Transport Corporation of India: En route to growth

Expected passage of GST Bill and Seventh Pay Commission payout will help the company



The Centre’s efforts to increase the share of coastal shipping through its Sagarmala project and the push to pass the Goods and Services Tax (GST) Bill bode well for companies such as Transport Corporation of India (TCI), that offer multimodal logistic solutions.

The company manages 11 million square feet of warehouse capacity and operates 9,000 vehicles per day. It expects to invest around ₹100 crore in new warehouses and hubs in 2016-17 and investment of about ₹66 crore is planned in ships and containers.

The passage of GST Bill, when it happens, can spur large warehouse-related investments by logistics providers to derive cost savings from route and warehouse optimisation.

With a strong balance sheet, TCI is well positioned to fund its expansion plans. The stock’s current price-to-earnings ratio (trailing 12 months) is at 28 times. This is lower than the 30 times its peer Gateway Distriparks trades at.

With the Centre’s investment push to road, rail, ports and coastal transportation networks, TCI’s prospects seem good. Investors with a long-term outlook can buy the stock. Pick-up in the rural economy — thanks to expectations of a normal monsoon — and the Seventh Pay Commission payouts should also help the company.

The company operates four main divisions — freight, XPS, supply chain solutions and seaways.

Synergies

The freight division, comprising road and rail transport, contributed 37 per cent of the company’s revenue in 2015-16, down from about 40 per cent in 2011-12. The division’s revenue increased at an annualised rate of about 5.5 per cent over the last four years.

The company’s joint venture with Container Corporation of India increased the revenue nearly 60 per cent compared with last year.

Despite this, the operating margin in this highly fragmented freight segment is less than 3 per cent. Over time, the company has increased its focus on the high-margin supply chain solutions and seaways divisions.

The supply chain division provides integrated inbound and outbound logistics, transportation and warehousing solutions. The auto sector contributes close to 75 per cent of the segment’s revenue with retail, pharmaceuticals and cold chain sectors also pitching in.

Operating profit margin is healthy at around 11 per cent and the segment contributes close to 30 per cent of the overall revenue. The segments revenue grew at an annualised rate of 7.6 per cent over the last four years.

The growth in this division should remain healthy, thanks to the ongoing growth in the auto segment. Besides, the company’s 49 per cent joint venture with Mitsui & Co Ltd, an international logistics provider, is expected to consolidate strength in auto logistics.

TCI’s seaways division that transports containerised shipment and bulk cargo recorded ; annualised revenue growth of about 11 per cent over the last four years. The planned addition of a new ship in the west coast should further strengthen the segment. This division has an operating margin of more than 25 per cent and contributes around 5 per cent of the overall revenue.

De-merger

The other key segment — express solution (XPS) — that offers time bound door-to-door logistics solutions is being demerged from the company.

The new entity will focus on consumption-driven businesses such as e-commerce that are expected to grow exponentially.

The XPS division’s revenue grew at an annual rate of about 8 per cent over the last four years, and is expected to accelerate further.

With an operating margin of more than 8 per cent, the division contributed 26 per cent of the 2015-16 revenues.

Shareholders in TCI will receive one share in the de-merged entity for every two shares owned in the parent company.

The de-merger, though recently sanctioned by the Hyderabad high court, is yet to be completed.

Financials

TCI’s consolidated revenue and profit grew an annual average of 6.6 per cent and 8.4 per cent respectively over the last four years. Iffy macro-economic conditions combined with weak rural demand hampered the company’s performance over the last year. A flat revenue growth was seen last year in the high-margin supply chain and XPS divisions.

Performance should revive with the economy picking up. TCI’s return on equity is about 12 per cent. The company’s leverage is at comfortable levels with debt-to-equity of about 0.6 times as of March 2016.

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