Mkt Price: Rs 622.

15 NIFTY: 10,604 Date: 19th Feb 2019

Mkt Cap: Rs 23.8 bn (USD 340 mn) Entry Price: Rs 580
COMPANY OVERVIEW

1. Share Holding (Dec-18): Promoters - 66.97%, MFs/AIFs - 3.93%, FPIs - 4.37%

2. Established in 1997, as an express cargo division of TCI Ltd, TCI Express demerged in 2016.
3. Revenues of Rs 8,851 mn with 3.7% market share in express cargo industry.
4. Business Mix:
FY18 % share
Surface Express 86%
B2B Air Express 8%
Air Intl 1%
B2C E-comm Express 5%
Note: Also does reverse logistics

INVESTMENT THESIS

1. Structural Shift in Express business

Domestic Express market to grow at 18.3% CAGR to reach USD 6.5 bn by FY25

 Shift from documents to heavier loads: Share of documents (<500 gms) in the express industry
has gone down from 70% to 20%. Consignments over 2kg now constitute 50% of total express
volume.
 Shift from unorganized to organized: ~60% of the express market is unorganized. With GST
and the E-Way bill, the shift to happen over next 5 years.
 Surface express preferred: Pricing disparity - Rs ~13/kg by road vs Rs 60/kg by air. Transit times
are <72 hrs vs 24-72 hrs respectively.
  Growth has favored surface industry:
- Drivers are lower pricing & infrastructure growth.
- In air express segment, while Blue Dart owns 6 aircrafts, most operate through belly cargo
of passenger aircrafts. This will make shift from air to surface difficult for Blue Dart as it
has to fill its aircrafts which have a fixed cost structure.
 Changing demand trends: Demand centers which were previously confined to commercial
centers & industrial areas have started expanding to tier 2/3/4 cities. Companies will need
express solutions with a wide network to tap that demand.
 GST Benefits: Warehouse consolidation & octroi removal will help in reduction of delivery time
& drive cost benefits for organized players.
 Other Drivers:
- Truck Axle load norms revised to allow 20-25% more load. Benefits freight operators.
- Consistency & quality of services and not pricing will ensure leadership in industry.

2. Room for all players for the unorganized pie

Players, Rs mn Surface Air Others Total
TCI Express 7,612 797 443 8,851
Blue Dart Express 6,438 21,554 27,992
Safexpress - - - 19,200
Gati-Kintetsu Express - - - 11,663
DTDC - - - 8,883
FedEx India - - - -

Organized Market 44,710 45,187 89,897

% share of Organized Market 33% 43% 37%
Total 136,500 104,000 240,500
Target Market 91,790 58,813 150,603

 Technological edge creates a competitive advantage: FedEx globally became a preferred

express partner because of offering simple tech-based solutions to suppliers & customers (150
researchers at FedEx Institute of Technology).
 But the Rs 150 bn unorganized pie is enough for medium to long-term growth:
- Until 2-3 leaders emerge from the shift of fragmented to non-fragmented, medium term
growth will favor all organized players.

3. Serving High Growth Cyclical & Non-Cyclical Industries

 % of express Expected
Industry Comments
industry Gr, %
Auto Components 12-14% 14-15% JIT for inventory mgmnt & Spare parts
Textile & Lifestyle 9-11% 13% Textile Supply Chain
Electronics 6-8% 25% Spare Parts
Pharma 3-5% 15%
Education, Telecom, Govt - B2C 5% - Mostly documents
BFSI - B2C 4% - Mostly documents
Consumer Durables <1% 24-26%
Others 18% -
E-Commerce 24% 28-30%
 Serves high growth industries which are going to have better logistics need with size
 Mix of cyclical & non-cyclical industry participants as customers offers support

4. More Expansive Network than Peers: Has more sorting centers across more branches with
relatively lesser employees than peers
Parameters TCI Express Blue Dart Express Gati-Kintetsu Express
Trucks (Third-Party Trucks) 4,500 11,122 5,000
Sorting Centres 28 21 16
Branches 650 610 500
Routes 500 250 -
Employees 2,500 11000 5500
5. Gross Margin Growth against peers, higher utilization to kick in next 3-5 years
Gross Margins, % 31-Mar-16 31-Mar-17 31-Mar-18
TCI Express - 23.1% 24.9%
Blue Dart 46.4% 47.8% 47.2%
Gati Kintetsu Express 31.1% 31.6% 30.9%
 FY18 Topline growth for the company was 18% - 14% volume growth, 3.5% price growth.
 FY19E Gross Margins at 28%.

6. Strong Growth Visibility

 Rs 4nb cap-ex over FY18-22 to support 20-25% revenue growth over next 4-5 years
o Double the capacity by Opening/Expanding 10 new sorting centers
o Rs 620 mn already invested in 5 sorting centers at Delhi, Pune, Indore, Nagpur &
Calcutta to be expanded/built over next 2 years.
o To open 100 new branches in FY19.

 Volumes & Pricing:

- In the last 5 years, revenues have doubled with a sorting capacity increase of about 35%.
Sorting Capacity increase in 5 years by approx. 40-45%. Assuming the similar churn rate
of volume, revenues can go up by 3x.
- Company confident of increasing prices by 8% every year. 5% escalation, 3% is pricing
power on account of service quality.

 Stronger Margins than peers with potential expansion:

 Margins, % 31-Mar-16 31-Mar-17 31-Mar-18
Gross Margins, %
TCI Express - 23.1% 24.9%
Blue Dart 46.4% 47.8% 47.2%
Gati Kintetsu Express 31.1% 31.6% 30.9%
EBIT, %
TCI Express 7.6% 7.7% 9.7%
Blue Dart 11.9% 8.8% 8.5%
Gati Kintetsu Express 6.7% 4.9% 4.6%
- Current truck utilization at 82%. Plan to take utilization to 92% over next 3-5 years.
- Gross/EBIDTA Margin of 33%/20% at 92% capacity utilization. FY19E EBITDA target 15%.

7. Superior growth & margins among peers

 Topline & EBIT Margins grew fastest among peers
FY15-18 Gr, % TCI Express BlueDart Express Gati-Kintetsu Express
Revenue 10.4% 7.2% 0.8%
EBIT 24.0% 9.4% -21.7%
 TCI Express, with its asset light model, makes up for a lower gross margin with lesser
comparable Rent and Employee Benefit Expense.
 Has better EBIT & PAT margins than peers at 9.7% & 6.6%.
FY18, Rs mn TCI Express BlueDart Express Gati-Kintetsu Express
Net Revenues 8,851 27,992 11,663
Gross Profit 2,207 13,204 3,607
Gross Profit, % 24.9% 47.2% 30.9%
% of Revenues
Employee Benefits Expense 8.2% 20.9% 13.2%
Rent 2.5% 6.3% 5.1%
Other Expenses 4.0% 7.4% 6.6%
EBITDA 907 3,513 711
EBITDA, % 10.2% 12.5% 6.1%
Depreciation & Amortisation 52 1,145 172
EBIT 854 2,368 539
EBIT, % 9.7% 8.5% 4.6%
PAT 584 1,447 310
PAT, % 6.6% 5.2% 2.7%

Ratios (FY18) TCI Express BlueDart Express Gati-Kintetsu Express

NWC, Days of Sales 30 (6) 46
Receivables, Days of Sales 64 55 65
Creditors, Days of Sales 28 48 28
Asset Turnover 3.8 3.8 2.4
Fixed Asset Turnover 5.5 5.4 5.9
Net Debt/Equity (x) 0.14 0.35 0.30
ROIC, % 23.6% 21.4% 7.4%
ROE, % 28.2% 27.2% 8.6%

VALUATION
 The company will generate 20%+ EPS growth over FY19-24 with core pre-tax ROCE of 35-40%. We
value TCI Express at exit 1-yr fwd P/E multiple of 25x on FY24E EPS. For a 20% IRR the entry price
is calculated @ Rs 580 per share.

RISK ANALYSIS / TO BE EXPLORED

1. Reliance on Asset Light Model: It necessitates good relationship with freight operators.
2. Pricing Pressure due to diesel prices: Clients may not be willing to pay a diesel surcharge post a
certain price increase since switching costs are not very high.
3. Cost pressures due to BS-VI: Cost of ownership is going to go up post compulsory BS-VI norms
requirement from April 1, 2020. Diesel vehicles will see more engine & exhaust upgradation than
petrol counterparts leading to 10-15% increase in prices which will increase the freight charges.
4. Threat of new startups capturing the e-commerce logistics market:
E-Commerce Startups (FY18) Rs mn
E-Commerce Logistics, FY17 %, Share Delhivery 10,700
Captive Logistics 50% Ecomm Express 6,902
E-Commerce Startups 25-30% Total 17,602
Traditional Express Players 20-25% % of E-Comm Logistics Market 30%
Total market 57,820
Captive logistics & traditional express players have lost market share to e-comm logistics
startups which have grown at 40% in FY18 vs industry average of 25-30%.

5. MSME growth mirrors GVA growth: MSME Industry contributes to express industry growth in
India and globally. Any recessionary pressure will impact the express industry & especially TCI
Express (50% of Rev. from MSMEs)

6. Technological Disadvantage (current or potential) unknown: Big Data for forecasting volumes,
Cloud Computing, Real-time route optimization & mgmnt of delays, vehicle mounted info systems
are slowly coming to the world & will take time to come to India. Potential technological
applications not in process are AR, blockchain, drone delivery & CCTV analytics
Currently, Blue Dart offers most comprehensive basket of services among peers:
Tech TCI Express BlueDart Express Gati-Kintetsu Express DTDC Safexpress
Product Tracking ✓ ✓ ✓ ✓ ✓
Integrated tracking on e-
seller's site ✓
Integrated tracking on
client's systems ✓ ✓ ✓ ✓
Heavily Integrated Pre-
Shipping & Post Tracking ✓
SMS Tracking ✓ ✓ ✓ ✓
Electronic POD ✓ ✓ ✓ ✓
FOD ✓ ✓ ✓
COD/DOD ✓ ✓ ✓

FINANCIAL HIGHLIGHTS
(All figures in Rs mn) Growth (%)
P&L ACCOUNT FY17 FY18 FY19E FY24E FY17-18 FY18-19E FY19-24
Net Revenues 7,503 8,851 10,444 22,898 18.0% 18.0% 17.0%
EBIDTA 619 907 1,149 2,748 46.5% 26.7% 19.1%
EBIDTA Margin, % 8.2% 10.2% 11.0% 12.0%
Dep 43 52 71 216 20.9% 36.3% 24.9%
EBIT 576 854 1,078 2,532 48.4% 26.2% 18.6%
EBIT Margin, % 7.7% 9.7% 10.3% 11.1%
Int Exp (Net of O.I.) 11 17 24 (129) 57.0% 42.5% -240.1%
PBT 565 838 1,054 2,661 48.2% 25.8% 20.4%
Prov for Tax 190 254 337 852 33.4% 32.9% 20.4%
PAT 375 584 717 1,810 55.7% 22.7% 20.4%
Extraordinary Items 1 3 0 0 230.0% -100.0%
Minority Interest - - 0 0
Net Income 376 587 717 1,810 56.2% 22.0% 20.4%
Dividend paid (Rs mn) 74 115 138 362 56.3% 20.0% 21.3%
Div Payout Ratio, % 19.6% 19.6% 19.2% 20%

(All figures in Rs mn) Growth (%)

BALANCE SHEET FY17 FY18 FY19E FY24E FY17-18 FY18-19E FY19-24
Net Worth 1,608 2,068 2,647 7,713 28.6% 28.0% 23.9%
Total Debt (Net of Cash) 228 285 399 (1,615) 24.7% 40.1% -232.3%
Other Long Term Liabilities - - - -
TOTAL LIABILITIES 1,836 2,353 3,046 6,098 28.2% 29.5% 14.9%

Gross Block 1,164 1,814 2,414 6,164 55.9% 33.1% 20.6%

Acc Dep 192 194 265 982 1.0% 36.5% 29.9%
Net Block 971 1,620 2,149 5,182 66.8% 32.7% 19.2%
CWIP 79 0 -
Net Wkg Cap 786 733 897 916 -6.8% 22.4% 0.4%
Inventory - - - -
Receivables 1,131 1,544 1,576 1,717 36.5% 2.1% 1.7%
Less: Payables 397 675 679 801 69.8% 0.6% 3.4%
Other Net Current Assets 52 -136 - - -360.3% -100.0%
TOTAL ASSETS 1,836 2,353 3,046 6,098 28.2% 29.5% 14.9%

KEY RATIOS FY17 FY18 FY19E FY24E

Dep Rate, % 3.7% 2.9% 2.9% 3.5%
Tax Rate, % 34% 30% 32% 32%
NWC, Days of Sales 38.2 30.2 37.0 32.0
Inventory, Days of sales 0.0 0.0 0.0 0.0
Receivable, Days of Sales 55.0 63.7 65.0 60.0
Creditors, Days of Sales 19.3 27.8 28.0 28.0
D/E (x) 0.14 0.14 0.15 -0.21
Cost of debt 4.7% 5.9% 6% 8%
Core RoCE 31% 36% 35% 42%