TCI: ICICI Securities initiates coverage with ‘buy’, sees 20% upside in next 12 months – here’s why

Just around 6 percent away from record high, Transport Corporation of India (TCI) is expected to see 20 percent upside in the next 12 months.

Brokerage house ICICI Securities has initiated coverage on the stock with a ‘buy’ call and a target price of ₹1,200. The brokerage sees TCI as a good opportunity in the current subdued operating environment for the logistics sector.

"Key points: 1) In the process of refining freight mix in favour of higher-margin LTL business; 2) Capex in high-margin sea freight segment likely to improve overall margins; 3) Improving performance of JVs expected to result in further earnings improvement; and 4) Trading at relatively attractive valuation compared to peers," said the brokerage.

Going ahead, it believes that higher Less Than Truckload (LTL) proportion in freight business and addition of two new ships (despite seaways margin receding) in seaways division are the two main growth drivers.

Stock Price Trend

The brokerage has gained almost 33 percent in the last 1 year and over 23 percent in 2023 YTD. It has jumped over 12 percent just in July following an 8 percent rise in June. However, the stock shed 4.5 percent in May. Prior to that, TCI stock jumped 8 percent in April after a 2.2 percent and 11.5 percent fall in March and February, respectively. In January, it gained 14 percent.

While the stock is just 5.8 percent away from its peak of ₹1,080, hit on February 1, 2024, it has rallied 48 percent from its 52-week low of ₹686.25, hit on April 18, 2024.

Investment Rationale

Margin Improvement in Store: Despite a projected decline in its seaways business, ICICI expects TCI's EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) margin to improve to 10.5 percent by FY26E, driven by a higher proportion of Less Than Truckload (LTL) services in the surface division, which is expected to grow to 40 percent compared to 36 percent in FY24, and an increased focus on the supply chain business. The company plans to invest ₹300-400 crore in capital expenditure over the next three years, focusing on acquiring two new ships for the more profitable seaways division and enhancing warehousing and surface infrastructure.

This investment is expected to pave the way for further margin improvement beyond FY26 as the new ships become operational and contribute to revenue. Additionally, the expansion of small warehouses is anticipated to help TCI leverage synergies between its freight and supply chain businesses, offering comprehensive solutions to customers and increasing wallet share, noted the brokerage.

Additional Thrust from JVs to Improve Earnings Further: According to ICICI, TCI's strategic ability to forge and nurture joint ventures (JVs) is a significant advantage. The share of profits attributable to TCI from JVs has tripled to ₹75.9 crore in FY24 compared to FY20, with JVs accounting for 19.6 percent of PBT in FY24, up from 15 percent in FY20. Moving forward, the performance of two key JVs—Transystems (with Mitsui) and TCI CONCOR Modular Solutions—is expected to improve further, stated the brokerage.

Additionally, the JV with Mitsui in the cold storage chain, established in FY22, is likely to contribute increasingly to earnings. Over the next five years, TCI anticipates the share of JVs in PBT to improve by an additional 300-400 basis points. These partnerships not only mitigate business volatility but also enable the integration of best practices from leading industry players, said the brokerage.

Revenue and EPS Growth Outlook: ICICI forecasts a revenue CAGR of 10.8 percent YoY for TCI through to FY26, primarily driven by a 15 percent CAGR in the supply chain segment.

The surface freight segment is expected to grow at 8 percent, supported by a higher proportion of LTL services, projected to reach 40 percent by FY26E. Revenue growth from the seaways segment is anticipated to be 5 percent, as the new ship is expected to contribute to revenue only from FY27.

Overall, the EBITDA margin is expected to remain stable at 10-10.5 percent, with any decline in the seaways segment being offset by slightly higher margins in the surface freight segment. ICICI also projects cumulative free cash flow (FCF) generation of ₹410 crore for FY25E and FY26E, approximately 5 percent of the current market cap, with stable working capital days at less than 50 days.

Consistent Performance and Attractive Valuations: Over the past five years, TCI has consistently delivered returns of 20-25 percent CAGR across short, medium, and long-term periods. The stock's returns have been not only superior to peers but also more consistent. Despite this strong performance, TCI's stock is trading at a lower P/E multiple compared to peers, despite having similar or higher expected Return on Equity (RoE), observed ICICI. Historically, TCI's stock has exhibited lower volatility, with a standard deviation of P/E at 2.4 compared to 4-5 for its peers, making it a relatively attractive investment, it informed.

Valuation: The brokerage values TCIL at 22x (corresponding to three standard deviations above mean), taking cognizance of improving earnings trajectory on account of higher proportion of LTL business in the near term and higher contribution from (more profitable) seaways business in the medium term.

The RoE of 15-16 percent over next two years, while being similar or better compared to peers, is likely to get a leg up post new ships in seaways division are put to service, it predicted.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.