The proportion of revenue from the freight division of Transport Corp. of India Ltd (TCI) in the overall revenue pie dropped to 46% in fiscal 2011 (FY11) from as high as 57% in FY07. That may not be an area of concern, chiefly because the supply chain and logistics service provider has been focusing on increasing growth from high-margin segments such as the XPS and the supply chain solutions (SCS) divisions.
XPS offers door-to-door delivery services. Ebitda (earnings before interest, tax, depreciation and amortization) margins of the freight business are typically lower (at about 4-5%) than that of the XPS and SCS segments (at 9-12%).
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For FY11, the XPS and the SCS businesses contributed 26% and 22% to the total revenue, respectively, and set off the somewhat tepid performance of the freight division to an extent.
The SCS business, in particular, has delivered a spectacular performance, with revenue increasing by about 60% on a year-on-year basis and Ebitda improving by 65%. Ebitda margins of the SCS business increased by half a percentage point to 11.1%, while that of the XPS business fell slightly.
Although the SCS revenue share is relatively lower in the total, this business is the highest contributor to operating profit; in FY11, the firm derived almost one-third of its operating profit from the SCS business.
On a consolidated basis, revenue, operating profit and net profit for FY11 have all increased by around 21% compared with the previous fiscal and operating profit margin remained flat at 7.5%.
Since the beginning of this calendar year, the TCI scrip has declined by 25% to Rs 90 and has underperformed both the mid-cap and the small-cap indices of the Bombay Stock Exchange. It now trades at around 9.5 times its estimated earnings for the current fiscal.
Valuations do appear attractive at these levels and analysts are positive on TCI’s strategy to focus on higher margin businesses, which is eventually expected to improve the company’s profitability in the years to come.
However, in the near term, there is also concern on the impact of the impending slowdown in the auto sector on the firm’s SCS business, as the segment derives three-fourths of its revenue from the auto sector.
Graphic by Yogesh Kumar/Mint
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