and lower fuel cost. Going ahead, it is expected that the Freight division to benefited due to improvement in industrial activities. The XPS Cargo division’s growth would be supported by growth in e- commerce. The Supply Chain Solution division is expected to grow by the support of recovery in the automobile industry and more than 75 % of the division’s revenue of TCIL comes from the automobile sector and the Seaways segment would benefit due to addition of new ships. The SCS and express segments possess massive growth potential. The SCS and express businesses are highly EPS accretive vis-à-vis the freight segment. The company can post Earnings per share (EPS) of Rs. 11.60 in FY15E and Rs. 14.40 in FY16E. It is expected that the company’s surplus scenario is likely to continue for the next three years & will keep its growth story intact for the coming quarters also.

KEY FINANCIALS	FY14	FY15E	FY16E	FY17E
SALES (₹ Crs)	2,228.00	2,468.00	2,830.00	3,350.00
NET PROFIT (₹ Cr)	72.00	87.00	109.00	138.00
EPS (₹)	9.50	11.60	14.40	18.30
PE (x)	26.40	21.60	17.40	13.70
P/BV (x)	3.90	3.00	2.70	2.30
EV/EBITDA (x)	12.80	10.90	8.90	7.60
ROE (%)	14.60	14.10	15.40	17.10
ROCE (%)	14.90	14.20	16.40	18.00

*As the author of this blog I disclose that I do not hold Transport Corporation of India Ltd in my any of the portfolios.

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Disclaimer: 

This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.

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