Transport Corporation of India

Buy Transport Corporation of India, tgt Rs 145: Kotak
Kotak PCR is bullish on Transport Corporation of India and has maintained buy rating on the stock with target price of Rs 145.

Kotak research report on Transport Corporation of India

Key investment rationale

Growing Logistics market.

India, with a GDP of around USD 827 billion spends 13% of its GDP on logistics. As against this, the global average for logistics spend is approximately 8-10% of GDP. This is primarily due to inefficiencies in transportation. Going forward, there will be the introduction of VAT and GST throughout the country and increased penetration of organized retail and outsourcing of logistics services. These are expected to be key growth drivers of the logistics industry in India.

Excellent infrastructure to cash in on logistics boom.

Currently, the TCI group moves goods valued at more than 1.5% of India's GDP. The company has a strong network of 1100 company owned branches across the county. TCI moves approximately 7000 trucks daily, 15% of which are company owned. The company has 6.5-million sq. ft of prime warehouse space across the country. This is expected to go up to 10 million sq ft by March 2010. TCI has over 3000 vendor and franchisee associates, employs more than 5700 professionally trained people and has a strong customer base of over 200,000.

Market leadership in transport segment.

TCI is the leader in the transport segment with 15% share of the organized market. The company has the maximum reach and network. TCI provides various services like full truck load, less than truck load and has formed a dedicated wing for the over dimensional cargo, which typically offers higher margins. The company also has advanced technology in terms of a vehicle tracking system that helps it to consolidate cargo at various places and thereby achieve optimum truckloads, which leads to higher efficiency and better operating margins. Going forward we expect the revenues of the transport segment to grow at CAGR of 18.7% over FY07 - FY09E.

Gaining strength in the express cargo services.

TCI operates in express distribution through its brand XPS, which is the fastest growing brand in that business. Brand XPS boasts of excellent quality service and integrated solutions to provide efficient key customer management. The company has created super hubs in the north and is in the process of establishing them in the south. TCI focuses on high value-added and high yield air and express services. Going forward we expect the revenues of the XPS segment to grow at CAGR of 27.5% over FY07 - FY09E.

Supply Chain solutions to be major growth driver.

TCI provides the entire gamut of supply chain solutions like distribution, clearing and forwarding, warehousing, cold chain logistics and other value-added services consultancy. Strong growth is expected from this segment due to larger volumes from existing clients. New clients are being added in a variety of verticals that include retail and cold chain solutions. Going forward we expect the revenues of the supply chain solutions segment to grow at CAGR of 44.9% over FY07 - FY09E.

Expanding operations in coastal shipping.

Currently, TCI has a fleet size of five vessels with a total capacity of 16444 DWT. The company also has plans to buy one ship every year for the next three years. All of them would be second-hand ships. This is expected to lead to strong growth in terms of revenues form the coastal shipping business. Going forward we expect the revenues of the coastal shipping segment to grow at CAGR of 32.3% over FY07 - FY09E.

Focus on high margin businesses by hiving off fuel stations.

The management has hived/sold off eight out of nine fuel stations, which generated less than 1% operating margins. The company is going to focus on the valued-added logistics segments with high margins like express distribution, cold chain and supply chain solutions. As a result of this, EBIDTA margins are likely to improve from 6.5% in FY07 to 7.4% in FY08E and further rise to 7.9% in FY09E. q

Property development - bonus to valuations.

TCI has over 220 properties across the country with a book value of Rs.930 million. Some of the properties are in prime locations and the company wants to relocate these warehouses and free of the land for property development. The company has identified four properties that would be developed in the next three to four years. As and when the company announces more properties for development it could unlock substantial value for TCI shareholders in the years to come.

Robust growth in sales & profits.

The net sales of the company have grown at a CAGR of 15.7% from Rs.5.2 billion in FY02 to Rs.10.9 billion in FY07. However, more importantly, net profits of the company have grown at a CAGR of 43.3% from Rs.51 million in FY02 to Rs.306 million in FY07. Going forward, we expect the revenues to grow at CAGR of 19.9%. More importantly, the net profits are slated to grow at a CAGR of 28.9% over FY07 - FY09E.

Attractive valuation.

At the current price of Rs.121, the stock is trading at 17.3x earnings, 9.9x EV/EBIDTA and 0.8x EV/sales multiple based on FY09E estimates. We feel the valuations are attractive due to the strong past track record, good future potential of the logistics industry and potential value unlocking in the property development business.

Key Risks

Any economic slowdown would impact the logistics industry as a whole. Thus, it would also impact TCI's growth. q TCI faces competition from the unorganized market in the transport business, which is more than 50% of the total revenues as of FY07. Any move to distort the market with irrational pricing would impact the profitability of the company. q Higher fuel costs that sometimes cannot be passed on to the customers can impact the operating margins of the company.

Any delay in scheduled capex could lead to flat to marginal growth for TCI. The company may go for another round of equity funding in FY09E. This would lead to equity dilution and revision in our earnings estimates.