TCI Express Research Report By ICICI-Direct

Growth continues unabated…

• Revenues grew 22% YoY to Rs 248 crore, in line with I-direct estimate of Rs 244 crore

• EBITDA margins increased 180 bps to 10.9% (I-direct estimate: 10.6%) mainly due to lower than estimated other expense to sales ratio (5.3% vs. estimated 6.5%). Robust revenue growth coupled with margin expansion led absolute EBITDA growth of 46% YoY to Rs 27 crore and came in line with I-direct estimate of Rs 26 crore

• Reported PAT grew 33% YoY to Rs 16 crore (I-direct estimate: Rs 17 crore). The strong operational performance was offset, to a certain extent, by a higher tax rate (35% in Q1FY19 vs. 30% in Q1FY18)

Growth momentum continues on lines of last few quarters

TCI Express has seen its fortunes revive post GST implementation, where revenues, EBITDA and PAT growth reached 20%, 40-50% and 35-50%, respectively. The performance has continued unabated even during the implementation of E-Way bill, which shows the readiness of the IT infrastructure and pro-activeness of management to deal with the dynamic environment surrounding logistics sector. Also, post the TCI de-merger event, the company is focused on a single express segment (that deals with time-sensitive cargo). Hence, the client is able to better identify with the brand. We expect revenue, EBITDA, PAT CAGR of 19%, 26%, 26%, respectively, in FY18-20E. EBITDA margin expansion is expected to continue due to operating leverage and new minimum pricing strategy introduced for new clients. Also, the company has included diesel cost as a pass through on both revenue and cost side de-risking it from fluctuations from fuel price.

GST led shift from unorganised to organised in medium to long term

Post the GST bill implementation, the clients have been able to benefit from input tax credit over the tax changed on transport of goods and services, when they deal with a tax compliant logistics player. It is expected that over the medium to longer term GST & E-way bill would result in a shift of market share in favour of organised players as unorganised players are expected to become less competitive owing to increased cost of compliance enabling opportunity for larger organised players to capture higher market share on a sustained basis. Also, warehousing consolidation due to removal of tax arbitrage at state level would lead to enhancing the lead distances for road transportation companies providing impetus to revenue growth.

Asset light model, strong FCF generation; attractive bet

TCI Express has 28 hubs, 550 branches and a fleet of 4000 vehicles at its disposal with no ownership. Given the benefits of reduced delivery time, growing preference for just-in-time approach (reducing inventory costs), minimisation of loss of sale opportunities and rising end-consumer demand for quality logistics services, express delivery services are increasingly becoming the preferred mode of logistics for a large number of users. Low leverage, a robust growth trajectory and high core return ratios (FY20E RoCE is at 36% and a 2% FCF yield), position TCIEL as one of the preferred picks in the logistics space. We value TCIEL at 32x P/E on an estimated EPS of ~Rs 24/share (FY20E) with a target price of Rs 780. We have a BUY recommendation on the stock.