Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities of Transport Corporation of India Ltd (TCIL).

 

The operating performance has remained strong with healthy revenue growth of 17% in fiscal 2023. Operating revenue increased to Rs 3,795 crore with margin of 11.6% in fiscal 2023 from Rs 3,270 crore with margin of 12.9% in fiscal 2022. Though the operating margin has moderated a bit on account of comparatively lower margin in seaways business in fiscal 2023 in line with expectation, it has improved in last two fiscals from 9-10% during fiscal 2018 to 2021. Operating profit was temporarily boosted because of two-way cargo in the seaways segment in fiscal 2022. TCIL’s revenue is expected to grow with a stable rate over the medium term on account of higher share of less-than-truckload in the freight segment, growing demand in supply chain division and capacity expansion in seaways division. TCIL is expected to undertake capital expenditure (capex) of ~Rs 375 crore in fiscal 2024 to purchase ships and trucks and build warehouses and hubs which will drive the increase in scale of operations. Furthermore, strong client relationships and integrated product offerings across the logistics industry are expected to keep the business risk profile stable. Sustained profitability, efficient working capital management and moderate capex is expected to benefit the financial risk profile over the medium term.

 

The ratings continue to reflect TCIL’s leading market position in the logistics business, strong infrastructure and healthy financial risk profile, backed by robust capital structure and healthy debt protection metrics. These strengths are partially offset by sizeable proportion of conventional low-margin freight business in revenue and large working capital requirement.

 

This Rating Rationale (RR) is being published in line with regulatory timelines, while the rated entity has appealed the rating. CRISIL Ratings is evaluating the appeal alongwith additional information shared, and shall publish a separate RR after the same is completed.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of TCIL and its subsidiaries and joint ventures (JVs; to the extent of TCIL’s interest) because of business and financial links.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Leading market position

TCIL is an established integrated logistics service provider in India. It handles more than 5 million tonnes of cargo and services nearly 200,000 customers annually. It is also the only player in the domestic logistics industry to offer services across road, rail, and sea. Apart from the original freight business, the company has healthy presence in supply chain solutions and seaways segments. Operating profitability is expected to remain healthy over the medium term, supported by higher proportion of less-than-truckload cargo in the freight segment and addition of ships leading to higher contribution from the seaways segment. Presence across the logistics value chain should protect the company from any large variation in operating performance in any of the divisions.

 

Strong infrastructure

TCIL operates a fleet of around 10000 trucks in operation, 3 AFTO trains and six coastal cargo ships, 8,500 general purpose containers, 650 ISO liquid tank containers, 13,000 cold pallet positions and a warehousing space of 14 million square feet. The hub-and-spoke marketing network, comprising over 25 hubs and 900 branches, enables the company to handle freight across 18,000 domestic and overseas locations. The advanced vehicle-tracking system and network provided to all branches give customers accurate and timely information and help cover any urgent requirements. The strong infrastructure should continue to support business growth over the medium term

 

Strong financial risk profile

The financial risk profile is expected to remain stable over the medium term, backed by healthy cash accrual, increased profit contribution from the supply chain and seaways divisions, and gradual improvement in the freight division. Networth was high and gearing comfortable at Rs 1,725 crore and 0.04 time, respectively, as on March 31, 2023. The debt protection metrics were robust, with interest coverage and net cash accrual to total debt ratios of ~50 times and ~6 times, respectively, in fiscal 2023 owing to lower debt. The company has repaid a large part of its long-term debt in fiscal 2022, leading to further improvement in the financial metrics. TCIL is expected to undertake capex of Rs 375 crore in fiscal 2024 for building hubs and small warehouses and increasing the fleet of ships, trucks and containers. The expenditure will be funded by a mix of internal accrual and debt.

 

Weaknesses:

Higher revenue from low-margin freight business and susceptibility to economic downturns

TCIL’s conventional road transportation business accounted for ~50% of the consolidated revenue for fiscal 2023. Profitability in this segment remains susceptible to economic downturns and competition from both unorganised players and new-age start-ups. However, increasing contribution from the more profitable less-than-truckload operations and asset-light operating model protects the business from significant cyclicality. This is evident in profit before interest and tax (PBIT) margin improving to 4.1% in fiscal 2023 from 1.5% in fiscal 2016. In addition, implementation of the goods and services tax has increased the entry barrier and helped organised players to gain larger market share. Profitability will remain a key rating sensitivity factor over the medium term.

 

Large but improving working capital requirement

Receivables was 54 days as on March 31, 2023, constituting almost 54% of current assets and 27% of total assets. This is mitigated partly by closely monitoring receivables through credit control managers and electronic proof of delivery. The cash and equivalents stood at Rs 185 crore as on March 31, 2023 apart from current investment of around Rs 88 crore in commercial paper. Nonetheless, improving accrual should mitigate any adverse impact on the financial risk profile. Also, working capital intensity acts as an entry barrier for newer players in this industry.

Liquidity: Strong

Liquidity is supported by expected net cash accrual over Rs 400 crore annually for the three fiscals through 2026, which will be utilized to meet capex partially as well as debt obligations over the medium term. The company had cash and cash equivalents of Rs 185 crore as on March 31, 2023 apart from current investment of around Rs 88 crore in commercial paper. Furthermore, bank limits remained unutilsed for the 12 months through March 2023 as TCIL depends on internal accrual majorly for working capital requirements.

Outlook: Stable

TCIL’s business risk profile will remain healthy over the medium term, supported by comfortable revenue growth, sustained profitability in the supply chain and coastal shipping divisions, and improving efficiency in the freight segment.

Rating Sensitivity factors

Upward Factors:

* Sustained improvement in scale of operations and operating margin of over 12%

* Sustenance of healthy financial risk profile 

 

Downward Factors:

* Stretch in receivables to more than 90 days of sales, leading to higher dependence on borrowings

* Weakening of the financial risk profile due to decline in profitability or substantial debt-funded capex

About the Company

TCIL was established in 1958 by Mr P D Agarwal. From a conventional transportation company, TCIL has emerged as India’s largest integrated logistics service provider. It has a network of over 1,000 company-owned offices and more than 3,700 employees. TCI's offers a diverse range of services which are highlighted below:

 

TCI Freight provides total transport solutions for cargo of any dimension or product segment. It transports cargo on FTL (Full truck load)/ LTL (Less than truck load)/ Small packages and consignments/ Over Dimensional cargo.

 

TCI Supply Chain Solutions is a single window enabler of integrated supply chain solutions right from conceptualization and designing the logistics network to actual implementation. The core service offerings are Supply Chain Consultancy, Inbound Logistics, Warehousing / Distribution Centre Management & Outbound Logistics. TCI Chemical Logistics Solutions is a subdivision which provides storage of chemicals – liquid, dry and gases – in compliant warehouses and movement in ISO tank containers, gas tankers and flexi tanks by Rail, Road and Coastal.

 

TCI Seaways is equipped with six ships in its fleet and caters to the coastal cargo requirements for transporting containers and bulk cargo.

 

It has formed two JVs: Transystem Logistics International Pvt Ltd with Mitsui and Co Ltd, which offers high quality integrated logistics solutions to Japanese automotive manufacturers and suppliers in India, and TCI-CONCOR Multimodal Solutions Pvt Ltd with Container Corporation of India Ltd, an end-to-end multimodal logistics solutions provider. TCIL demerged its express cargo division into a separate entity, TCI Express Ltd (rated ‘CRISIL AA-/Stable’), with effect from April 1, 2016. TCI through its subsidiary TCI Cold Chain Solutions Limited, an integrated cold chain service provider for temperature-controlled warehousing and distribution services, has entered into another joint venture with Mitsui & Co. Limited (Mitsui) in fiscal 2022. Mitsui enjoys global expertise in logistics and supply chain management. It is believed that the synergies created by bringing together the respective resources and capabilities of the two companies will further help create more value for the customers.

Any other information: Not applicable