Stock Fundamentals

Transport Corporation of India: On the move

Seetharaman R | Updated on January 13, 2018 Published on March 05, 2017

Implementation of GST and the Centre’s focus on infrastructure should lift prospects

The Centre’s budgeted plan of about ₹2.4 lakh crore to improve transportation (roads, railways and ports), along with greater emphasis on implementing the Goods and Services Tax (GST) Bill by July 2017, should bode well for companies like Transport Corporation of India (TCI).

Strong growth in the auto segment and corresponding increase in auto components, increasing freight movements, growing use of seaways and cold chain warehousing segment should boost revenue over the next two to three years. Besides, increasing focus on the Sagarmala project to improve the share of coastal shipping should further help these companies.

Large organised logistics players like TCI should benefit in the long run as more companies adopt the hub-and-spoke model of warehousing and transportation. Automation of warehousing operations can also lead to cost reduction. With consumption staying robust due to Seventh Pay Commission payout and normal monsoon, revenue growth for TCI should stay on a firm wicket. The expansion planned over the next few years should also aid the topline.

The stock’s current price to earnings ratio (trailing 12 months) is about 19 times. This is significantly higher than its three-year average of about 15 times. But with healthy revenue and profit growth expected over the next few years, investors can continue to hold the stock.

After a successful de-merger of TCI’s Express delivery division (TCI-XPS), the standalone company operates mainly across three divisions — freight, supply chain solutions and seaways. Besides, the company also has joint ventures with other organisations.

Strong pull factors

After the de-merger of its express delivery segment, freight revenue contributed nearly 50 per cent of the standalone business in the nine months ending December 2016. This is much higher than the nearly 40 per cent revenue contribution, pre-demerger. Also, the growth in this segment was an impressive 7.7 per cent in the first three quarters of FY17; much higher than the 5.5 per cent annualised growth rate in revenue for four years ending 2015-16.

This can be attributed to the strategy of deriving a larger share of the revenue from the less than truck load (LTL) business where rates are higher, resulting in better utilisation of its branch network. Besides, with implementation of GST as greater amount of goods getting transported through full truck load, higher revenue can be garnered over the next few years.

But for TCI, the increase in profit margin contribution comes mainly from the supply chain and seaways divisions.

The supply chain solutions division that accounts for about 40 per cent of the total standalone revenue has grown at 18.6 per cent in the nine months to December 2016, compared to the nine-month period a year earlier. The rate of growth is much higher than the 7.6 per cent annualised growth rate witnessed in the last four years ending 2015-16. About 70-75 per cent of the division’s revenue is derived from providing supply chain and warehousing solutions to auto and auto component manufacturers.

Moreover, domestic sale of motor vehicles increased about 9 per cent in the first three quarters of this fiscal year, compared with the same period a year earlier. Despite a drop in sales due to demonetisation in November and December, auto sales rebounded a strong 33 per cent in January sequentially.

Good growth prospects for the auto sector is advantageous to TCI, which has signed long-term contracts (ranging from three to seven years) for providing supply chain solutions to auto players. This segment also caters to other industries such as FMCG, retail and chemical. The operating margin for this division was 10.5 per cent in the nine months of FY17.

Similarly, the seaways division which accounts for about 8 per cent of the total standalone revenue had an operating margin of 33 per cent in FY17. Besides, an investment of more than ₹150 crore is planned for new ships, hubs and warehouse capacities — we can expect strong growth in this segment — both along the relatively virgin east coast and mature west coast.

Also, over the long term, as multi-modal transportation gains increased relevance and dedicated freight corridor starts getting operationalised, TCI’s joint venture with Container Corporation of India (for multi-modal solutions) and Mitsui & Co (for auto logistics) should prove beneficial.

Fit financials

TCI’s consolidated revenue and profit for 2015-16 was about ₹2,530 and ₹82 crore respectively. Its standalone revenue is 90 per cent of the consolidated revenue. The standalone adjusted profit after tax accounts for more than the entire earnings of the consolidated business.

The standalone revenue for the nine months of this fiscal was ₹1,334 crore, 12 per cent higher than the same period a year earlier. The operating profit margin and net profit margin stand at 9.6 and 3.9 per cent respectively, which are 60 and 25 basis points greater than the same period a year earlier.

Also, TCI’s leverage is at a comfortable 0.6 times (almost flat compared to the end of 2015-16). The debt service coverage ratio stands at a comfortable 2.6 times for nine months ending December 2016.

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