In its latest report, Sharekhan has reiterated a Buy rating for TCI Express Limited, a prominent player in India’s logistics sector. Despite short-term challenges in Q2FY2025, TCI is poised for growth through strategic expansion and automation, with a price target (PT) of Rs. 1,250 based on anticipated recovery and growth from FY2026. Key highlights include moderate revenue growth projections, operational adjustments, and capital expenditures aimed at capacity enhancement. This analysis delves into the report's major insights and the stock’s performance trajectory.

Investment Thesis and Strategic Direction

Positive Long-term Growth Potential
Despite subdued Q2FY2025 performance, TCI Express exhibits a strong long-term growth outlook. With consistent expansion in its branch network and automation projects in key centers, the company is set to achieve a 16% compound annual growth rate (CAGR) in net earnings from FY2024 to FY2027, supported by demand from sectors such as e-commerce and pharmaceuticals.

Management’s Confidence in Mid-term Revival
Management anticipates mid-single-digit revenue growth for H2FY2025, shifting to double-digit growth from FY2026 as macroeconomic conditions improve. Projected volume growth of 13-15% and a 1-2% pricing uptick in FY2026 are expected to drive overall revenue.

Quarterly Performance Review: Weak Q2 Due to External Headwinds

Revenue Decline and Operational Margins
Q2FY2025 standalone revenue declined 2.7% y-o-y to Rs. 311.5 crore due to a drop in tonnage volumes. Operating Profit Margins (OPM) shrank by 354 basis points to 12.2%, impacted by higher air freight and toll costs, increased labor expenses, and lower truck utilization levels. This resulted in a 24.5% y-o-y decline in operating profit, with net profit falling 26% to Rs. 26 crore.

External Challenges and Demand Impact
Sectoral demand from auto, textile, and engineering industries was weak, reducing truck utilization to 83%. Persistent inflation in fuel and tolls has increased overall logistics costs, preventing TCI from achieving its typical 84-85% utilization rates.

Operational Enhancements and Capex Plans

Focus on Automation and Expansion
TCI’s ongoing capital expenditure plan of Rs. 500 crore aims to strengthen its operational infrastructure. With automation projects underway in Kolkata and Ahmedabad, targeted for completion by FY2026, TCI’s sorting centers in Pune and other locations are set to improve efficiency and cost management.

Rail Express Division Gains Momentum
The company’s Rail Express segment, catering to the B2B air cargo sector, has expanded with over 5,000 clients and services on more than 150 routes. This diversification effort enhances TCI’s service mix, positioning it favorably against industry volatility.

Market Position and Financial Stability

Strong Balance Sheet and Cash Flow Resilience
TCI Express maintains a robust balance sheet, with healthy cash flows and high return ratios. This financial strength enables the company to continue its capex program without undue leverage, making it well-prepared to capitalize on the sector’s recovery post-COVID.

Valuation Metrics and Price Target
With a Price-to-Earnings (P/E) multiple of 33.1x for FY2025, the stock trades at a premium, reflecting investor confidence in its long-term growth. The target price of Rs. 1,250 represents a significant upside, based on expected volume and pricing improvements over the next fiscal years.

Sectoral Outlook and Growth Drivers

Macro Drivers Support Logistics Sector Growth
The organized logistics industry in India, benefiting from e-commerce and third-party logistics demand, shows potential for sustained expansion. Domestic indicators such as increased e-way bill generation and port volumes underscore the recovery. TCI’s broad portfolio, covering consumer electronics, retail, pharmaceuticals, and automotive logistics, positions it well to capture growth across these sectors.

Emerging Trends Favoring Organized Players
The post-GST landscape has led to a shift toward organized logistics providers. TCI’s surface transport, representing 86% of revenue, is expected to grow at 12-15%, driven by increasing demand from sectors such as pharmaceuticals, FMCG, and e-commerce, doubling GDP growth projections for the next five years.

Risks and Challenges

Macroeconomic and Sectoral Risks
A prolonged downturn in the manufacturing sector or sustained weakness in small and medium enterprises (SMEs), which contribute 50% of TCI’s revenue, could dampen growth. The inability to increase market share from unorganized players may also restrict revenue gains.

Cost Pressures in Freight and Logistics
High air freight costs, toll charges, and labor expenses continue to squeeze margins. TCI’s ability to pass these costs to clients remains constrained, particularly in a competitive market, potentially impacting profitability in the near term.

Key Management Insights and Future Outlook

Branch Expansion and Service Innovations
While TCI has limited new branch additions due to subdued volumes, it remains committed to its multi-modal strategy. Innovations in its service offerings, such as the Cold Chain Express and Customer-to-Customer (C2C) Express, aim to capture niche segments within the logistics market.

Capex Execution and Efficiency Goals
The company plans to complete automation in its major centers by FY2026, which is expected to bolster margins through higher truck utilization and process efficiencies. TCI’s strategic investments in sorting centers reflect its focus on scalability and operational resilience.

Investor Recommendations and Conclusion

Buy Recommendation with a Price Target of Rs. 1,250
Despite short-term volume softness, TCI Express is well-positioned for long-term profitability. Sharekhan’s BUY rating with a target price of Rs. 1,250 reflects the expected recovery in demand, margin improvements, and the company’s comprehensive capex strategy.

TCI Express represents a compelling opportunity within India’s rapidly evolving logistics sector. Its resilience, backed by a robust balance sheet and strategic investments, positions it to benefit as macroeconomic conditions stabilize. Investors with a mid- to long-term horizon may find the current valuation attractive as the company navigates short-term challenges and gears up for anticipated growth.