Stock Pick from Surface Transportation

Here Is Why:

• Changing economical scenario in India is expected to increase the movement of goods.

• Implementation of GST is expected to increase efficiency and profitability of TCI.

• TCI has a wide network with a fleet of 7,000 trucks, four cargo ships and 1,000-plus computerised offices.

The changing economic environment with improving macro economic data suggests a good increase in manufacturing activity across India. This very event is expected to increase the movement of goods across the country, thereby benefiting companies involved in logistic operations. Here’s such a transport company which moves 2.5 per cent of India’s GDP by value and operates a fleet of 7,000 trucks across the country. Transport Corporation of India (TCI) provides integrated supply chain and logistics solutions primarily in India. It operates predominantly in five divisions’ viz. TCI Freight, TCI XPS, TCI SCS, TCI Seaways, and TCI Global. TCI Freight is a complete road-rail transport solutions’ provider for cargo of any dimension and size.

The strong mandate as laid down by the new government seems to be driving the sentiments in the Indian markets. Further, the pro-reform ruling party is expected to push reforms to drive economic growth in future. Meanwhile, acceleration in industrial production and changes in consumption patterns have resulted in a high demand for basic and specialised logistics management. The exponential growth in earnings and consumption is fuelling the purchasing power of the burgeoning middle class, which is driving some of the key sectors such as retail, e-commerce, pharmaceuticals and FMCG. These all sectors spend about 6 per cent of their revenue on logistics. Taking all this into account, it must be noted that TCI SCS has already established a good track record in providing services for sectors like automotive, retail, telecom, electricals, pharmaceuticals, FMCG, and cold chains.

Another big positive for the logistics’ companies will be the implementation of Goods and Service Tax (GST). GST is essentially a tax which will replace all indirect taxes levied on goods and services by the central and state governments in India. At present, the range of taxes in force includes central sales tax, state sales tax, octroi (at the city level), entry tax (for entering into any state), etc. There are long delays of almost 5 to 7 hours at interstate checkpoints as state authorities review and examine freight and then apply relevant taxes and fees. Owing to these delays, and traffic jams, Indian trucks average only 250-500 kilometers per day as compared to 700-800 kilometers in the US. The implementation of GST will increase the efficiency of the freight companies and improve profitability in a big way.

For TCI, the expected economic revival, huge infrastructural development, implementation of GST, rise in usage of third party logistics, and booming e-commerce growth will act as the key catalysts. Further, the company is planning for considerable capital expenditure to take advantage of these opportunities in the near future. TCI has also reported strong Q2 FY15 results with sales growing by 11 per cent and EBITDA by 27 per cent on a yearly basis. Interestingly, higher topline growth and strong operating profit led its PAT growth by 63 per cent on a yearly basis. On the valuation front, the company’s stock is available at a PE ratio of 26.80 times its current EPS. We therefore recommend buying this stock at its current levels.