TCI - Q4FY12 Result update - Centrum

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Transport Corp of India

Buy

Target Price: Rs93

CMP: Rs54          

Upside: 72%

Supply chain leads growth and margin momentum

Transport Corporation of India’s (TCI) Q4FY12 result was operationally ahead of our expectations. Revenue grew across segments but declined in the freight business due to a slowdown in the manufacturing sector. The operating margin though down 47bp YoY, was flat sequentially and 28bp above 7.5% estimated mainly on the back of improvement in Supply Chain Solution (SCS) segment’s PBIT margins. We have revised our estimates to factor in improvement in margins going ahead, led by increased revenue contribution from high-margin express (XPS) and SCS divisions. We continue to remain positive on TCI on the back of healthy growth in SCS and XPS divisions and attractive valuations. 

m  Q4 results better than expectation: Standalone Q4FY12 revenue grew 3.5% YoY to Rs4,957mn, 3.2% higher than estimated. Though operating profit declined 2.5% YoY to Rs384mn, it was 7.0% above our estimate on the back of higher-than-expected operating margins in the SCS and freight divisions. Lower tax further aided net profit (adjusted) to grow 9.0% YoY to Rs139mn, 82.4% above expectations.

m  Improvement in SCS helps boost overall margins: Operating margins though down 47bp YoY to 7.7%, was 28bp above estimates. This was mainly led by a 74bp YoY increase in SCS division’s EBIT margins to 9.0%. Margins for other divisions however remained under pressure with express business’ margins declining 80bp YoY to 5.7% and freight segment’s margins contracting 25bp YoY to 4.6%.

m  Revenue mix shifting towards high-margin business: TCI has been focusing on enhancing its value chain deliverables and the results are visible in its revenue mix. The revenue share from the low-margin freight division declined to 42.0% in Q4FY12 vs. 44.9% in Q4FY11. The share of the SCS division has grown to 27.3%, while that of the XPS division has inched up to 26.0%.

m  FY12 annual consolidated results: TCI’s annual consolidated performance was much better than expectations. While revenue grew 5.6% YoY to Rs19.553mn, EBITDA increased 14.0% YoY to Rs1,580mn and net profit jumped 18.7% YoY to Rs595mn. Overall operating margins improved 60bp YoY to 8.1% and net margins improved 33bp YoY to Rs3.0%.

m  Maintain Buy with a revised target price of Rs93: At the CMP, the stock is trading at P/E valuations of 6.4x and 5.8x FY13E & FY14E P/E respectively and appears attractive. We continue to remain positive on TCI with a buy rating valuing it at 10x FY14 EPS and revise our target price to Rs93 (earlier Rs96). (We assign a 15% discount to our earlier multiple of 12x to factor in the risk of economic slowdown resulting in lower movement of freight and also in line with our discounting valuation for all logistics companies post Q4)

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