New non-trucking divisions come to the rescue of Transport Corporation of India

The slowdown in industrial activity in the country has forced Transport Corporation of India (TCI) to remain conservative about the prospect of its trucking division. However, the continued focus on non-trucking divisions helped the company in maintaining a constant profit.

TCI operates in various segments in the logistics business. During the nine months ended December 2011, revenues from the trucking division was 43% of its total revenues, while the express, supply chain management (SCM), coastal shipping contributed 27%, 23%, and 5%, respectively.

The trucking division, which is the company’s core division, is a low margin business. The earnings before interest and taxes (EBIT) margins from this division range between 3% and 4%. Due to weak macro- economic environment, the company has been cautious in getting new clients in this segment.

Since trucking is a capital-intensive business, any delay in receivables would have stretched the company’s working capital. In the high interest rate scenario, any increase in working capital would have increased its interest outgo, thereby affecting profitability.

As a result of this cautious approach, the company’s revenues from this division have declined 4% in the nine months ended December 2011 compared to the same period a year ago. The company’s two relatively new divisions – express and supply chain management – have been consistently growing at a healthy rate. Revenues from express and SCM divisions have grown by 8% and 15%, respectively, in the nine months ended December 2011.

Margins on these divisions are higher compared to the trucking division. On an average, both these divisions have been generating around 8% of EBIT margin. As a result, growth in these two divisions has helped the company to post 6% growth in net profit for the nine months ended December 2011.

In the coming months, the trucking division will continue to remain sluggish till there is an improvement in the macro-economic scenario. However, revenues from the SCM division are likely to grow due to the increasing focus of the company on this segment.

The company is spending nearly one-third of planned capex of Rs 110 crore for this financial year in this segment. The present stock price factors in the sluggish growth in earnings of the company in this financial year.

TCI’s stock price has relatively underperformed with respect to broader ET Logistics Index over the past one year. TCI has fallen by over 32% in the last one year compared to the ET Logistics index that fell 15% in the same period. Investors can accumulate stock at this level.