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TCI Express: Q3 goes the distance, but mind the valuations

TCI Express: Q3 goes the distance, but mind the valuations
February 28
16:25 2020

Highlights
– Q3 volumes came in higher by 1 percent
– Margin improvement backed up profit
– Building new sorting centres in Pune and Gurgaon

– Trading at 38 times FY20 estimated earnings

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Express logistics solution provider TCI Express (TCIX) (CMP: Rs 871, market cap: Rs 3,342 crore) delivered a strong set of quarterly numbers during the three months to December.

Revenue turned steady. It’s the expansion in margins that was the centrepiece of the quarterly show, lending a hand to operating profit and bottom line. The overall performance clearly stood out, considering the challenging business environment.

The result highlights

TCIX’s quarterly revenue went up by a meagre 2 percent year-on-year (YoY) to Rs 268 crore during October-December. Sluggish economic activity and the unrest in the North-East hit sales, but volumes grew 1 percent on the back of new client additions in the SME (small and medium-sized enterprises) segment.

The company saw a subdued growth in realisations at 1 percent. Operating efficiency, a result of better capacity utilisation, and the change in axle load norms gave margins the strength.

Earnings before interest, tax, depreciation and amortization (EBITDA) for the quarter came in at Rs 34 crore, up 11 percent, from the same period last year. Profit after tax jumped 36 percent on reduced interest payments and a lower tax outgo.

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During the first nine months of 2019-20, the company opened 57 new branches and invested Rs 23 crore in expansion of sorting centres and technology upgradation. The capex guidance for FY20 has been revised downwards to Rs 50 crore, from the Rs 80 crore earlier.

The construction of new sorting centres in Pune and Gurgaon is under way and the same is expected to be operational from 2020-21. Additionally, the company is ramping up its presence in Indore and Nagpur to augment its distribution network in central India.

TCIX’s revenue growth has been in decline in recent quarters. A subdued external environment and weak demand footprint are largely to blame. However, originations volumes are nudging up despite the slowdown in engineering, manufacturing and automobiles. Economies of scale and integration of technology are supporting the cost structure and driving the improvement in margins.

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That said, the overall demand environment has been challenging throughout FY20. The management has lowered its revenue guidance to 8 percent for this fiscal year, from 13-14 percent earlier. The revised target appears pretty optimistic, considering the slowdown across multiple sectors.

Outlook and Recommendation

Government initiatives for development of logistic parks and construction of roads are turning out to be a boon for the express logistics market. Besides, the demand is on the rise as corporates focus on supply chain efficiency.

The medium-term outlook for TCIX appears promising as the demand for express cargo is expected to grow much faster (~2x) than India’s economic activity.

However, the near-term growth appears unlikely as the outbreak of Coronavirus in China is going to hamper the volumes over the next 1-2 quarters.  The company could face also some pricing pressures due to the existing spare capacity in the sector.

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Given its solid business fundamentals, high return ratios and proven track record of execution, TCIX is one of our preferred picks in the sector. However, the current risk-reward proposition for investors appears unfavourable, going by the lofty valuations (nearly 38 times FY20 estimated earnings).

The current multiple appears too stretched and we believe that it’s an opportune time to take profit on the current positions. Prospective investors may wait for correction before initiating fresh longs.

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