In continuation of our weekly tactical call to guide investors to look at investment opportunities amid market volatility, we have chosen Transport Corporation of India (TCI), an integrated multimodal logistics and supply chain service provider, as our pick for this week.
While the company's business fundamentals continue to improve at a steady pace, the stock price has withstood volatility in the broader market and has been fairly range-bound over the past year. At its current valuation, the stock presents an attractive investment opportunity, given its favourable industry and regulatory dynamics.
Robust quarterly performance
TCI reported a mixed set of numbers for Q2 FY19. Its revenue grew at a healthy pace, but its net profit came in flat as an increase in operating cost dented its margin. The company's overall performance during the quarter under review was hampered by multiple factors.
The festive season starting later than usual, coupled with the truckers' strike in July, had a compounding effect on the volumes of TCI's three business verticals. The floods in Kerala and adverse coastal conditions on the west coast impacted cargo movement for its Seaways business. On the cost front, the company reported higher operating expenses due to a sharp jump in crude oil prices.
Sector set to grow at a healthy rate
The country's GDP growth has a direct correlation with the growth of the logistics sector (1.5-2.0 times GDP growth), as the demand for goods and services moves in line with economic growth. The demand for logistics and related services is set to grow at a healthy double-digit rate as the country's GDP growth is being pegged at 7-8 percent for the next 3-4 years.
Further, recent government initiatives like dedicated freight corridors, Sagarmala and BharatMala), along with GST, E-Way bill and a change in axle load norms, is helping the sector grow and formalise. TCI, through its integrated business offering, remains well placed to capture the opportunities the sector has to offer.
Trading at attractive valuation
TCI's Q2 financial performance was fairly robust, considering the business was hit by a number of adverse factors. The company's margin, which remained under pressure in Q2, is expected to recover in the short-to-medium term, as fuel-related costs will be passed on to clients in 1-2 quarters.
Among its three business verticals, seaways and supply chain solutions will continue to drive revenue growth and profitability. The supply chain business has been gaining traction since the implementation of GST, as players in the industry are realigning and redesigning their distribution network to bring in operating efficiencies.
The company's operating profit margin is seen improving from its current level as both the supply chain and seaways businesses enjoy significantly higher margins than its core freight business. From a valuation standpoint, TCI trades at a significant discount to its sectoral peers and offers a compelling investment opportunity at a price-earnings multiple of 15 times its estimated earnings for FY20. It also has significant scope for multiple re-rating.