TCI Express Q1 review: Steady earnings, robust execution, premium valuation

Highlights:
- Q1 volumes were higher by 2 percent
- Margins improvement aided bottom line
- Achieved debt-free status during the quarter
- Capex for FY20 pegged at Rs 60 crore

- Trading at 28 times FY20 estimated earnings

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Third-party express logistics service provider TCI Express (TCIX) delivered robust quarterly performance in Q1 FY20. While top line growth was sluggish for the second successive quarter, expansion in operating margin lent support to operating profit.

Quarterly result highlights

Revenue of TCIX for the quarter rose by just 3 percent year-on-year (YoY) to Rs 256 crore amid sluggish economic activity. Top line was driven by an equal combination of higher volumes and price hikes. Demand continued to be weaker in automobile and engineering segments, but this was offset by incremental volumes from the small and medium enterprises (SME) segment.

Operational performance remained robust as earnings before interest, tax, depreciation and amortisation (EBITDA) came in 10 percent ahead of last year at Rs 30 crore. Economies of scale, along with price hikes and operating efficiencies, supported the expansion in operating margin to 11.6 percent in Q1 FY20. The margin, however, dipped slightly on a sequentially basis.  Improvement in revenue, along with margin expansion, trickled down to bottom line, which improved 14 percent YoY.

Finance cost for the quarter stood at Rs 0.2 crore and was down more than 80 percent YoY. The company has repaid all its outstanding debt and ended the quarter with a cash surplus of Rs 10 crore.

In Q1 FY20, the company invested Rs 2 crore in expansion of sorting centres and technology upgradation. For the full year, the company has revised its capital expenditure lower to Rs 60 crore (from Rs 80 crore earlier) and the same will be majorly directed towards setting up new sorting centres in Pune and Gurgaon.

Post a tepid Q1, the business has seen some revival during July as the business volumes climbed 12 percent YoY. The management is targeting 17-18 percent revenue growth in FY20 led by a strong volume recovery in second half of the fiscal year, closer to the Diwali festive season. However, the targeted number appears very challenging as the slowdown has gripped multiple sectors over the past few months. A multitude of factors such as tight liquidity, consumption slowdown and the global trade war is having a domino effect on the domestic economic growth. The automobiles sector has been the hardest hit and the weakness has now extended to other sectors such as cement and certain pockets of fast moving consumer goods.

Outlook and Recommendation

Express logistics forms a small portion of the overall logistics market and the demand for express cargo is anticipated to grow much faster (~2x) than the growth in economic activity of the country. The medium- to long-term outlook on TCIX appears fairly promising on the back of structural reforms in the industry. Despite near-term weakness, we believe TCIX will continue to benefit from the emerging need for express delivery.

TCIX is among our top picks in the logistics sector owing to its solid business fundamentals and proven track record of execution. The strategic focus on technology integration and expansion of distribution network build the wide economic moat for TCIX compared to its peers. However, the current valuations (27.5 times based on FY20 projected earnings) leave little scope for capital appreciation from a near-term perspective and investors with a medium- to long-term view should look to accumulate the stock on corrections.

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