TCI Express ahead of curve: Jefferies

Initiating coverage on TCI Express with a Buy, Jeffries India says the company is focussed on business-to-business (B2B) model with 95 percent revenues and only 5 percent from business-to-consumer (B2C or e-commerce).

"Management is focused on profitable business with healthy cash flows. This is seen in the 26% return on equity (ROE) even in a Covid-impacted FY21. The company is debt free and its 30 percent earnings CAGR for FY21-25E (30 percent in FY22E-25E) with high ROE should drive upside from current levels. We initiate coverage at Buy valuing the stock at 40xPE FY24E – 34 percent potential upside at our Rs 2,300 PT (price target)."

TCI Express reported nearly tripling of income from operations at Rs 783 crore for the third quarter ended December 31, 2021 compared to the same period last year. Net profit also nearly tripled to Rs 93 crore and EPS moved up to Rs 24.14.

Sweet spot – experienced management, right space, right time
Jeffries believe two key triggers will play out for the logistics sector in India over the next three-five years:

1) GST driving double-digit growth for organised players, and
2) Dedicated Freight Corridor (DFC) commissioning seeing road to rail traffic shift.

"TCI Express parentage is TCI, which was formed in 1958 and has been in the logistics business for over 50 years. TCI Express was demerged in 2015-16 to exclusively focus on the express market in part truckload (PTL) and parcel. The company has a 10 percent market share in PTL among organised players. B2B is 95 percent of its revenues as it facilitates cargo supply, primarily through road for its industrial clients from their vendors or to their distributors. The company also facilitates use of rail and air for its clients. Model is asset-light as it has relationships with fleet owners but doesn't own trucks. It owns land of its key sorting centres where cargo is aligned as per end destination pin-codes, and leases some."

TCI Express, according to Jefferies, is a profitable express player unlike new age peers like Delhivery, Rivigo and Ecomm, which are growing exponentially but are loss-making companies. "TCI Express's past track record shows that it has been growing slower than the market and is focused on improving margins and cash flows instead. Our estimates factor in 23 percent revenue CAGR in FY21-25E although unlisted peers are growing at a relatively higher rate of 30 percent +. Track record on timely delivery is an edge that TCI Express has, which helps it grow from existing and new clients."

No client concentration
The top-10 customers for TCI Express account for less than 10 percent of revenues and top 25 less than 15 percent, says Jefferies. "Pharma and auto industries account for a higher proportion of sales. The company has recently launched cold chain services where it expects pharma to be a key driver. The top 3,000 companies in India account for 50 percent of its revenues with the remainder coming from smaller customers. The company is not focused on B2C driven by e-commerce as it believes it is not an industry that will provide strong profitability in the medium term."

Valuations yet to reflect growth model
Jefferies is of the firm belief that TCI Express "is a stock that has a discovery element as it was demerged from the parent and listed independently only in 2016. The company has seen consistent growth and margin improvement over the past decade, which accelerated post the GST implementation. The stock has rerated over the years but is yet to fully reflect a sustainable 30 percent earnings growth with 25 percent+ ROE business model.

"The company has withstood the competition of new-age tech players like Delhivery, Ecomm and Rivigo, and only grown stronger. The stock has traded at a high of 63x and average of 31x since it listed in December 2016. Our PT of Rs 2,300 is based on 40xPE FY24E, which is essentially a rollover from FY23E. We believe 30 percent EPS CAGR in FY22E-25E and 25 percent ROE in an industry set for high growth for organised players could see the stock re-rate further as it consistently delivers."

The stock closed today with a gain of over 2 percent at Rs 1,900 on the National Stock Exchange and Rs 1,895 on the Bombay Stock Exchange.

(Credit: National Stock Exchange)