A stable play
We see Transport Corporation of India (TCIL) as a good opportunity in the current subdued operating environment for the logistics sector. Key points: 1) In the process of refining freight mix in favour of higher-margin LTL business; 2) Capex in high-margin sea freight segment likely to improve overall margins; 3) Improving performance of JVs expected to result in further earnings improvement; and 4) Trading at relatively attractive valuation compared to peers. Going ahead, we believe that higher LTL proportion in freight business and addition of two new ships (despite seaways margin receding) in seaways division are the two main growth drivers. Factoring in favourable risk-reward at current valuations vs. peers, we initiate coverage on TCIL with a BUY rating and TP of INR 1,200 based on 22x FY26E EPS.
Margin improvement in store
Despite the likely decline in seaways business, we expect EBITDA margin to improve to 10.5% by FY26E on the back of higher proportion of LTL in surface division – growing to 40% compared to 36% in FY24 and enhanced focus on supply chain business. Capex of INR 3-4bn expected to be incurred in next three years, focused on acquisition of two new ships for (more profitable) seaways division and augmenting warehousing and surface infrastructure. Hence, we see a clear trajectory for margin improvement beyond FY26 as two new ships are added and start contributing. Further, the small warehouses will aid the company in harnessing synergies between freight and supply chain businesses, thus providing complete solution to the customer and increased wallet share.
Additional thrust from JVs to improve earnings further
A unique feature of TCIL is its ability to forge and nurture JVs. Share of JVs attributable to TCIL has grown 3x to INR 759mn in FY24 compared to FY20. As a result, JVs comprised 19.6% of PBT in FY24 compared to 15% in FY20. Going ahead, we expect the performance of two JVs – Transystems (with Mitsui) and TCI CONCOR Modular Solutions – to improve further. Besides, the JV with cold storage chain with Mitsui (incorporated in FY22) is also likely to start contributing increasingly to the earnings. In next five years, we expect the share of JVs in PBT to improve further by 300-400bps. In our view, besides insulating the core business to business volatility, the tie-up with the leading industry players also leads to cross pollination of the best practices.
Expect revenue/EPS CAGR of 11%/10% through to FY26
We expect TCIL’s revenue CAGR at 10.8% YoY through to FY26 largely on the back of revenue growth (CAGR) in supply chain segment at 15% YoY. We expect revenue growth of surface freight segment at 8%, mainly due to higher proportion of LTL segment – 40% by FY26E compared to 36% in FY24. We expect revenue growth from seaways segment at 5% only as new ship is expected to contribute to revenue only from FY27. We expect EBITDA margin to stay largely stable at 10-10.5% as the margin decline from seaways segment is expected to be offset by slightly higher margins at surface freight segment. We expect cumulative FCF generation for FY25E and FY26E at INR 4.1bn (~5% of the current market cap) and working capital days to stay stable at less than 50 days.
A consistent performer available at relatively attractive valuations
Over past five years, TCIL has delivered consistent returns of 20-25% CAGR over short, medium and long term. Besides, being better than the peers, the stock returns are far more consistent compared to peers. On valuations, the stock is trading at a lower P/E multiple compared to peers despite higher or similar expected RoE. Historically (past five years), the TCIL stock has exhibited lower volatility compared to peers. The standard deviation of P/E for TCIL stock is at 2.4 compared to 4-5 for peers.
We value TCIL at INR 1,200/share; Initiate with BUY rating
We value TCIL at 22x (corresponding to three standard deviations above mean), taking cognizance of improving earnings trajectory on account of higher proportion of LTL business in the near term and higher contribution from (more profitable) seaways business in the medium term. The RoE of 15-16% over next two years, while being similar or better compared to peers, is likely to get a leg up post new ships in seaways division are put to service. Our TP works out to INR 1,200/share. We initiate on TCIL stock with BUY. Our TP implies 24% return on the CMP.
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