Top-line growth to accelerate to 15% CAGR over FY2014-17E on economic
revival; eventual GST implementation would provide further boost: We expect
Transport Corporation of India (TCIL) to report a healthy top-line growth ~15%
CAGR over FY2014-17E on the back of revival in the Indian economy. Among
TCIL’s four business segments, we expect (a) Express segment to report ~17%
CAGR. TCIL is also be well-placed to garner e-commerce business, as bulkier
categories like furniture, white goods see more traction in online sales. (b) Supply
Chain Solution segment to report ~21% CAGR, owing to recovery in the
automobile sector, growth in E-commerce fulfillment hubs, as well `as new
customer wins due to increasing outsourcing of supply chain in other sectors like
FMCG, chemicals, cold storage, etc. especially once GST kicks in. The other two
segments, viz. Seaways and Freight, are also likely to benefit from economic
revival and expected to report ~9% CAGR.
Stepped-up capex spending in higher margin businesses to aid overall earnings
growth trajectory: As the demand environment improves, we expect margins to
improve across segments for TCIL. Moreover, we expect the company to increase
focus on higher margin businesses like XPS and Supply Chain Solution. As a
result, the revenue contribution of these businesses is expected to increase from
~56% in FY2014 to ~62% in FY2017E, with the company having aggressive
expansion plans in these businesses (Rs500cr capex over FY2015-17E). As a
result, we expect overall margins to improve from 7.6% in FY2014E to 9.0% in
FY2017E, driving 25% CAGR in net profits over the same period.
Outlook and Valuation: TCIL benefits from its pan-India scale (which gives it
competitive advantage in higher margin segments of the logistics industry) as well
as from its asset-light business model (which cushions its profitability in cyclical
downturns and gives it an attractive ROE profile). The company is well-placed to
be a key beneficiary once GST is implemented, when corporates will need reliable
pan-india logistics players to manage their hub-and-spoke supply chains. At the
CMP, TCIL trades at a P/E of 13.7x FY2017E. We initiate with a Buy and target
price of Rs293 (16x FY2017E EPS), indicating an upside of ~17%.

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