Transport Corporation of India

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October 8, 2007 | Logistics

Initiating Coverage

Transport Corporation of India (TRACOR)
Integrated logistics solutions …
Transport Corporation of India (TCI), one of the largest players in the domestic logistics industry, has transformed itself from a transportation company to an integrated logistics solution provider. The company has a presence across the entire logistics value chain and is enhancing its role in the high-value supply chain solution (SCS) business. We initiate coverage on the company with an OUTPERFORMER rating.

Current price Rs 115 Potential upside 35%

Siddhartha Khemka
[email protected]

Time frame 12 months Potential upsidemonths Time frame 12 13%

Target price Rs 155 Time Frame 12-15 mts

Ember Pereira

[email protected] Sales & EPS trend
1800 1600 1400 1200 1000 800 600 400 200 0 FY05 FY06 FY07 Sales FY08E Diluted EPS FY09E 8 7 6 5 4 3 2 1 0 Rs

Domestic logistics industry on a high growth trajectory
The Indian logistics sector has grown at a robust CAGR of 11.5% during FY02-06. According to a Datamonitor study, it is further expected to grow at a CAGR of over 16% over 2007-10. The huge growth in the manufacturing sector, coupled with an increase in domestic spending will be the key growth drivers for the domestic logistics sector.

Integrated role gives it an edge
TCI is the largest integrated player having a 15% market share of the organised logistics industry. The company is capable of providing end-toend logistics solutions through its various divisions. Apart from transportation, it operates one of the largest warehousing facilities of about 6.5 million sq. ft.

Rs 340 crore capex to move up the logistics chain
The company has lined up an aggressive Rs 340 crore capex to scale up its business in order to meet increased demand. It plans to increase its warehousing space, buy new trucks, invest in cold chains, and boost its ship fleet strength over the next three years.

Stock metrics Promoters holding Market Cap 52 Week H/L Sensex Average volume

Rs crore

72.64% Rs 776 crore 138 / 52 17,491 61,082

At the current price of Rs 115, the stock discounts its FY09E EPS of Rs 7.11 by 16.1x. Given TCI’s leadership position in the organised logistics sector, and transformation to an integrated player, we value the stock at 22x its FY09E earnings. We rate the stock an OUTPERFORMER with a target price of Rs 155, an upside potential of 35% from current levels.

Comparative return metrics Stock return 3M TCI 12% Gati 1% Gateway Distriparks -9% Allcargo Global -14%

6M 85% 15% 1% -13%

12M 60% 12% 5% 17%

Exhibit 1: Key Financials Year to March 31 Net Profit (Rs crore) EPS (Rs) % Growth P/E (x) Price/Book (x) EV/EBIDTA (x) NPM (%) RoNW (%) RoCE (%)

FY06 26.83 3.97 154.4% 28.93 7.45 14.08 2.97 16.56 16.08

FY07 30.57 4.53 13.9% 25.40 8.26 13.19 2.82 16.27 13.37

FY08E 36.52 5.04 11.2% 22.83 6.13 11.40 2.93 13.42 12.48

FY09E 55.14 7.11 41.2% 16.17 4.55 8.87 3.60 14.07 14.23

Price trend
160 140 Share Price (Rs) 120 100 80 60 40 20 0 Oct-04 Oct-05 Oct-06 Jan-05 Jan-06 Jan-07 Oct-07 Jul-04 Jul-05 Jul-06 Apr-04 Apr-05 Apr-06 Apr-07 Jul-07

Target Price

Absolute Buy

Source: ICICIdirect Research
ICICIdirect | Equity Research


Company Background
Transport Corporation of India (TCI), set up in 1958 and part of the TCI Group, is the largest integrated supply chain and logistics solutions provider in India. The company has an extensive network of over 1,100 company-owned offices and over 5,700 employees. It operates in six business segments: transportation, express (courier), supply chain solutions (SCS), coastal shipping, windmills and trading (fuel stations). It operates a fleet of over 3,000 trucks, 5 cargo ships, 6.5 million sq ft of state-of-the-art warehousing space, and a total installed windmill power generation capacity of 11.5 MW. The company forayed into third party logistics (3PL) solutions by forming a 49:51 JV with Mitsui & Co in 1999. The JV provides complete logistics solutions, to Toyota Kirloskar Motors India. TCI is the first road transport organization in the country to achieve ISO 9001:2000 certification in service quality for its operations. Exhibit 2: Revenue Model (FY07)

Share holding pattern Share holder Promoters Institutional investors Other investors General public Promoter & Institutional holding trend
80 60 40 20 0 Q2FY07 Q3FY07 Q4FY07 10.1 10.2 6.6 72.6 72.6 72.6

% Holding 72.64 6.52 6.30 14.54


6.5 Q1FY08

Promoters (%)

Institutional investors (%)

Transport Corporation of India



Supply chain

Coastal shipping


Contribution to revenue (%) 52.7% 24.2% 10.4% EBIDTA Margins (%) 3.4%
Source: ICICIdirect Research








Logistics sector at an inflection point
The Indian logistics industry is at take-off point. The economy has been growing at a robust pace of about 9% annually for the past few years. The manufacturing sector is becoming more competitive and companies are outsourcing non-core activities. Demand for logistics solutions is directly corelated to the growth of the economy. While the GDP grew at a CAGR of 7.1% during FY02-06, the logistics sector has grown at a healthy CAGR of 11.5%. According to a Datamonitor study, Indian logistics market is slated to grow at a CAGR of over 16% over 2007-10. Exhibit 3: Logistics industry on a high growth trajectory
25% 20% 15% 10% 5% 0% 2002-03 2003-04 GDP 2004-05 Logistics Sector TCI 2005-06

Growth of the logistics sector closely related to GDP growth

Source: Industry, Company, ICICIdirect Research

Key growth drivers
Economic growth to lead to higher transportation
The boom in the economy has led to a robust growth in key sectors like auto, electronics, FMCG, textiles, retail and consumer durables. This has resulted in an increased movement of goods, both within the country and outside. Although, India's export-import (EXIM) trade has grown at 20.17% CAGR in the last five years, its share in global trade remains miniscule at 0.8%. The Ministry of Commerce has targeted to increase this figure to 1.6% in the next five years. We believe that increased EXIM trade scenario will drive logistics growth. Exhibit 4: India’s international trade growth
140 120 billion $ 100 80 60 40 20 0 2001 2002 2003 Exports
Source: CMIE, ICICIdirect Research

India’s share of global trade to increase from 0.8% to 1.6% in the next five years

2004 Imports




Improved infrastructure to boost logistics sector
The infrastructure required for logistics includes ports, roads, railways and airways to ensure safe and timely delivery of cargo. One of India's major drawbacks is the poor state of infrastructure. This has resulted in high cost of logistics. Logistics cost in India amount to about 13% of the GDP against less than 10% in Western Europe and North America. The government has ambitious plans to improve this situation. In the 11th fiveyear plan (2007-11), it plans to invest US$ 350 billion in upgrading and creating infrastructure. This will raise infrastructure spending from 4.7% of GDP last year to around 8% of the GDP over the next five years.

Government plans US$ 350 billion investment in the during 11th five-year plan to boost infrastructure in India

Roads continue to dominate traffic movement in India
India has an existing road network of 3.3 million km, which is the second largest road network in the world. According to the National Highway Authority of India (NHAI), roads form the most common form of transportation and accounted for 80% of passenger traffic and 65% of freight traffic in 200506. Road development will have a major impact on the logistics sector. For instance, the Golden Quadrilateral and the North-South, East-West Highway projects are likely to increase the efficiency in road transportation. According to CRISIL, Rs 184,700 crore will be invested in roads and highways sector over the next five years. Exhibit 5: Road development projects Length (km) Golden Quadrilateral North-South East-West (Phase I & II) Phase III Phase V Port connectivity Others Total length
Source: NHAI, ICICIdirect Research

5846 7300 4000 6500 380 945 24971

Of which 4-laned 5601 1418 126 159 322 7626

Under Balance length Implementation 245 0 4903 1866 148 215 620 7997 821 2008 6352 6 20 9207

Ports: Key to EXIM trade
Currently, Indian ports have the capacity to handle around 737 million tonnes of cargo annually. This is expected to double by 2012 with various private ports coming up and several minor ports being upgraded to major ones. Exhibit 6: Capacity at ports (million tonnes) Capacity (FY07) Major Ports (12) Minor Ports (187) Total (199)
Source: IPA, ICICIdirect Research

Expected additional capacity 508.60 493.20 228.31 345.19 736.91 838.39

Capacity by FY12 1001.8 573.5 1575.3


Railway development to ease pressure on roads
The cost of transporting goods by rail is 60% cheaper than by roads. However, due to infrastructure constraints, 70% of the goods in India are transported by roads and only 30% by rail. Apart from the lack of wagons and containers, rail tracks have to be shared with passenger trains. The government has conceived a massive investment plan for the railways to eliminate capacity bottlenecks on the Golden Quadrilateral and other highways. It plans to provide strategic rail links to ports, improve connectivity to the hinterland and develop multi-modal transport corridors. The Rail Vikas Nigam Ltd has been set up as a special purpose vehicle (SPV) for executing projects included under "Strengthening of Golden Quadrilateral".

Dedicated Freight Corridor (DFC)
The Dedicated Freight Corridor (DFC) will connect the northern hinterlands to the western and eastern ports with high-speed connectivity for high-axle load wagons. The estimated cost of this project is around Rs 22,000 crore. It will have a total rail length of 2,700 km, with feeder lines of about 5,000 km. The corridor between Delhi and Mumbai would be 1,483 km and is expected to complete by 2012. Once commissioned, this route will reduce the transit time between Delhi and Mumbai from 60 hours to 36 hours, apart from reducing the cost of operation. Exhibit 7: Benefits of Dedicated Freight Corridor Existing Axle load wagons < 25 tonnes Speed ~ 30 km/hr Train length < 15000 m
Source: Indian Railways, ICICIdirect Research

DFC to create additional 2,700 km of rail at an investment of Rs 22,000 crore

Post DFC > 30 tonnes 100 km / hr 15000 m

Integrated logistics: The future of the industry
Outsourcing of logistics activities to third party logistics (3PL) players will be a key growth driver as companies feel the pressure of reducing costs. 3PL is a concept where a single logistics service provider manages the entire logistics functions of a company, usually a large manufacturing firm. Currently, the logistics industry in India is highly fragmented with a large number of players providing services in individual segments like transportation, warehousing, freight forwarding, etc. Integrated logistics companies provide cost-effective solutions to manufacturers through value-added services, economies of scale and investment in IT and tracking systems. The concept of just-in-time (JIT) is percolating into the Indian manufacturing sector, and the need for timely delivery, inventory management and safety of goods, is creating increasing demand for integrated logistics suppliers.

Outsourcing: A key growth driver for integrated logistics players.


3PL market a growth opportunity
According to a Frost & Sullivan report, the Indian 3PL market, estimated at about US$ 890.3 million in 2005, is expected to grow at a CAGR of 21.9% to US$ 3,556.7 million in 2012. The report identified the auto industry as the largest end-user industry for 3PL services, with multinational companies being the predominant users of these services. Other sectors that have shown substantial contribution to 3PL market and significant growth potential include IT hardware and electronics, FMCG, and retail sectors. Exhibit 8: Indian logistics players moving up the 3PL hierarchy 3PL hierarchy Services (high to low) Customer developer Customer adapter Service developer Integrates with the customer and takes control over the entire logistics function Provides services at the request of the customer Value-added services (tracking and tracing, cross docking, providing unique security system)

3PL market expected to grow at a CAGR of 22% to reach US$ 3,556.7 million by 2012

Customer base Very few Small Medium Huge

Standard 3PL provider Packaging, warehousing distribution
Source: ICICIdirect Research

Simplified tax regime to boost warehousing outsourcing
The central government and almost all state governments have agreed to phase out the central sales tax (CST) over the next three years. It will be reduced from 4% to 3% in 2007-08, 2% in 2008-09 and 1% in 2009-10. The tax will be phased out completely in 2010-11. Under the CST regime, different states followed a system of differential sales tax rates with a 4% CST levied on inter-state sales. Manufacturing companies had to maintain small warehouses and depots in every state. It helped them to show movement of goods within the company and reduce the CST burden. However, this resulted in higher costs of inventory, manpower, infrastructure and other overheads. But with the phasing out of CST, companies can avoid that and outsource the job to logistics service providers who can build large warehouses in few key locations. Manufacturers will be able to operate on a hub-and-spoke model. Large regional warehouses can be set up at central locations, which can be used to supply cargo to different states in the region. It will also pave the way for value-added taxation (VAT) becoming a central level tax, which in turn can guarantee a much smoother logistics and distribution. Phasing out of CST to boost outsourcing of warehousing activities to logistics companies


TCI’s business segments
TCI has transformed itself from a pure transport company to an integrated logistics solutions provider. It has a presence across the entire logistics value chain, from conventional trucking solutions to express cargo & courier, supply chain solutions & warehousing to coastal shipping. The integration has enabled it to become one of the largest multi-modal logistics solutions providers in India.

Transport division
The company entered the logistics business through its transport division in 1958. This division provides FTL (full truck load), LTL (less than truck load), FCL (full container load), rail and ODC (over dimensional cargo) services with its mammoth fleet of 3,000 owned and leased trucks and 1,100 strong network of offices. The company recently signed a memorandum of understanding (MoU) with Container Corporation of India, India's leading container train operator, to provide comprehensive rail-road-based "Door-to-Door Logistics and Warehousing" services for all categories of customers.

XPS division (Express cargo)
XPS is a leading express logistics service provider, offering door-to-door surface & air cargo and courier services. XPS Global provides international freight forwarding and customs clearance services.

Supply Chain Solution (SCS)
SCS division provides single-window customized logistics and supply chain solutions to customers across industry verticals. Its range of services includes milk-run and just-in-time (JIT) deliveries to the consumer durables and automobile industries. Other services include warehousing, outbound transportation & distribution to a clientele of 40 – 50 manufactures. Transystem Logistics International is a joint venture between TCI and Mitsui (Japan). It provides automotive logistics solutions to Toyota Kirloskar Motors in India.

Shipping division
TCI Seaways started as an independent sea cargo division in February 1995 and merged with itself in FY07. It caters to the coastal cargo requirements for transporting container and bulk cargo from ports on the eastern coast to Port Blair and further distribution within the islands. Occasionally, the company also provides chartered services to Myanmar and South-East Asian destinations. The company has about 300 shipping cargo containers and five vessels with a total capacity of 16,000 DWT (dead weight tonnes).

The company entered the wind power generation business to avail substantial tax benefits. Its windmill operations with capacities of 11.5 MW consist of a 5 MW wind farm in Rajasthan and 6.5 MW in Sangli, Maharashtra. EBITDA margins in the wind power segment exceed 95%.


Integrated logistics player, an edge over peers
TCI is the largest integrated player, having a 15% market share of the organised logistics industry. The group moves goods valued at more than 1.5% of India's GDP. Over the years, the company has built up a strong infrastructure to cash on the boom in the logistics sector. It has the country's widest branch network of over 1,100 company-owned offices. It operates approximately 7,000 trucks on a daily basis, of which it owns around 15% while the rest are leased. It leveraged this infrastructure to develop its express division, XPS, which is currently amongst the top 3 express distribution companies in the country. Apart from transportation, it operates one of the largest warehousing space of about 6.5 million square feet. TCI has also invested heavily in technology. It has a vehicle tracking system that helps it to consolidate cargo at various locations. For its XPS division it has in place a consignment tracking system that helps clients to track their consignments using web-based intelligent systems.

TCI has a market share of 15% in the organized logistics sector and is one of the largest players

Transformation from transport to integrated logistics
TCI has transformed its business model over the years to focus on high-margin businesses like supply chain, express cargo and shipping. Revenue contribution from the high-volume low-margin transport business has come down from 72.5% in FY02 to 53% in FY07. We expect it to reduce further to 47% by FY10E, and stabilize around 40% over the next five years. Exhibit 9: Evolution of business model
100% 80% 60% 40% 20% 0% FY02 Transport FY03 FY04 FY05 Supply chain FY06 FY07 FY08E FY09E FY10E

Revenue contribution from transport to come down from 73% in FY02 to 47% in FY10E


Costal Shipping



Source: Company, ICICIdirect Research

Supply chain solution (SCS) is in the growth phase in India and is expected to grow at a CAGR of 30% over the next 2-3 years. TCI segregated SCS from its transportation division in 2006 to increase focus and provide customized services. This will enable the company to grow at a CAGR of 19% to Rs 1531 crore along with improved operating margins and a strong earnings growth of 25% to Rs 7.11 per share over FY07–09E.


SCS division to grow at robust pace
The end-to-end supply chain solution approach involves providing assistance for purchasing, production planning, order processing and fulfillment, inventory management, transportation, distribution and customer service etc. Leading automobile companies now rigorously follow the concepts of pull against push, and just-in-time to improve the efficiency of supply chain. Recognising this need, TCI is offering state-of-the-art warehousing and inventory management services based on just-in-time (JIT) and first-in-first-out (FIFO) basis. As a 3PL provider, TCI is enhancing its focus on the fast growing supply chain solutions division. It operates a fleet of 550 trucks and caters to a clientele of 40 – 50 manufactures. These clients are grouped into six key verticals namely: auto, pharma, FMCG, retail, telecom and consumer durables. Exhibit 10: List of key clients across Industry verticals Auto FMCG Telecom Pharma Toyota HLL Nokia Dr Reddys Bajaj P&G Reliance Sunil Health Maruti Nestle Motorola Bharti Health Tata Cadbury Ericson M&M Amul Tata Tele Chemicals Sonalika Office One MCC PTA TVS CCD Indo Rama JCB PRAXAIR
Source: Company

Hitech Whirlpool ABB L&T Dixon

Auto & auto ancillary industry forms 60% of revenue in SCS division
In India, logistics costs in the automobile industry accounts for 2%-3% of sales, whereas in auto components industry it is around 3-4%. The size of the auto logistics industry is estimated to be at Rs 3,471 crore in 2006-07. Reverse logistics cost which involves the process of dispatching faulty or outdated components back to the manufacturer is estimated to be around 0.5%-1% of the total industry. About 90% of the auto component industry outsources their logistics requirement to 3PLs. Auto and retail sectors to drive growth in SCS

Retail holds out the promise for the future
The Indian retail market is expected to grow from US$ 350 billion to US$ 427 billion by 2010. Organised retail accounts for 4% of the total market and is expected to grow at 40% to reach around US$ 30 billion by 2010. Globally, logistics costs account for 4%-5% of the retail cost, while in India it is as high as 7%-10%. This high cost for an industry which operates on wafer-thin margins of 2%-3% globally, makes it imperative for retailers to outsource noncore operations to reduce costs. Demand for end-to-end logistics solutions in retail far outstripping supply. According to Frost & Sullivan, the 3PL market in the Indian retail sector was at US$ 49.5 million in 2005 and is estimated to reach US$ 140.0 million in 2012.


Aggressive ramp-up in warehousing capacities
TCI is investing heavily to ramp-up its warehousing facilities to meet the growing demand for SCS. Currently, it has a capacity of 6.5 million sq ft. of owned/leased space at various locations. The company has lined up an aggressive capex of Rs 152 crore over FY07-10E to increase its warehousing capacities to 10 million square feet by 2010. It would own around 4 million sq ft, while around 6 million sq ft will be leased. Exhibit 11: Warehouse capacity (million sq ft) Company Existing capacity TCI 6.5 Safexpress 3.0 DRS Logistics 1.2 Gati 0.6 Blue Dart 0.5 TNT 0.5 Indo Arya 0.5 Total 12.8
Source: Industry, ICICIdirect Research

By 2010 10.0 10.0 5.0 2.0 2.0 2.0 1.5 32.5

We believe the investments in warehouses and other infrastructure will increase TCI’s competitiveness, thus helping it grow its SCS business revenues at a CAGR of 50% over FY07-09E to Rs 263 crore.

TCIs experience with Mitsui
TCI entered into a joint venture with Mitsui & Co (49:51) to provide supply chain management solutions to Toyota Kirloskar Motors in 1999. The joint venture company named Transystem Logistics works on globally implemented “Just in time” concept. It handles Toyota’s entire logistics chain, from procurement of raw material from over 83 suppliers, loading them on a common carrier at the warehouse, managing inventory and distribution of the finished product. TCI leveraged this rich experience of international standards, to build up its SCS division.

Capex to tap growth opportunities
To expand its scale of operations and foray into emerging sectors like supply chain solutions and express division, TCI unveiled a Rs 440 crore capex plan in FY07. The funds will be used to expand its warehousing facilities, buy more ships, trucks and containers, and invest in wind power facilities. About Rs 100 crore of the capex has been incurred in FY07. The capex is being funded through a mix of equity (Rs 125 crore), debt (Rs 129 crore), and internal accruals (Rs 186 crore). Exhibit 12: Capex plan (Rs crore) Particulars FY07 Warehouse & land 22 Windpower 9 Ships & Containers 37 Trucks & Containers 23 Others 9 Total 100
Source: Company, ICICIdirect Research

FY08E 110 18 40 30 2 200

FY09E 10 0 25 30 5 70

FY10E 10 0 25 27 8 70

Total 152 27 127 110 24 440

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Development of key properties to create additional value
TCI has around 220 properties with a book value of Rs 93 crore, which are currently being used as branch offices or warehouses. With most cities expanding due to increasing urbanization, some of these properties, which were earlier situated on the outskirts of cities, are now within city limits. Most are not operational due to the prohibition of transportation trucks plying within city limits. The company has decided to move its logistics activities out of the cities and commercially develop the existing land. It has engaged international consultancy firms to identify the best use option. These properties can be developed for outright sale/lease etc. Initially the company plans to develop 4 properties with a total area of 12.54 acres over FY08-12. These properties are situated in Delhi, Bangalore, Dehradun and Ahmedabad. According to the company’s estimates, if it sells these four properties, it expects to get a net realisable value of Rs 200 crore. This translates into a value of Rs 25.80 per share taking an equity base of 7.75 crore shares. Exhibit 13: Property development plan Location Rambagh, Delhi Dehradun Nalmangala. Bangalore Asalali, Ahmedabad Total Development Type Commercial / Residential Commercial Residential Residential Area (acres) 1.2 1.5 6.3 3.5 12.5 Book Value (Rs crore) 4.9 0.5 1.5 1.5 8.4 Estimated Net realizable value (Rs crore) 50 50 80 20 200

Source: Company, ICICIdirect Research

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Slowdown in the economy
The growth of the logistics sector is closely related to GDP growth. The growth in manufacturing and agricultural activities creates greater need for logistics. A slow down in manufacturing activities would directly affect the growth in movement of inbound and outbound goods and adversely impact the logistics sector.

Delay in infrastructure development plans
The development of Tier II and Tier III cities has resulted in the increasing urbanization away from major cities. As a result supply, procurement and distribution of goods has become a challenging job for manufacturers. 3PL firms, which are specialized in the logistics operations, would benefit from this opportunity. However, if bottlenecks in the infrastructure system are not overcome on account of delay in implementing the proposed plans, this would reduce efficiency and therefore hamper profitability.

Availability of skilled manpower
The scale and scope at which the logistics industry is growing is likely to pose a strain on the availability of skilled manpower. The outsourcing of logistics function to 3PL has resulted in larger number of players investing heavily in warehousing and transportation. Taking a deeper look at the work profile, there is a huge requirement of skilled manpower in areas suck as truck drivers, loading supervisors and warehouse managers.

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Revenue and net profit to surge
We expect revenues to grow at a CAGR of 19% from Rs 1085 crore in FY07 to Rs 1531 crore in FY09E. Net profit is expected to grow at a CAGR of 34% from Rs 31 crore in FY07 to Rs 55 crore in FY09E. Exhibit 14: Growth in revenue and net profit
1700 1500 1300 Rs crore 1100 900 700 500 FY06 FY07 Revenues (LHS) FY08E Net Profit (RHS) FY09E 60 50 Rs crore 40 30 20 10

Source: Company, ICICIdirect Research

Segment wise contribution to EBITDA
Revamping of the revenue mix would result to a change in contribution to EBITDA from each segment. We believe the SCS and XPS divisions with high EBITDA margins would contribute over 55% to EBITDA, while the transportation business should see its contribution decline to 20% from the existing 26% levels. Exhibit 15: Contribution to EBITDA
100% 80% 60% 40% 20% 0% FY07 Transport FY08E Supply chain XPS Seaways FY09E Windmills 8 17 28 8 19 27 7 20 26

20 26

23 24



Source: Company, ICICIdirect Research

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EBITDA margins to improve
EBITDA grew by 31% to Rs 70 crore in FY07 from Rs 54 crore in FY06. Segment-wise EBITDA margins vary significantly. While the transport business has thin margins, ranging between 2.5-3.5%, those for SCS and XPS division are significantly high at 12% and 8% respectively. The gradual shift in focus from pure transportation to value-added, high margin businesses will consequently lead to improved EBITDA margins over the next two years. We expect margins to increase by 195 bps over FY07-09E to 8.4% from 6.4%. Exhibit 16: Increase in EBITDA margins
140 120 100 Rs crore 80 60 40 20 0 FY06 FY07 EBIDTA (LHS) FY08E OPM (%) FY09E 10% 8% 6% 4% 2% 0%

Source: Company, ICICIdirect Research

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TCI is slated to benefit from the robust growth in the economy. Though the stock price has recently run up, we believe that it is still attractively valued. At the current price of Rs 115, the stock is trading at 22.8x its FY08E EPS of Rs 5.04 and 16.2x its FY09E EPS of Rs 7.11. On an EV/EBIDTA basis, the stock is available at 11.4x FY08E earnings and 8.9x FY09E earnings. The stock price recently got re-rated from around 14x its FY08E EPS to around 22x. We rate the stock an OUTPERFORMER with a price target of Rs 155, at 22x FY09E earnings.

Exhibit 17: One-year forward rolling P/E Band
140 120 Share Price (Rs) 100 80 60 40 20 0 Jul-04 Jul-05 Jul-06 Oct-04 Jan-05 Oct-05 Jan-06 Oct-06 Jan-07 Jul-07 Oct-07 Apr-04 Apr-05 Apr-06 Apr-07
22x 18x 14x 10x

Source: ICICIdirect Research

Exhibit 18: Peer comparison (Estimates for FY09E) Market cap Revenue PAT Company Price (Rs crore) (Rs crore) (Rs crore) EPS (Rs) TCI 115 776.31 1531.21 55.14 7.11 Gati 113 806.82 916.00 54.90 7.69 Allcargo 912 1842.24 1986.20 127.00 62.87 Gateway 135 1553.85 373.00 111.90 9.72
Source: Consensus Estimates, ICICIdirect Research

P/E 16.17 14.70 14.51 13.89

EV/EBITDA 8.87 10.50 11.30 6.60

ROE 14.07 14.20 23.00 16.20

ROCE 14.23 16.20 20.60 17.90

Exhibit 19: Global valuation matrix (CY06, US$ million) Company Mkt Cap Sales PAT Kuehne & Nagel 8592 11881 366 TNT 13809 9948 670 United Parcel Service 81653 47547 4202 FedEx 33874 32294 1806
Source: Bloomberg

P/E 23 17 19 18

RoE 22 21 21 17

EV/EBITDA 12 9 10 7

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Profit and Loss Account
Year to March 31 Net Sales % Growth Total Expenditure Operating Profit % Growth Other Income EBIDTA EBIDTA margin (%) Depreciation EBIT Interest PBT % Growth Taxation PAT % Change YoY Shares O/S (crore) EPS (Rs) FY06 904.79 23.2% 851.24 53.55 61.2% 9.19 62.75 6.87% 18.52 44.23 7.13 37.10 143.5% 10.26 26.83 154.4% 5.25 5.11 FY07 1085.33 20.0% 1015.31 70.03 30.8% 4.24 74.27 6.82% 19.91 54.36 10.34 44.02 18.7% 13.45 30.57 13.9% 6.75 4.53 FY08E 1246.37 14.8% 1149.51 96.86 38.3% 2.94 99.80 7.99% 26.31 73.49 21.25 52.24 18.7% 15.74 36.50 19.4% 7.25 5.03 (Rs crore) FY09E 1531.21 22.9% 1402.59 128.62 32.8% 2.94 131.56 8.58% 30.68 100.89 22.20 78.69 50.6% 23.57 55.11 51.0% 7.75 7.11

Revenues to grow at a CAGR of 19% over FY07-FY09E

Net profit to grow at a CAGR of 34% over FY07-FY09E

Balance Sheet
Year to March 31 Sources of funds Equity Share Capital Reserves & Surplus Secured Loans Unsecured Loans Deferred Tax Liability Current Liabilities & Provisions Total Liability Application of Funds Net Block Capital WIP Investments Cash & Bank Trade Receivables Inventory /other current assets Loans & Advances Total Asset FY06 10.50 151.53 81.13 31.94 22.76 40.85 338.71 186.05 1.38 6.05 5.90 112.18 1.60 25.55 338.71 FY07 13.50 174.42 217.14 1.44 26.42 43.47 476.39 263.40 2.60 5.59 15.34 154.28 0.68 34.50 476.39 FY08E 14.50 257.58 317.14 0.00 27.42 42.55 659.20 435.09 4.60 6.59 15.21 153.66 0.00 44.04 659.20

(Rs crore) FY09E 15.50 376.40 317.14 0.00 28.42 44.44 781.90 473.41 5.60 7.19 45.76 197.17 0.00 52.76 781.90 Capex of Rs 370 crore over FY07-FY09E

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Cash Flow Statement
Year to March 31 Opening Cash Balance Profit after Tax Misc Items Dividend Paid Depreciation Provision for deferred tax Cash Flow before WC Changes Net Increase in Current Liabilities Net Increase in Current Assets Cash Flow after WC Changes Purchase of Fixed Assets (Increase) / Decrease in Investment Increase / (Decrease) in Loan Funds Increase / (Decrease) in Equity Capital Net Change in Cash Closing Cash Balance FY06 8.76 26.83 6.25 (3.96) 18.52 4.36 52.00 12.74 (31.43) 33.31 (56.80) (0.41) 17.04 4.00 (2.86) 5.90 FY07 5.90 30.57 0.00 (4.68) 19.91 3.66 49.46 2.62 (50.12) 1.96 (98.47) 0.46 105.51 0.00 9.45 15.35 FY08E 15.34 36.50 0.00 (4.96) 26.31 1.00 58.85 -0.92 (8.24) 49.68 (200.00) (1.00) 98.56 52.63 (0.13) 15.21

(Rs crore) FY09E 15.21 55.11 0.00 (5.30) 30.68 1.00 81.49 1.89 (52.23) 31.15 (70.00) (0.60) 0.00 70.00 30.55 45.76

Ratio Analysis
Year to March 31 EPS (Rs) Book Value (Rs) Enterprise Value (Rs crore) EV/Sales (x) EV/EBIDTA (x) Market Cap to sales (x) Price to Book Value (x) Operating Margin (%) Net Profit Margin (%) RONW (%) ROCE (%) Debt/ Equity (x) Current Ratio Debtors Turnover Ratio Fixed Assets Turnover Ratio FY06 5.11 39.36 789.67 0.87 12.59 0.75 3.30 6.87 2.94 16.56 16.08 0.70 3.56 8.07 4.83 FY07 4.53 39.34 1080.81 1.00 14.55 0.81 3.30 6.82 2.81 16.27 13.37 1.16 4.71 7.03 4.08 FY08E 5.03 50.03 1244.50 1.00 12.47 0.76 2.60 7.99 2.92 13.41 12.47 1.17 5.00 8.11 2.83 FY09E 7.11 64.06 1278.95 0.84 9.72 0.66 2.03 8.58 3.59 14.06 14.23 0.81 6.65 7.77 3.20

Improving margins due to increased contribution from high-margin businesses like SCS and XPS

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RATING RATIONALE ICICIDirect endeavors to provide objective opinions and recommendations. ICICIdirect assigns ratings to its stocks according to their notional target price vs current market price and then categorises them as Outperformer, Performer, Hold, and Underperformer. The performance horizon is 2 years unless specified and the notional target price is defined as the analysts' valuation for a stock. Outperformer: 20% or more Performer: Between 10% and 20% Hold: +10% return Underperformer: -10% or more Harendra Kumar Head - Research & Advisory ICICIdirect Research Desk, ICICI Securities Limited, 2nd Floor, Stanrose House, Appasaheb Marathe Marg, Prabhadevi, Mumbai – 400 025 [email protected] [email protected]

The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities Ltd (I-Sec). The author of the report does not hold any investment in any of the companies mentioned in this report. I-Sec may be holding a small number of shares/position in the above-referred companies as on date of release of this report. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This report may not be taken in substitution for the exercise of independent judgement by any recipient. The recipient should independently evaluate the investment risks. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Actual results may differ materially from those set forth in projections. I-Sec may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject I-Sec and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

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