Transport Corp demerger: Co to focus on ecomm, stock up 18%

The stock rallied 18 percent, hitting an intraday high of Rs 292.30 in early morning trade. Below is the verbatim transcript of Vineet Agarwal’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: If you can just start off by telling us what the rationale is for the demerger? A: The board when we met yesterday, we felt that there is a huge and fast growing ecommerce sector as well as express distribution business has been growing quite rapidly and we required a complete focused attention on that and hence the need to demerge into a separate entity. This would lead to a company that will be focused very much on the growing ecommerce sector, high value cargo movement and it already comes with a very strong customer base, great infrastructure as well as a team that is there that is already positioned. So, we are hoping to capitalise on that growth story. Latha: What does the division now to contribute to you and post the demerger what will be the split of the balance sheet, for instance, what will be the split of the debt? A: The division contributes about 30 percent of revenues today and about 37 percent of the net profits of the company. Post the demerger, the current debt on the balance sheet is about Rs 300 crore and about a third of the debt would will also get shifted. Sonia: If you can just give us the numbers post the demerger, what will the residual business have in terms of revenues and profits and what will the growth be?A: If I take the figures for the last year, March 31 2015, then the residual company at a standalone level would be approximately about Rs 1,700-1,800 crore with about Rs 45 crore odd of net profit. Latha: For the split company, the express business, what kind of growth prospects? A: As you know that ecommerce and the delivery system has been rapidly expanding in the country and there is a need to create a lot more deeper networks because penetration is going to keep increasing and demand for these services are going to keep growing. So, we do anticipate at least 15 percent growth year-on-year (Y-o-Y) from now onwards in the new company. Sonia: Will you be listing this new company, XPS? A: That is right. Once we get the approvals from shareholders, creditors, Securities and Exchange Board of India (SEBI), stock exchanges and of course from the High Court we would seek listing.  Sonia: By when? A: I think the process itself should take a few months, five to six months at least, so, subsequent to that. Latha: This financial year you will first have the demerged balanced Transport Corporation of India (TCI) trading without the express division and further on a listing of the express division itself – all that will be done by the end of the fiscal? A: The demerger is effective from March 31 2016. So, everything remains as is till we get the clearances and the approvals. Sonia: You did mention that the residual business has a revenue of about Rs 1,700 crore and profit of Rs 45 crore. What kind of growth would you expect to see in the residual business in the next couple of years? A: That business should also keep growing at about 10-15 percent. If the economy picks up the way that it should, we do expect that to also pickup because there we have the freight business, the supply chain solution business as well as the shipping business and all of them given the fact that we would have aggressive gross domestic product (GDP) growth, direct impact on infrastructure, goods and services tax (GST) that business should also have a positive impact. Sonia: What are your capex plans both for the XPS business if you can give us separately and also for the residual supply chain business – how much do you plan to pump in? A: The board earlier in this financial had approved budget of about Rs 250 crore odd. So, that continues till the end of this fiscal. I think we would end up doing about Rs 200 crore odd and next year onwards we would probably look at about Rs 50-75 crore odd in the new company and about a Rs 100 crore odd in the residual company. Latha: At the moment you are trading at 16 times forward earnings, FY17 earnings according to some estimates. What would be the valuation you will expect for your express division?A: If we look at benchmark valuations in the current market, some of our peers are trading at more than 50 multiples but that is really not the way that we are looking at. We are thinking that the company is a profit making company. It already has a brand name; it is already there in the market so I would definitely look at a higher multiple than what we are trading today.Sonia: Can you just give us a little more colour on what the customer profile is for the XPS business and going ahead what could the triggers be? A: The general customer base is high value products. So, it could be from consumer durables to pharmaceuticals to spare parts, etc. The ecommerce delivery is the other part of the business as well. These are the drivers; I think essentially GDP growth which will lead to higher consumption, which would lead to demand for faster services. So, express offers both roads as well as air services and that should help the division.