TCI Express Q3 review: Margin expansion aids profitability; buy on dips

Sachin Pal
Moneycontrol Research

Third-party express logistics service provider TCI Express (TCIX) reported yet another strong quarterly performance in Q3 FY19. The company reported healthy topline performance, with mid-teen growth in revenue and an expansion in operating margin. The management is upbeat on the growth outlook and expects the company to deliver high double-digit volume growth along with an improvement in margin over the next few years.

Key highlights
- Revenue for the quarter under review increased 15 percent to Rs 247 crore on the back of a 11 percent growth in business volume. Besides, prices hikes in certain segments also contributed to growth in topline. Volume growth was broad-based with higher contribution from pharmaceutical, automobile, e-commerce and engineering sectors. The tapering of consumer demand after the festive season (Diwali) led to softer volume growth in comparison to previous quarters.

- EBITDA came in 29 percent higher than last year at Rs 31 crore as margin expanded further to 11.8 percent. The expansion indicates its ability to pass on the fuel price hikes amid volatility in crude oil prices. The express logistics operator enjoys strong pricing power and is largely insulated by diesel price movements as it follows a fuel surcharge-based pricing mechanism with its vendors and customers.

- Higher tax outgo and increase in depreciation adversely impacted the bottomline, which increased 21 percent year-on-year

- Within the auto segment, TCIX generates revenue from transportation of spare parts and other automotive components. Replacement demand in the sector continues to be the key revenue driver. The management has highlighted that the slowdown in auto sector is unlikely to have a major impact on the company

- Capital expenditure for nine months-ended December 2018 stood at Rs 22 crore. The same for the full year has been revised lower at Rs 40-45 crore (versus Rs 55-60 crore earlier). Capex outlay for the next four years is pegged at Rs 400 crore, spread equally across the years. The investments will primarily be financed through internal accruals and will be directed towards expanding its network presence through opening new sorting centres and offices.

Outlook and recommendation- Demand for express logistics is anticipated to grow much faster than the growth in economic activity of the country. The management seems confident in achieving 15-16 percent volume growth for the next 2-3 years as the sectoral reforms (GST, e-Way bill and change in axle load norms) would continue to drive formalisation of the sector.

- We remain optimistic on the earnings growth of TCIX and expect the margin expansion to continue going forward. From a valuation standpoint, the stock trades at 26 times FY20 price-to-earnings multiple, which appears to be priced to perfection from a near-term perspective. Investors with a medium- to long-term view should look to accumulate the stock on dips, given its earnings outlook and strong business fundamentals.

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 Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here