Transport corporation of india hbj capital

Transport Corp of India (TCI)
Investment Line-The largest Integrated logistics and supply chain solutions provider in India with
7000 trucks,6 Cargo Ships,9 Mn.Sq ft ofWarehousing and 13000 delivery points is available at just
440 Cr Rs of Market Capitalisation!
Our key objective is to pick stocks which can compound sustainably at a healthy
rate for the next 3-5 years and create wealth.We like to select companies with strong
competitive advantages and are quoting at a discount to their intrinsic value.

Content Index
• Transport Corporation of India – Investment Snapshot :- Slide #3
• Industry Opportunity – An Overview:- Slide #7
• Transport Corporation of India – Business Overview :- Slide #12
• Investment Rationale :- Slide #21
• TCI – Consolidated Financials:- Slide #28
• Concerns & Reasoning :- Slide #30
• Conclusion :- Slide #31
“ Specialists in discovering Multibagger stocks “

Transport Corporation of India (TCI) – Investment Snapshot
(as on April 26, 2012)
Website: www.tcil.com

TCI - Investment Details
Best Buying Price : Between INR 62 to 65 [CMP is Rs
60.50 it is advisable to wait for breakout on the upper side]
Best Selling Price : Above INR 180+ [Huge scale of
opportunity, hence target price can be revised upward also]
Expect at least 200-300% return in next 730 days [ 2 years]
time frame!!!
One can allocate 4-8% of his portfolio to TCI. We feel the Risk-Return
ratio in this investment is skewed in favor of the investor.

Basic Details
 Transport Corporation of India (TCI), set up in 1958 and a part of the TCI Group, is the largest integrated
supply chain and logistics solutions provider in India.
 The Company operates in five business segments: transportation ,express (courier), supply chain
solutions (SCS), coastal shipping and windmill.
 TCI is India’s largest Integrated Logistics Services Provider in Revenues (INR 15 Billion), Reach (Covers
99.45% of the geographical GDP of India); Share (moves 2.5% of the GDP by Value) by a mammoth fleet of
trucks (Average vehicles on road carrying TCI goods on any given time - 7000) and a office and warehouse
footprint of 1100 locations covering 7.25 Mn square feet. TCI group’s strength rests on its integrated yet
independent divisions, each a leader in its own right.
 TCI is the first road transport organization in the country to achieve ISO9001:2000 certification in service
quality for its operations. TCI has a strong brand image across India.

Key Investment Highlights
Scale & Size of Operations – TCI’s scale of operations can be understood from the fact that, “2.5% of India’s
GDP by Value is being moved by TCI”. TCI has a leadership position in the Road Freight segment which has
been built over several years of operation. It provides Integrated Logistic solutions for companies across the
country. This is only possible because of its scale and reach (99.45% of India under TCI’s reach).
Strong Moats – TCI has strong Competitive advantages over its peers. It’s difficult for any new player to
construct 10 Mn Sq.Ft of Warehousing space, considering today’s Real estate costs. Moreover, its scale of
operations in itself provides a strong cost advantage to TCI. Trucking business being a very tough business,
which will consolidate and benefit stronger players like TCI. We don’t see many logistics companies reaching
TCI’s scale in the next few years considering the low margins in the business.
Improving Business Model – TCI from being a basic trucking company is leveraging its assets and scale to
build a robust Express cargo and Supply Chain solution divisions. These businesses are high value-add
operations and have strong Return on Employed Capital. TCI has been able to improve the share of these
high margin business in the overall component and this will help in better valuations.
Huge Levers for Margin Expansion – TCI has several margin levers which will results in margins expansion
and hence higher PAT growth. All things which can go wrong has gone wrong in the past 12 months with
demand slump, increased interest rates, Fuel price hike etc. Hence going forward, we can expect
consolidation and cyclical reversal to boost margins. More importantly, Increasing share of high margin
business will additionally improve EBIDTA.
Highly Attractive Valuations – In spite of strong business operations and high potential businesses, TCI is
being valued by the market at less than 10X P/E and 5X EV/EBIDTA which indicates the cheapness of the
stock. Even on a historical basis, stock is undervalued. The shift in business will get reflected by the markets
with better valuations in the coming days.

Industry Opportunity & Potential
- An Overview

Indian Logistics Industry
 The Global Logistics sector has a market of USD 3.5 trillion with United States contributing to over 25%
to the World Logistics Industry.
 The Indian Logistics industry stands at 12% of Indian GDP which translates into USD 150 billion with
industry generating an employment of more than 45 million people. Indian Logistics is highly inefficient with
scope for huge improvements. In developed economies, Logistics as % of GDP is less than 5%.
 If looked closely outsourced logistics accounts for 54% of the total logistic spends in India, with organized
sector accounting for a mere 10% share. Market is largely fragmented.
 Logistics as a business is usually expected to grow at 1.5X GDP growth. Hence, Indian logistics industry can
be expected to grow at a healthy pace, considering the fast growth of India.
 Third Party Logistics (3PL) Solutions, is slated to grow at a compound annual growth rate (CAGR) of over
16% from 2011-14. 3PL solutions will continue to expand itself in the coming years.

Sophisticated Logistics Opportunities
• India at present provides basic logistics solutions and going forward there will be huge requirements for
higher-value added Logistics solutions.
• As the economy matures, basic trucking solutions will get enhanced to more sophisticated Cold storage,
Custom Warehousing, Inventory Management, Order Processing, Air cargo etc.
• These sub-sectors of Logistics require a highly professional setup, financial backing, Focus and Large scale
of operations to be successful. Hence these Entry barriers will make the Industry highly concentrated with
better margins as compared to fragmented trucking business with low margins.
Indian Logistics
Sector
Air Cargo
Custom
Warehous
e
Courier
Services
Cold
Storage
Road
transport
Project
Cargo
Sea Port

Industry Analysis using Porter Five Force Model
• The above model shows, how tough it is to scale up a basic Road Freight business. Low entry barriers and
High competition with little bargaining power for Suppliers makes sure that, only a handful of players will be
able to build scale and operate profitably on a consistent basis.

Industry Growth Drivers
Streamlining of the indirect tax structure: The introduction of Value Added Tax (VAT) and the proposed
introduction of a singular Goods and Services Tax (GST) are expected to significantly reduce the number of
warehouses, manufacturers are required to maintain in different states, thereby resulting in a substantial
increase in demand for integrated logistics solutions. Also, this streamlining makes sure that the Logistics
sectors get more organized going forward and weeding out the smaller players.
GST – A Big boost for Road Freight Industry : Road transportation is a costlier mode of transportation when
compared to rail, seaways or pipelines. Introduction of GST will eliminate multiple taxes presently charged
while carrying goods by road, thereby reducing the overall transportation cost, making road freight rates
more viable. TCI being a largest integrated logistics service provider, we believe the company to be a major
beneficiary of the proposed Tax changes.
Robust trade growth: Strong economic growth and liberalization have led to considerable increase in
domestic and international trade volumes over the past five years. Consequently, the requirement for
transportation, handling and warehousing is growing at a robust pace and is driving the demand for
integrated logistics solutions.
Globalization of manufacturing systems: Globalization of manufacturing systems coupled with
advancements in technology are increasingly compelling companies across verticals to concentrate on their
core competencies and avail the cost saving potential of outsourcing. This is expected to contribute to an
increase in the need for integrated logistic solutions, which is the niche of every Third Party Logistics Service
(“3PL Services”) provider.
Infrastructure Investment: Investments in the infrastructure sector amounting to US$ 350 billion: Increased
efficiency and productivity of the transport system would result in lower transit times. Increased plan outlay
for Roads will certainly help in better competitive advantage for a company like TCI.

Transport Corporation of India – Business Overview

Key Highlights
TCI has a strong sectoral leadership in
TCI has leadership position in
Freight business and also has 25-30%
Market share in XPS division.
Company has invested over 350 Cr Rs
in the past 5 years to maintain its
leadership and create fresh assets.
Sectoral Leadership
India’s high GDP growth has led to
increased logistics opportunity in
the country. TCI has been able to get
a strong foothold in the emerging
verticals like Express Cargo and
Supply chain Solutions.
Emerging Growth
Verticals
TCI, with the expected shift to High
Value add business will be able to
generate ROE’s in excess of 20%.
We also expect its EBIDTA Margins
to reach 8% in FY-13 and leverage
ratio to reduce to 0.6.
Strong Financials
There are also a lot of Macro-Levers to
this opportunity in the form of GST
implementation, increasing acceptance
of 3rd party logistics solutions etc.
In Japan nearly, 90% of Logistics is
handled by 3rd party solution providers
compared to 9% in India which shows
the potential.
Macro Improvements
TCI has a competent management
which understands the business
completely. They have been highly
transparent and Share-Holder friendly.
It’s ED, Vineet Agarwal has been the
key leader and is transforming the
company to high-margin business.
Good Management
Transport
Corporation
of India

TCI – Various Business Divisions

TCI’s Scale of Operations
• TCI has been able to scale up in the Tough Road freight business, because of efficient operations for the last
several decades. Their biggest competitive advantage is their size and scale of operations and assets which
it owns. This is clearly visible in the above snapshot.

TCI – Freight Business
• The Road freight industry is getting more
organized and consolidated which can be
seen from the increasing presence of large
scale professional operators.
• TCI expects to concentrate on services like
LTL and over dimensional cargo within the
Road freight segment, which will help it to
improve its margins.
• Road freight segment is not a very high
growth (or) strong returns business, but a
scale in this business is necessary for
providing more sophisticated Logistics
solutions to big corporate customers.
Truck Ownership 1978-79 1993-94 2002-03 2008-09 2013-14(E)
Operators own up to 5 trucks (SFOs) 98% 85% 77% 74% 70%
Operators own 6 to 20 trucks (MFOs) 2% 13% 17% 15% 12%
Operators own > than 20 trucks (LFOs) 0% 2% 6% 11% 18%

TCI – XPS Division
• TCI’s Express cargo division has been performing well
over the last few years and company has been able to
gain nearly 25-30% market share in this business.
• Blue dart is by far the leader in this business and with
its dominance over the Air-Cargo market, it is very
difficult for TCI-XPS to break into this space. Market is
valuing Blue-Dart at over 40X its earnings.
• But looking into the complimentary strengths of TCI’s
other divisions and its execution capability in this
division in the past few years, it has the potential to be a
strong second rung player in this business.
• With the increasing e-commerce players and increasing
needs for shifting of important documents, XPS divisions
is growing at a fast clip and industry leaders are
capitalizing on this using customized solutions.
• TCI operates around 200 dedicated XPS trucks along
with about 2000 vendor trucks. Company’s efficient
operations can be seen from the 100% accuracy rate in
parcel delivery.
Key Highlights :
Domestic & International Operations :-
- 130000 locations in India & 200 countries.
- 10% business is through Air cargo
(chartered space from Airlines).
- Surface : Both Rail & Road operations.
- Over 20,000 Customers.
Value Added Services :-
- Diplomat (non service location ) Delivery.
- Holiday Service.
- Freight on Delivery.
USP :-
- Packages : 5-50 Kgs.
- Air Cargo : All dimensions.
- Accuracy rate of 100% with money back
guarantee schemes.

TCI – Supply Chain Solutions
• TCI supply chain solutions (SCS) is the fastest growing division in the company. This business is a high
growth, high margin and high returns business because of the entry barriers involved.
• At present, Auto industry is a major component in the overall SCS business. Volume growth in the industry
directly translates into increased business for TCI-SCS. But management is diversifying into other sectors
with highly customized value added solutions.
• As the economy matures and companies understand the advantages of 3rd party logistics, there will be
huge demand for SCS solutions. In Japan 90% of logistics of any company is entirely handled by professional
logistics players compared with 9% in India.

TCI - JV’s and Synergies
• TCI’s enterprising management has been quick to form JV’s with strong partners to build synergies and
grow the Logistics business. These JV’s also help in understanding the Industry's Best practices.
• Transystem is the sole logistics partner for Toyota Kiloskar India. It provides complete solutions, from
Inbound to Outbound transportation across India and abroad.
• Infinite makes use of the synergies between the Road and Rail logistics giants for better integration of
Road and Rail cargo movement. This JV provides end-to-end Multi modal solutions.

Other Verticals + Business Mix
TCI – Seaways Division :-
Nearly 90 Cr Rs has been invested in this business to build up 6
Shipping assets. This helps TCI in providing a Multi-Modal logistics
solution to all its customers.
TCI – Global :-
TCI global with its offices across the globe is trying to build a global
network and provide long term customized solutions to its customers
from logistics to Import/ Export clearances.
TCI – Infrastructure :-
TCI Infrastructure, though housed in separate listed company will help
in creating Logistics infrastructure like Warehousing, Truck terminals
and Multi-Modal parks .
Business Mix Change :-
Just a few years back, TCI’s entire revenues came from the base Road
freight services which is a low margin business. But the company has
been able to diversify quickly into other higher Value-Add services. At
present, only 44% of revenues come from Freight segment and more
importantly, just 18% of operating profits come from this division.

Investment Rationale

Industry Dynamics & SBU Snapshot
• This Snapshot clearly shows the quality of businesses which is growing in TCI and makes the case easy for
the Re-valuation of TCI. Company’s higher than 30% growth in the 10% margin business which is knowledge
intensive and has High return on capital employed is a great sign for the future of the company. TCI’s
management is focused on growing the right businesses.

Improving Business Mix
• The rapid shift in the business mix can
be seen in the sequential quarterly
improvements of the XPS and the supply
chain solutions business.
• We expect the SCS + XPS business to
cross over 66% of total revenues in the
medium term and reducing the low value
freight business to less than 25% of the
overall pie in the long term.
• Improved business mix is not showing
up in the margins largely because of the
deterioration of margins in the Road
Freight business and hence markets have
not took a clear note of this improvement
in the business mix.
• The declining % of road freight business
doesn’t mean de-growth of the business.
Because, SCS and XPS business divisions
have been growing at a rapid pace, there
is a decrease in the % of Freight business.

Aggressive CAPEX
• TCI has invested over 330 Cr Rs in the past 4 years in assets like Warehouses, Hub Centers, Trucks and Cars.
Company has been building up assets which will help it to grow above its competition.
• Company’s 110 Cr Rs CAPEX in 2011-12 shows the intention of the management to be aggressive and
continue to be leaders in the market. But Management, needs to make sure that they don’t expand too
much leading to lower utilizations and hence less returns on Invested Capital.
• Increasing Land Prices across the country, makes it difficult for any new player to acquire good properties
at attractive locations at decent valuations. TCI’s assets which are at historical costs on its books, doesn’t
truly reflect the true value and the competitive strength it gives to TCI’s business.

Margin Levers
• Rebounding Margins in Road Freight segment :
Margins in the Road Freight segment has taken a severe hit over the past year. Margins have compressed
by over 100 bps. With expect improved Road Freight rates due to cyclical improvements, which will help in
better margins going forward. Moreover, consolidation and increasing organized nature of the industry will
over a period of time lead to better margins for large operators.
• Turnaround of Loss Making Subsidiary :
TCI has subsidiaries like TCI-Global which have been posting losses on EBIT level itself. This has been
pulling down the overall margins of the company. Management is taking sincere efforts to turnaround such
subsidiaries and we expect the division to post lower losses next year and turn profitable the year next.
• Decreased Interest Payment :
TCI has around 300 Cr Rs of loans in its books. Cost of servicing them has been increasing continuously
because of the steep RBI rate hikes. With RBI starting to ease rates, we expect the interest payments to
reduce which can improve margins by around 20 bps.
• Higher Demand pushing up margins :
Low demand combined with an economic slow down has led to elongation in the working capital cycle of
TCI. Whenever demand improves, we expect not only the Road Freight rates to go up but also shorter
payment cycle. This along with improved demand for more sophisticated logistics solutions, will enable TCI
to improve its margins meaningfully going forward.

Management Credibility
• TCI’s management has been building the business efficiently step-by-step. The top management is Hands-
On with a deep knowledge about the business they operate in.
• TCI has been at the forefront of introducing strong Systems and Processes in the Industry. It has introduced
IT to improve its operations. TCI has an in-house ERP and has also implemented Web based Trace and Track.
• Through his pioneering initiatives, Mr. Vineet Agarwal has transformed a trucking company into India’s
largest integrated logistics and supply chain solutions providers. A progressive thinker, Mr. Agarwal has
driven the organization towards adopting leading-edge technologies to actuate business process
improvements which is getting reflected in the numbers.
• TCI has also pioneered in creating Indian Road Freight Index – This is a index of weighted average lorry
freight rates across various routes, similar to that of stock market index.
Mr. S.M. Datta
Chairman
Mr. D.P.Agarwal
VC & MD
Mr.VineetAgarwal
Executive Director
Mr. Chander
Agarwal
Executive Director

Relative Valuations – Deals + Free Cash EPS
• Company’s relative undervaluation can been seen from the fact that, its closest competitor GATI sold a
minority stake in its Express distribution Supply Chain business valuing the company at over 900 Cr Rs.
It’s not rocket science to understand that TCI at Market-Cap of 450 Cr Rs is undervalued.
• Another competitor, VRL Logistics raised 175 Cr Rs from NSR Fund for a minority stake. While the
valuations are not known, it is expected to be far higher than the current valuations of TCI.
• The P/BV of the company stands at 1.40x while average stands at 1.9x. The Company is currently trading
at M-Cap/sales of 0.15x whereas its peers are trading at much higher valuation .
We feel Market is providing a good opportunity to buy a Good company at Undervalued prices.
TCI Gati Gateway
Distripark
PAT (TTM in Cr Rs) 40.69 14.35 2.72
M Cap (Cr Rs) 439.84 303.97 1620
ROE 18.58% 4.86% 12.49%
P/E 8.3x 21.59x 19.05x
P/BV 1.40x 1.1x 2.25x
Operating Margin (%) 7.84% 9.70% 52.75%

Financials

Earnings Projection
Income Statement (INR Cr) FY 10 FY 11 FY 12E FY 13E
Sales 1450 1758 1835 2020
Operating Expenses 1340 1622 1695 1852
Depreciation 26.8 32 33.5 36
EBIT 83.2 103.4 109 136
Interest 19.6 25.4 33 34
Tax 21.3 24.1 29 34
- Tax Rate % 32.9% 30.2% 32% 32%
PAT 43.9 55.9 58 70
Diluted EPS 6.4 7.7 8.2 9.7
EBIDTA % 7.6% 7.7% 8.2% 8.4%
ROE % 15.2% 17.5% 18.7% 20.8%
• TCI’s accounting practice clarity
is evident from the constant
+30% tax rate. Transparency in
accounting is key to any
investment decision.
• Margin expansion and Higher
Return ratios can be seen from
the projected earnings. Our
estimated are little optimistic
than the consensus.
• Over the next few years, we
can see a significant change in
the Earnings profile of TCI, inline
with the business improvement.
• The real earnings kicker will
start only after FY-14 by when
the low margin business will fall
to around 25% of the overall
revenues of the company.
Specialists in discovering Multibagger stocks “

Concerns & Reasoning
1.) Deteriorating GDP Growth :
India continues to face severe challenges on the Macro-front. As Logistics sector is highly intertwined with
the GDP growth of the country, it may get affected. If the manufacturing and CAPEX demand doesn’t pick-
up, then we are headed for a strong slow down. TCI’s topline growth will be under risk but we feel that the
company is strong enough be the, “Last Man Standing” in the industry.
2.) Margins Pressure due to Fuel & Interest Rate risks :
Margins may not rebound owing to elevated Fuel prices and Interest rate risks. Though TCI’s margins will get
affected in the short term, 80% of the contracts have a price-escalation clause built-in which will help in
maintaining margins with a lag. RBI has shown that the Interest Rate has peaked out.
3.) Lower Investment returns :
Since most of the business work in Fixed costs and asset-build up, any deterioration in the growth will
ultimately lead to lower investment returns. This will in turn reduce the ROE’s of the business and hence the
P/E expansion may not happen in the stock.
4.) Trucking Business continues to be Fragmented :
The expected consolidation in the highly fragmented Tricking business may get delayed leading to low
margins for the next many years. But, considering the pressure on smaller operators – Consolidation is
inevitable and cyclical up turn will make sure that margins will rebound.

Conclusion

Price Chart
 The Stock has been under consolidation mode since last
six months after showing a straight fall.
 Stock’s Historical Median P/E is around 14 and by buying
at this price, we are definitely buying cheap.
 Chart clearly indicates that the stock which was under
consolidation zone can be bought once it shows a upside
breakout at 62 to 65 level.
Share
Holding %
Mar
2012
Dec
2011
Sep
2011
June
2011
Promoters 69.06 69.06 69.02 68.92
FII 6.56 6.56 6.59 6.58
DII 0.03 0.03 0.03 0.03

Conclusion
India’s GDP growth story will accelerate going forward and Logistics sector which is an integral part of the
economy will flourish due to the efficiency improvements they bring to the system. Road transport will
continue to increase its share in the overall logistics, as it is the only sub-sector of infrastructure which
continues to create new assets with enhanced Private sector participation.
Trucking is a business where, “A Efficient Big operator will grow bigger and increase the Competitive gap
with small operators continuously”. Transport Corporation India, being a leader in the trucking space has a
strong edge over its peers. It is with this huge advantage, the company is shifting to high value add
opportunities in logistics like Express Cargo and Supply Chain solutions. Over the next few years, the base
which it has built over the years will shift seamlessly and the scale-up in these emerging opportunities will
enable TCI to become a strong Logistics company.
Markets usually like businesses where Margins are expanding, High ROE’s and increased Free Cash flow.
We expect all of this to happen in TCI in the coming years. Stock markets have not discounted this change
and is fact viewing TCI as a low margin trucking company. We expect the bottom-line growth to outperform
Top-line growth in the next few years.
Transport Corporation of India with its High growth potential is being severely undervalued with
respect to the assets it is holding. The largest Logistics company in the country can’t continue to trade at
these kind of Market-Capitalizations. TCI’s earnings growth combined with P/E expansion makes way for a
Potential Multi-bagger stock. All the risks in the business is being discounted at current valuations. If we
are lucky and India delivers on GST and GDP growth kicks in, then we are set for Huge gains on TCI stock.
We are fairly confident that TCI has the potential to become the UPS (or) DHL of India.

THANK YOU

Transport corporation of india hbj capital

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