Detailed Rationale

This Rating Rationale (RR) is being published in continuation to the RR dated July 26, 2023 which communicated that the rating was under appeal. Upon due consideration of the additional information received, the ratings has been reaffirmed at ‘CRISIL AA/Stable/CRISIL A1+’. The detailed rationale follows:

 

While operating revenue grew at a healthy 16.1% in fiscal 2023, operating margin moderated to 11.6% against 12.9% in fiscal 2022. The performance has further moderated in the first half of fiscal 2024 (H1 2024) with revenue growing by 5.8% year-on-year and operating margin declining to 10.4% vis-à-vis 11.0% for the corresponding period in previous fiscal. The performance in H1 2024 was supported by healthy growth of 14.1% in supply chain division with PBIT (profit before interest and tax) margin being maintained at 6.5%. However, revenue for both freight and seaways segments remained flattish and profitability was lower. For the freight segment the decline in margin was on account of low growth of 2.6% while fixed costs related to infrastructure and employees remained the same. Operating profit was temporarily boosted for the seaways segment because of two-way cargo in fiscal 2022 and higher-than-normal freight rates. With freight rates normalising PBIT margin in seaways segment has moderated as well. Notwithstanding, the balance sheet continues to remain healthy.

 

Transport Corporation of India’s (TCIL’s) revenue is expected to grow at a stable rate over the medium term on account of higher share of less-than-truckload in the freight segment and growing demand in supply chain division. The company was in the process of expanding capacity in its seaways division which was also expected to drive revenue growth and improvement in profitability. It has now revised its capital expenditure (capex) downward for fiscal 2024 to Rs 275 crore from Rs 375 crore earlier. The company is purchasing two ships with total capacity of 14600 deadweight tonnage (DWT) which are expected to be added only by fiscal 2026 now.

 

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.

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, TCIL 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 TCIL 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 TCIL 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 robust and 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 healthy 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. TCIL 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 275 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. Despite the capex, the financial risk profile is expected to remain comfortable.

 

Weaknesses:

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

TCIL’s conventional road transportation business accounted for around half of the consolidated revenue (excluding revenue of JVs with minority shareholding – in line with reported financial statements) 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 around Rs 300 crore as of September 30, 2023. 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. TCIL had cash and cash equivalents of around Rs 300 crore as of September 30, 2023. 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

Annexure - List of Entities Consolidated

Name of entities	Extent of consolidation	Rationale for consolidation
TCI Global Pte Ltd	Full	Step-down subsidiary with 100.0% shareholding
TCI Holdings Asia Pacific Pte Ltd	Full	Subsidiary with 100.0% shareholding
TCI Global Brazil Logistica Ltd*	Full	Step-down subsidiary with 100.0% shareholding
TCI Holdings Netherlands B.V.**	Full	Step-down subsidiary with 100.0% shareholding
TCI Holdings SA & E Pte Ltd	Full	Subsidiary with 100.0% shareholding
TCI Bangladesh Ltd	Full	Subsidiary with 100.0% shareholding
TCI Nepal Pvt Ltd	Full	Subsidiary with 100.0% shareholding
TCI Cold Chain Solutions Ltd	Full	Subsidiary with 80.0% shareholding
TCI Venture Ltd	Full	Subsidiary with 100.0% shareholding
Stratsol Logistic Pvt Ltd	Full	Step-down subsidiary with 100.0% shareholding
TCI-CONCOR Multimodal Solutions Pvt Ltd	Full	Subsidiary with 51.0% shareholding
Transystem Logistics International Pvt Ltd	Equity method	JV/associate with 49.0% shareholding
Cargo Exchange India Pvt Ltd	Equity method	JV/associate with 32.5% shareholding

*liquidated on June 15, 2022

**liquidated on October 12, 2022