Transport Corporation of India - good times ahead; Buy:: Edelweiss

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􀂄 Top-line as estimated; XPS, SCS drive growth
Transport Corporation of India (TCI) reported top-line of INR 4,421 mn in Q2FY11
against INR 3,571 mn in Q2FY10 and INR 3,937 mn in Q1FY11, up 24% Y-o-Y and
12% Q-o-Q. Growth was primarily driven by increased revenue contribution of the
supply chain supply (SCS) segment, from INR 578 mn in Q2FY10 to INR 985 mn
in Q2FY11; contribution from express distribution specialists (XPS) rose from INR
942 mn in Q2FY10 to INR 11,738 mn in Q2FY11. PAT has increased more than
estimated, at INR 149 mn against INR 124 mn in Q2FY10, a growth of 20% Y-o-Y.


􀂄 Higher interest and depreciation costs hit PAT
The company posted PAT of INR 149 mn in Q2FY11 against INR 124 mn in
Q2FY10, below our estimates, due to high depreciation and interest costs.
Increase in interest was due to higher debt (up from INR 2,316 mn in Q2FY10 to
INR 3,058.9 mn in Q2FY11) and rise in depreciation was owing to addition of 165
trucks in the supply chain management solution division.

􀂄 Change in revenue mix to boost margins
Revenue contribution from the supply chain segment increased from 16.2% in
Q2FY10 to 22.3% in Q2FY11, whereas that of transportation business declined
from 50% in Q2FY10 to 45.5% in Q2FY11. With contribution rising from the highmargin
XPS and SCS segments, we expect EBIDTA margin to improve from the
current level, going forward.

􀂄 Demerger of real estate, warehouse to unlock value
TCI has demerged its real estate and warehouse divisions w.e.f. April 01, 2010,
into a new company, TCI Developers. As per the scheme, the existing TCI
shareholders will get one equity share of face value INR 10 of TCI Developers for
every 20 shares with face value of INR 2 of TCI held by them. TCI Developers
intends to build five large warehouses, together with prime residential and
commercial properties. The new company will list by November end.

􀂄 Outlook and valuations: Attractive; maintain ‘BUY’
With the worst in road freight rates behind, TCI, being the largest road
transporter is attractively placed to ride the next upcycle in freight rates. We have
derived a fair price of INR 153 per share, valuing the company at 17x FY12E
earnings. On our EPS estimate, the stock is currently trading at 16.6x FY11E and
14.4x FY12E earnings. We maintain ‘BUY’ on the stock.