Transport corporation of india hbj capital

Transport Corp of India (TCI) Investment Line- The largest Integrated logistics and supply chain solutions provider in India with

7000 trucks, 6 Cargo Ships, 9 Mn.Sq ft of Warehousing and 13000 delivery points is available at just

440 Cr Rs of Market Capitalisation!

Our key objective is to pick stocks which can compound sustainably at a healthy

rate for the next 3-5 years and create wealth. We like to select companies with strong

competitive advantages and are quoting at a discount to their intrinsic value.

Content Index

• Transport Corporation of India – Investment Snapshot :- Slide #3 • Industry Opportunity – An Overview:- Slide #7 • Transport Corporation of India – Business Overview :- Slide #12 • Investment Rationale :- Slide #21 • TCI – Consolidated Financials:- Slide #28 • Concerns & Reasoning :- Slide #30 • Conclusion :- Slide #31

“ Specialists in discovering Multibagger stocks “

Transport Corporation of India (TCI) – Investment Snapshot (as on April 26, 2012)


Website: www.tcil.com

TCI - Investment Details


Best Buying Price : Between INR 62 to 65 [CMP is Rs

60.50 it is advisable to wait for breakout on the upper side]

Best Selling Price : Above INR 180+ [Huge scale of

opportunity, hence target price can be revised upward also]

Expect at least 200-300% return in next 730 days [ 2 years] time frame!!!

One can allocate 4-8% of his portfolio to TCI. We feel the Risk-Return ratio in this investment is skewed in favor of the investor.


Basic Details Transport Corporation of India (TCI), set up in 1958 and a part of the TCI Group, is the largest integrated

supply chain and logistics solutions provider in India.

The Company operates in five business segments: transportation ,express (courier), supply chain solutions (SCS), coastal shipping and windmill.

TCI is India’s largest Integrated Logistics Services Provider in Revenues (INR 15 Billion), Reach (Covers 99.45% of the geographical GDP of India); Share (moves 2.5% of the GDP by Value) by a mammoth fleet of trucks (Average vehicles on road carrying TCI goods on any given time - 7000) and a office and warehouse footprint of 1100 locations covering 7.25 Mn square feet. TCI group’s strength rests on its integrated yet independent divisions, each a leader in its own right.

TCI is the first road transport organization in the country to achieve ISO9001:2000 certification in service quality for its operations. TCI has a strong brand image across India.

Key Investment Highlights Scale & Size of Operations – TCI’s scale of operations can be understood from the fact that, “2.5% of India’s GDP by Value is being moved by TCI”. TCI has a leadership position in the Road Freight segment which has been built over several years of operation. It provides Integrated Logistic solutions for companies across the country. This is only possible because of its scale and reach (99.45% of India under TCI’s reach). Strong Moats – TCI has strong Competitive advantages over its peers. It’s difficult for any new player to construct 10 Mn Sq.Ft of Warehousing space, considering today’s Real estate costs. Moreover, its scale of operations in itself provides a strong cost advantage to TCI. Trucking business being a very tough business, which will consolidate and benefit stronger players like TCI. We don’t see many logistics companies reaching TCI’s scale in the next few years considering the low margins in the business. Improving Business Model – TCI from being a basic trucking company is leveraging its assets and scale to build a robust Express cargo and Supply Chain solution divisions. These businesses are high value-add operations and have strong Return on Employed Capital. TCI has been able to improve the share of these high margin business in the overall component and this will help in better valuations. Huge Levers for Margin Expansion – TCI has several margin levers which will results in margins expansion and hence higher PAT growth. All things which can go wrong has gone wrong in the past 12 months with demand slump, increased interest rates, Fuel price hike etc. Hence going forward, we can expect consolidation and cyclical reversal to boost margins. More importantly, Increasing share of high margin business will additionally improve EBIDTA. Highly Attractive Valuations – In spite of strong business operations and high potential businesses, TCI is being valued by the market at less than 10X P/E and 5X EV/EBIDTA which indicates the cheapness of the stock. Even on a historical basis, stock is undervalued. The shift in business will get reflected by the markets with better valuations in the coming days. “ Specialists in discovering Multibagger stocks “

Industry Opportunity & Potential - An Overview


Indian Logistics Industry

The Global Logistics sector has a market of USD 3.5 trillion with United States contributing to over 25% to the World Logistics Industry.

The Indian Logistics industry stands at 12% of Indian GDP which translates into USD 150 billion with industry generating an employment of more than 45 million people. Indian Logistics is highly inefficient with scope for huge improvements. In developed economies, Logistics as % of GDP is less than 5%.

If looked closely outsourced logistics accounts for 54% of the total logistic spends in India, with organized sector accounting for a mere 10% share. Market is largely fragmented.

Logistics as a business is usually expected to grow at 1.5X GDP growth. Hence, Indian logistics industry can be expected to grow at a healthy pace, considering the fast growth of India.

Third Party Logistics (3PL) Solutions, is slated to grow at a compound annual growth rate (CAGR) of over 16% from 2011-14. 3PL solutions will continue to expand itself in the coming years.


Sophisticated Logistics Opportunities

• India at present provides basic logistics solutions and going forward there will be huge requirements for higher-value added Logistics solutions.

• As the economy matures, basic trucking solutions will get enhanced to more sophisticated Cold storage, Custom Warehousing, Inventory Management, Order Processing, Air cargo etc.

• These sub-sectors of Logistics require a highly professional setup, financial backing, Focus and Large scale of operations to be successful. Hence these Entry barriers will make the Industry highly concentrated with better margins as compared to fragmented trucking business with low margins.


Indian Logistics Sector

Air Cargo

Custom Warehous

e

Courier Services

Cold Storage

Road transport

Project Cargo

Sea Port

Industry Analysis using Porter Five Force Model


• The above model shows, how tough it is to scale up a basic Road Freight business. Low entry barriers and High competition with little bargaining power for Suppliers makes sure that, only a handful of players will be able to build scale and operate profitably on a consistent basis.

Industry Growth Drivers

Streamlining of the indirect tax structure: The introduction of Value Added Tax (VAT) and the proposed introduction of a singular Goods and Services Tax (GST) are expected to significantly reduce the number of warehouses, manufacturers are required to maintain in different states, thereby resulting in a substantial increase in demand for integrated logistics solutions. Also, this streamlining makes sure that the Logistics sectors get more organized going forward and weeding out the smaller players.

GST – A Big boost for Road Freight Industry : Road transportation is a costlier mode of transportation when compared to rail, seaways or pipelines. Introduction of GST will eliminate multiple taxes presently charged while carrying goods by road, thereby reducing the overall transportation cost, making road freight rates more viable. TCI being a largest integrated logistics service provider, we believe the company to be a major beneficiary of the proposed Tax changes.

Robust trade growth: Strong economic growth and liberalization have led to considerable increase in domestic and international trade volumes over the past five years. Consequently, the requirement for transportation, handling and warehousing is growing at a robust pace and is driving the demand for integrated logistics solutions.

Globalization of manufacturing systems: Globalization of manufacturing systems coupled with advancements in technology are increasingly compelling companies across verticals to concentrate on their core competencies and avail the cost saving potential of outsourcing. This is expected to contribute to an increase in the need for integrated logistic solutions, which is the niche of every Third Party Logistics Service (“3PL Services”) provider.

Infrastructure Investment: Investments in the infrastructure sector amounting to US$ 350 billion: Increased efficiency and productivity of the transport system would result in lower transit times. Increased plan outlay for Roads will certainly help in better competitive advantage for a company like TCI.


Transport Corporation of India – Business Overview


Key Highlights

TCI has a strong sectoral leadership in

TCI has leadership position in Freight business and also has 25-30%

Market share in XPS division.

Company has invested over 350 Cr Rs in the past 5 years to maintain its

leadership and create fresh assets.

Sectoral Leadership

India’s high GDP growth has led to increased logistics opportunity in

the country. TCI has been able to get a strong foothold in the emerging

verticals like Express Cargo and Supply chain Solutions.

Emerging Growth Verticals

TCI, with the expected shift to High Value add business will be able to generate ROE’s in excess of 20%.

We also expect its EBIDTA Margins to reach 8% in FY-13 and leverage

ratio to reduce to 0.6.

Strong Financials

There are also a lot of Macro-Levers to this opportunity in the form of GST

implementation, increasing acceptance of 3rd party logistics solutions etc.

In Japan nearly, 90% of Logistics is handled by 3rd party solution providers compared to 9% in India which shows

the potential.

Macro Improvements

TCI has a competent management which understands the business

completely. They have been highly transparent and Share-Holder friendly.

It’s ED, Vineet Agarwal has been the key leader and is transforming the company to high-margin business.

Good Management

Transport Corporation

of India


TCI – Various Business Divisions


TCI’s Scale of Operations

• TCI has been able to scale up in the Tough Road freight business, because of efficient operations for the last several decades. Their biggest competitive advantage is their size and scale of operations and assets which it owns. This is clearly visible in the above snapshot.


TCI – Freight Business

• The Road freight industry is getting more organized and consolidated which can be seen from the increasing presence of large scale professional operators. • TCI expects to concentrate on services like LTL and over dimensional cargo within the Road freight segment, which will help it to improve its margins. • Road freight segment is not a very high growth (or) strong returns business, but a scale in this business is necessary for providing more sophisticated Logistics solutions to big corporate customers.


Truck Ownership 1978-79 1993-94 2002-03 2008-09 2013-14(E)

Operators own up to 5 trucks (SFOs) 98% 85% 77% 74% 70%

Operators own 6 to 20 trucks (MFOs) 2% 13% 17% 15% 12%

Operators own > than 20 trucks (LFOs) 0% 2% 6% 11% 18%

TCI – XPS Division • TCI’s Express cargo division has been performing well over the last few years and company has been able to gain nearly 25-30% market share in this business. • Blue dart is by far the leader in this business and with its dominance over the Air-Cargo market, it is very difficult for TCI-XPS to break into this space. Market is valuing Blue-Dart at over 40X its earnings. • But looking into the complimentary strengths of TCI’s other divisions and its execution capability in this division in the past few years, it has the potential to be a strong second rung player in this business. • With the increasing e-commerce players and increasing needs for shifting of important documents, XPS divisions is growing at a fast clip and industry leaders are capitalizing on this using customized solutions. • TCI operates around 200 dedicated XPS trucks along with about 2000 vendor trucks. Company’s efficient operations can be seen from the 100% accuracy rate in parcel delivery.


Key Highlights :

Domestic & International Operations :-

- 130000 locations in India & 200 countries.

- 10% business is through Air cargo (chartered space from Airlines).

- Surface : Both Rail & Road operations.

- Over 20,000 Customers.

Value Added Services :-

- Diplomat (non service location ) Delivery.

- Holiday Service.

- Freight on Delivery.

USP :-

- Packages : 5-50 Kgs.

- Air Cargo : All dimensions.

- Accuracy rate of 100% with money back guarantee schemes.

TCI – Supply Chain Solutions

• TCI supply chain solutions (SCS) is the fastest growing division in the company. This business is a high growth, high margin and high returns business because of the entry barriers involved. • At present, Auto industry is a major component in the overall SCS business. Volume growth in the industry directly translates into increased business for TCI-SCS. But management is diversifying into other sectors with highly customized value added solutions. • As the economy matures and companies understand the advantages of 3rd party logistics, there will be huge demand for SCS solutions. In Japan 90% of logistics of any company is entirely handled by professional logistics players compared with 9% in India.


TCI - JV’s and Synergies

• TCI’s enterprising management has been quick to form JV’s with strong partners to build synergies and grow the Logistics business. These JV’s also help in understanding the Industry's Best practices. • Transystem is the sole logistics partner for Toyota Kiloskar India. It provides complete solutions, from Inbound to Outbound transportation across India and abroad. • Infinite makes use of the synergies between the Road and Rail logistics giants for better integration of Road and Rail cargo movement. This JV provides end-to-end Multi modal solutions.


Other Verticals + Business Mix TCI – Seaways Division :-

Nearly 90 Cr Rs has been invested in this business to build up 6 Shipping assets. This helps TCI in providing a Multi-Modal logistics solution to all its customers. TCI – Global :-

TCI global with its offices across the globe is trying to build a global network and provide long term customized solutions to its customers from logistics to Import/ Export clearances. TCI – Infrastructure :-

TCI Infrastructure, though housed in separate listed company will help in creating Logistics infrastructure like Warehousing, Truck terminals and Multi-Modal parks . Business Mix Change :-

Just a few years back, TCI’s entire revenues came from the base Road freight services which is a low margin business. But the company has been able to diversify quickly into other higher Value-Add services. At present, only 44% of revenues come from Freight segment and more importantly, just 18% of operating profits come from this division.


Investment Rationale


Industry Dynamics & SBU Snapshot

• This Snapshot clearly shows the quality of businesses which is growing in TCI and makes the case easy for the Re-valuation of TCI. Company’s higher than 30% growth in the 10% margin business which is knowledge intensive and has High return on capital employed is a great sign for the future of the company. TCI’s management is focused on growing the right businesses.


Improving Business Mix


• The rapid shift in the business mix can be seen in the sequential quarterly improvements of the XPS and the supply chain solutions business. • We expect the SCS + XPS business to cross over 66% of total revenues in the medium term and reducing the low value freight business to less than 25% of the overall pie in the long term. • Improved business mix is not showing up in the margins largely because of the deterioration of margins in the Road Freight business and hence markets have not took a clear note of this improvement in the business mix. • The declining % of road freight business doesn’t mean de-growth of the business. Because, SCS and XPS business divisions have been growing at a rapid pace, there is a decrease in the % of Freight business.

Aggressive CAPEX


• TCI has invested over 330 Cr Rs in the past 4 years in assets like Warehouses, Hub Centers, Trucks and Cars. Company has been building up assets which will help it to grow above its competition. • Company’s 110 Cr Rs CAPEX in 2011-12 shows the intention of the management to be aggressive and continue to be leaders in the market. But Management, needs to make sure that they don’t expand too much leading to lower utilizations and hence less returns on Invested Capital. • Increasing Land Prices across the country, makes it difficult for any new player to acquire good properties at attractive locations at decent valuations. TCI’s assets which are at historical costs on its books, doesn’t truly reflect the true value and the competitive strength it gives to TCI’s business.

Margin Levers


• Rebounding Margins in Road Freight segment :

Margins in the Road Freight segment has taken a severe hit over the past year. Margins have compressed by over 100 bps. With expect improved Road Freight rates due to cyclical improvements, which will help in better margins going forward. Moreover, consolidation and increasing organized nature of the industry will over a period of time lead to better margins for large operators. • Turnaround of Loss Making Subsidiary :

TCI has subsidiaries like TCI-Global which have been posting losses on EBIT level itself. This has been pulling down the overall margins of the company. Management is taking sincere efforts to turnaround such subsidiaries and we expect the division to post lower losses next year and turn profitable the year next. • Decreased Interest Payment :

TCI has around 300 Cr Rs of loans in its books. Cost of servicing them has been increasing continuously because of the steep RBI rate hikes. With RBI starting to ease rates, we expect the interest payments to reduce which can improve margins by around 20 bps. • Higher Demand pushing up margins :

Low demand combined with an economic slow down has led to elongation in the working capital cycle of TCI. Whenever demand improves, we expect not only the Road Freight rates to go up but also shorter payment cycle. This along with improved demand for more sophisticated logistics solutions, will enable TCI to improve its margins meaningfully going forward.

Management Credibility


• TCI’s management has been building the business efficiently step-by-step. The top management is Hands-On with a deep knowledge about the business they operate in. • TCI has been at the forefront of introducing strong Systems and Processes in the Industry. It has introduced IT to improve its operations. TCI has an in-house ERP and has also implemented Web based Trace and Track. • Through his pioneering initiatives, Mr. Vineet Agarwal has transformed a trucking company into India’s largest integrated logistics and supply chain solutions providers. A progressive thinker, Mr. Agarwal has driven the organization towards adopting leading-edge technologies to actuate business process improvements which is getting reflected in the numbers. • TCI has also pioneered in creating Indian Road Freight Index – This is a index of weighted average lorry freight rates across various routes, similar to that of stock market index.

Mr. S.M. Datta

Chairman

Mr. D.P. Agarwal

VC & MD

Mr. Vineet Agarwal

Executive Director

Mr. Chander

Agarwal

Executive Director

Relative Valuations – Deals + Free Cash EPS


• Company’s relative undervaluation can been seen from the fact that, its closest competitor GATI sold a

minority stake in its Express distribution Supply Chain business valuing the company at over 900 Cr Rs. It’s not rocket science to understand that TCI at Market-Cap of 450 Cr Rs is undervalued.

• Another competitor, VRL Logistics raised 175 Cr Rs from NSR Fund for a minority stake. While the valuations are not known, it is expected to be far higher than the current valuations of TCI.

• The P/BV of the company stands at 1.40x while average stands at 1.9x. The Company is currently trading at M-Cap/sales of 0.15x whereas its peers are trading at much higher valuation .

We feel Market is providing a good opportunity to buy a Good company at Undervalued prices.

TCI Gati Gateway Distripark

PAT (TTM in Cr Rs) 40.69 14.35 2.72

M Cap (Cr Rs) 439.84 303.97 1620

ROE 18.58% 4.86% 12.49%

P/E 8.3x 21.59x 19.05x

P/BV 1.40x 1.1x 2.25x

Operating Margin (%) 7.84% 9.70% 52.75%

Financials


Earnings Projection

Income Statement (INR Cr) FY 10 FY 11 FY 12E FY 13E

Sales 1450 1758 1835 2020

Operating Expenses 1340 1622 1695 1852

Depreciation 26.8 32 33.5 36

EBIT 83.2 103.4 109 136

Interest 19.6 25.4 33 34

Tax 21.3 24.1 29 34

- Tax Rate % 32.9% 30.2% 32% 32%

PAT 43.9 55.9 58 70

Diluted EPS 6.4 7.7 8.2 9.7

EBIDTA % 7.6% 7.7% 8.2% 8.4%

ROE % 15.2% 17.5% 18.7% 20.8%

• TCI’s accounting practice clarity is evident from the constant +30% tax rate. Transparency in accounting is key to any investment decision. • Margin expansion and Higher Return ratios can be seen from the projected earnings. Our estimated are little optimistic than the consensus. • Over the next few years, we can see a significant change in the Earnings profile of TCI, inline with the business improvement. • The real earnings kicker will start only after FY-14 by when the low margin business will fall to around 25% of the overall revenues of the company.

Specialists in discovering Multibagger stocks “

Concerns & Reasoning


1.) Deteriorating GDP Growth :

India continues to face severe challenges on the Macro-front. As Logistics sector is highly intertwined with the GDP growth of the country, it may get affected. If the manufacturing and CAPEX demand doesn’t pick-up, then we are headed for a strong slow down. TCI’s topline growth will be under risk but we feel that the company is strong enough be the, “Last Man Standing” in the industry. 2.) Margins Pressure due to Fuel & Interest Rate risks :

Margins may not rebound owing to elevated Fuel prices and Interest rate risks. Though TCI’s margins will get affected in the short term, 80% of the contracts have a price-escalation clause built-in which will help in maintaining margins with a lag. RBI has shown that the Interest Rate has peaked out. 3.) Lower Investment returns :

Since most of the business work in Fixed costs and asset-build up, any deterioration in the growth will ultimately lead to lower investment returns. This will in turn reduce the ROE’s of the business and hence the P/E expansion may not happen in the stock. 4.) Trucking Business continues to be Fragmented :

The expected consolidation in the highly fragmented Tricking business may get delayed leading to low margins for the next many years. But, considering the pressure on smaller operators – Consolidation is inevitable and cyclical up turn will make sure that margins will rebound.

Conclusion


Price Chart

The Stock has been under consolidation mode since last six months after showing a straight fall.

Stock’s Historical Median P/E is around 14 and by buying at this price, we are definitely buying cheap.

Chart clearly indicates that the stock which was under consolidation zone can be bought once it shows a upside breakout at 62 to 65 level.


Share Holding %

Mar 2012

Dec 2011

Sep 2011

June 2011

Promoters 69.06 69.06 69.02 68.92

FII 6.56 6.56 6.59 6.58

DII 0.03 0.03 0.03 0.03

Conclusion India’s GDP growth story will accelerate going forward and Logistics sector which is an integral part of the economy will flourish due to the efficiency improvements they bring to the system. Road transport will continue to increase its share in the overall logistics, as it is the only sub-sector of infrastructure which continues to create new assets with enhanced Private sector participation.

Trucking is a business where, “A Efficient Big operator will grow bigger and increase the Competitive gap with small operators continuously”. Transport Corporation India, being a leader in the trucking space has a strong edge over its peers. It is with this huge advantage, the company is shifting to high value add opportunities in logistics like Express Cargo and Supply Chain solutions. Over the next few years, the base which it has built over the years will shift seamlessly and the scale-up in these emerging opportunities will enable TCI to become a strong Logistics company.

Markets usually like businesses where Margins are expanding, High ROE’s and increased Free Cash flow. We expect all of this to happen in TCI in the coming years. Stock markets have not discounted this change and is fact viewing TCI as a low margin trucking company. We expect the bottom-line growth to outperform Top-line growth in the next few years.

Transport Corporation of India with its High growth potential is being severely undervalued with respect to the assets it is holding. The largest Logistics company in the country can’t continue to trade at these kind of Market-Capitalizations. TCI’s earnings growth combined with P/E expansion makes way for a Potential Multi-bagger stock. All the risks in the business is being discounted at current valuations. If we are lucky and India delivers on GST and GDP growth kicks in, then we are set for Huge gains on TCI stock.

We are fairly confident that TCI has the potential to become the UPS (or) DHL of India.


THANK YOU


Transport corporation of india hbj capital

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