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TCI: Moving India

A growing economy and the big infrastructure boom mean that things are looking up for TCI. One of India's largest logistics solutions provider, TCI's stock is hot at the moment. Find out why

Gone are the days when Transport Corporation of India (TCI) was just a transportation company. It is now an integrated logistics solution provider with a presence across the entire logistics value chain. In fact, TCI is one of the largest multi-modal logistics solutions providers in India.

Set up in 1958 as part of the TCI Group, the company has an extensive network of around 1,100 company-owned offices with over 5,700 employees. TCI has transformed its business model over the years to focus on high-margin businesses like supply chain, express cargo and shipping. Its six business segments ensure that it has a presence across the entire logistics value chain: transportation (including conventional trucking), express (cargo and courier), supply chain solutions (SCS), coastal shipping, windmills and trading (fuel stations).

It operates a fleet of over 3,000 trucks, 5 cargo ships, 6.5 million square feet of state-of-the-art warehousing space, and a total installed windmill power generation capacity of 11.5 MW. The company forayed into third party logistics (3PL) solutions by forming a joint venture with Mitsui & Co in 1999. This venture provides complete logistics solutions to Toyota Kirloskar Motors India.

Edge Above The Rest
The company is enhancing its role in the high-value supply chain solution (SCS) business. It is the largest integrated player with a 15 per cent market share of the organised logistics industry. The group moves goods valued at more than 1.5 per cent of India's GDP and has the country's widest branch network of offices. It operates approximately 7,000 trucks on a daily basis, of which it owns around 15 per cent while the rest are leased. The company is capable of providing end-to-end logistics solutions through its various divisions. It leveraged this infrastructure to develop its express division, XPS, which is currently amongst the top three express distribution companies in the country. TCI's vehicle tracking system that helps it to consolidate cargo at various locations. For its XPS division, it has in place a consignment tracking system that helps clients to track their consignments using web-based intelligent systems.

Growth Drivers
The Indian logistics industry is at a take-off point. The economy has been growing at a robust pace and the demand for logistics solutions is directly correlated to the growth of the economy. TCI has lined up an aggressive Rs 340 crore capex to scale up its business in order to meet increased demand. It plans to increase its warehousing space, buy new trucks, invest in cold chains, and boost its ship fleet strength over the next three years. The government has ambitious plans to improve the poor state of infrastructure in India which in turn will help in boosting the logistics sector. The infrastructure required for logistics includes ports, roads, railways and airways to ensure safe and timely delivery of cargo. In the 11th five year plan (2007-11), government plans to invest $350 billion in upgrading and creating infrastructure.

Road development will have a major impact on the logistics sector. According to CRISIL, Rs 184,700 crore will be invested in roads and highways over the next five years in India. According to the National Highway Authority of India (NHAI), roads form the most common form of transportation and accounted for 80 per cent of passenger traffic and 65 per cent of freight traffic in 2005-06.

The central government and almost all state governments have agreed to completely phase out the central sales tax (CST) over the next three years. Under the CST regime, different states followed a system of differential sales tax rates with a 4 per cent CST levied on inter-state sales. Manufacturing companies had to maintain small warehouses and depots in every state to show movement of goods within the company and reduce the CST burden. The result: higher costs of inventory, manpower, infrastructure and overheads. With the phasing out of CST, companies can avoid that and outsource the job to logistics service providers who can build large warehouses in few key locations. Manufacturers will be able to operate on a hub-and-spoke model.

Hurdles Ahead
A slow down in the economy would directly affect the growth of inbound and outbound goods. Delay in infrastructure development plans will also affect the sector adversely as supply, procurement and distribution of goods will turn out to be a challenging job for manufacturers. Also, the scale and scope at which the logistics industry is growing is likely to pose a strain on the availability of skilled manpower.

TCI is slated to benefit from the robust growth in the economy. Though the stock price has recently run up, we believe that it is still attractively valued. At the current price, the stock is trading at 22.8x its FY08E EPS and 16.2x its FY09E EPS. We expect revenues to grow at a CAGR of 19 per cent from Rs 1,085 crore (FY07) to Rs 1,531 crore (FY09E) while net profit is expected to grow at a CAGR of 34 per cent from Rs 31 crore to Rs 55 crore during the same time frame. EBITDA grew by 31 per cent to Rs 70 crore in FY07 from Rs 54 crore in FY06. The gradual shift in focus from pure transportation to value-added, high margin businesses will lead to improved EBITDA margins.

Given TCI's leadership position in the organised logistics sector, and its transformation to an integrated player, we value the stock at 22x its FY09E earnings.