Transport Corporation of India Report by Sharekhan

Transport Corporation of India
Cluster: Cannonball
Recommendation: Book Profit
Current market price: Rs130

Book profit

Result highlights

For Q2FY2008, Transport Corporation of India's (TCI) profit after tax (PAT) declined by 26% year on year (yoy) to Rs4.8 crore on account of slack performance at operating level.
The topline grew by a modest 10% yoy to Rs300.4 crore due to a slowdown in the transportation revenues and hiving off of the fuel stations.
Following its performance trend in the previous quarters, the Express (XPS) division and the Supply Chain Division (SCD) division recorded a robust topline growth of 20.7% yoy and 358% yoy to Rs80 crore and Rs37.1 crore respectively.
The margin of the transport division improved marginally by 10 basis points to 2.3% in the quarter. The margins of the XPS and the SCM division witnessed a sharp fall of 110 basis points and 40 basis points to 5.8% and 3.2% respectively. The margin of shipping division reduced drastically by 1,320 basis points to 7% as the company incurred higher expenditure towards the dry-docking of four ships. But on account of higher margin in the wind power division and hiving off of the lower-margin trading division, the overall earnings before interest and tax (EBIT) margin was reduced by 100 basis points to 4.5%. The EBIT grew by 9.6% yoy to Rs13.64 crore.
The interest cost increased by 88% yoy to Rs4.4 crore as the company borrowed debt to finance its capital expenditure (capex). Whereas its depreciation provision increased by 47% yoy to Rs6.9 crore as the company added assets during the year.
The tax provision stood much higher at 39.6%, which led the PAT decline by 26% yoy to Rs4.8 crore.
The company placed Rs53 crore to Fidelity Investments International at Rs105 per share, whereas the next tranche is expected to be placed in the next couple of months. The capex will drive the revenues of the company going ahead.
As the first-half performance of the company was much below our expectations, we are downgrading our profit estimate for FY2008 by 18% to Rs32 crore and that for FY2009 by 3.1% to Rs47.1 crore.
As we know, TCI is transforming itself from a pure play transportation company to an integrated company in the logistics space. The company is incurring a capex of Rs440 crore over FY2007-10 to augment its warehouse capacity, to increase its truck fleet and to buy more ships. Currently the margins of its two new focus businesses—Express and Supply Chain—have not stabilised as the company is in the expansion phase. The courier business is still not profitable and is expected to break-even only in the next fiscal year. Therefore the numbers have been much lower than expected. At the current market price of Rs128, the stock trades at 29x its FY2008 earnings per share (EPS) and 21x its FY2009 EPS. We believe even after factoring the upside from real estate, the current valuations are expensive considering the historical price-earnings ratio (P/E) of the company. Thus taking cognisance of the steep valuations and lower than expected performance of the company, we recommend investors to book profits.