TVS Supply Chain Solutions

Handles well

Offers end to end SCM solutions to customers across diverse industries with its global network

TVS Supply Chain Solutions (TSCS), a part of TVS Mobility Group (earlier part of erstwhile TVS Group), is a leading integrated supply chain solutions provider that has global capabilities and network across the value chain with cross deployment abilities. Its deep domain expertise and global expertise coupled with technology enables it to develop and offer customized solutions to customers’ thereby empowering agile and efficient supply chains at large scale. Its customers span across numerous industries such as automotive, industrial, consumer, tech and tech infra, rail and utilities, and healthcare.

Solutions offered by the company can be divided into two segments i.e. (i) integrated supply chain solutions (ISCS); and (ii) network solutions (NS). In FY23, about 44.75% of the revenue come from ISCS segment and 55.25% come from NS.

Its capabilities under the ISCS segment include sourcing and procurement, integrated transportation, logistics operation centers, in-plant logistics operations, finished goods, aftermarket fulfillment and supply chain consulting.

Its capabilities under the NS segment include global forwarding solutions (GFS), which involves managing end-to-end freight forwarding and distribution across ocean, air and land, warehousing and at port storage and value-added services, and time critical final mile solutions (TCFMS) which involves closed loop logistics and support including spares logistics, break-fix, refurbishment and engineering support, and courier and consignment management.

The customer base of the company for its supply chain solutions in FY2023 stood at 8788 (down from 11546 in FY2021) globally and 902 (down from 1120 in FY21) in India. The company has added an aggregate of 1,179, 152 and 177 new customers (i.e., new customers who the company did not provide any services in the immediately preceding year) in Fiscals 2021, 2022 and 2023, respectively.

Moreover,in Fiscal 2023, its global customers included 72 (up from 54 companies in FY21) ‘Fortune Global 500companies and its Indian customers include 25 (up from 24 in FY21) Fortune Global 500 companies. In addition, TSCS added about 16 ‘Fortune Global 500 2022’ companies in Fiscal 2023.

In Fiscal 2023, TSCS provided ISCS services to 412 customers (comprising 308 customers in India & 104 customers in RoW) and provided NS services to 8376 customers (594 customers in India& 7782 customers in RoW) spanning across industries such as automotive, industrial, consumer and tech and tech infra. Overall, it provided supply chain solutions to 8,788 customers globally in Fiscal 2023.

As part of its business development strategy, it has focused on expanding the scope of its customer engagements and, thereby, focused on larger customers and disengaging with smaller opportunistic customers, particularly in the NS segment. Accordingly, its total number of customers serviced globally has decreased from Fiscal 2021 to Fiscal 2023.

Its key customers in India include Daimler India Commercial Vehicles Pvt Ltd., Sony India Private Limited, Hyundai Motor India Limited, TVS Srichakra Limited, TVS Motor Company Limited, Panasonic Life Solutions India Private Limited, Hero MotoCorp Limited, Modicare Limited, Ashok Leyland Limited, Yamaha Motor India Private Limited and Torrot Electric Europa, S.A.

Some of the customers with whom it have had long term relationships as of March 31, 2023 include Sony India Private Limited (12 years), Hyundai Motor India Limited (13 years), Johnson Controls-Hitachi Air Conditioning India Limited (3 years), Ashok Leyland Limited (17 years), TVS Motor Company Limited (17 years), Diebold Nixdorf (8 years), TVS Srichakra Limited (10 years), Lexmark International Technology Sarl (6 years), VARTA Microbattery Pte Ltd (7 years), Daimler India Commercial Vehicles Private Limited (12 years), Hero MotoCorp Limited (8 years), Modicare Limited (7 years), Panasonic Life Solutions India Private Limited (12 years), Dennis Eagle Limited (17 years), Electricity North West Limited (5 years), Yamaha Motor India Private Limited (7 years) and Torrot Electric Europa, S.A. (3 years).

Operations of the company have, over the years, significantly grown and as of March 31, 2023, it has presence in 26 countries including India, United Kingdom, Spain, Germany, Australia and Singapore. Of its FY2023 revenue about 29.57% is from India and balance 70.43% is from rest of the world (29.67% from UK, 13.37% from Europe excluding UK, 7.15% from North America, 8.59% from Australia & New Zealand and 11.65% from others).

The company as of March 31, 2023, managed 27218541 square feet of logistics warehouse space (22,532,509 sft in India; 4686032 sft overseas). In Fiscal 2023, the company carried 2,074 tons of air freight and 32,720 TEU of sea freight in India and it carried 28,524 tons of air freight and 74,558 TEU of sea freight in the rest of the world (i.e., geographies other than India).

The majority of lease agreements for its warehouses have tenure of three and eight years.

TSCS provides solutions and services to meet its customers’ supply chain management and logistics requirements. As part of its engagement with customers, customers outsource portions of their supply chain to TSCS to improve their efficiency and to better manage their resources. For instance, TSCS provided purchase services, assembling of component and parts, kitting, and using of packing materials for a global wind turbine company.

TVS Supply Chain Solution’s market share in the organized sector in the supply chain solutions industry in terms of revenue was approximately 7% in Fiscal 2022.

The Issue, Objects of the offer

The issue comprises both fresh issue and offer for sale. While fresh issue comprises new equity shares aggregating upto Rs 600 crore and that of offer for sale comprises sale of 14,213,198 Equity Shares by selling investor selling shareholders and other selling share holders.

Of the net proceeds from fresh issue about Rs 525 crore will be used to prepay all or a portion of certain borrowings availed by the company and its UK Subsidiary, i.e., TVS LI and balance for general corporate purposes.

Total consolidated borrowings of the company as of March 31, 2023, was Rs 1989.616 crore million.

Strength

Critical scale with global network in a fast-growing and fragmented third-party logistics market in India

End to end supply chain solutions enabled by domain expertise, global network and knowledge/technology base across multiple geographies and customer sectors.

Large customer base across industries both in India & RoW offers opportunity to maximize wallet share. Moreover, it developed long-term relationships with many clients, which provides resilience to its revenue and profitability.

The company operate an asset-light business wherein its warehouses (primarily comprising after market warehouses, dedicated consumer product and retail warehouses, multi-client facilities and national distribution centres) and vehicles are operated through leases with its network partners. Moreover, it also manages customer owned/ leased warehouses. The company believes that its asset-light model has enabled it to expand to geographically dispersed locations, scale up volumes, optimize loads and maintain flexibility in handling seasonal variations and changes in client requirements.

Long and consistent track-record of successful integration of acquisitions to support capabilities and service delivery.

Its revenues are diversified in terms of customers, geographies, and industries. It serviced 8,788 customers globally in Fiscal 2023 spread across 26 countries in Europe, United Kingdom, Asia-Pacific and North America, and industries such as automotive(23.17% of revenue), industrial (35.35%), consumer(11.74%), tech and tech infra (11.99%), rail and utilities(5.77%), healthcare (1.7%) with balance 10.28% by others.

Weakness

Operating in a highly competitive and fragmented logistics industry,especially some segments, such as transportation, warehousing and freight forwarding etc. Moreover, freight forwarding business revenue is also impacted by fluctuations in global freight rates.

The Top 5/10/20 customers accounted for 17.91%/27.69%/38.88% of the revenue from operations in FY23 and thus any loss of key customers will adversely impact the operations/financials of the company.

Out of the 684 properties leased by the company (on a consolidated basis) as of March 31, 2023, 11 properties have been leased from related parties, i.e., TVS Industrial & Logistics Park, TVS Mobility and TVS Automobile Solutions.

Promoters of the company have entered into a non-compete agreement dated January 29, 2021 (Non-Compete Agreement) with the other TVS families, wherein the family members as well as their controlled entities have inter-alia agreed to not undertake any business which competes with that of another TVS family group for a period ranging from 36 months to 96 months from February 4, 2022, depending on the nature of business. This restricts the company if desires, from diversifying into existing business of the other TVS family groups for the non-compete period.

Certain of its material subsidiaries such as Rico Logistics of UK have incurred losses in the preceding Fiscals and may incur losses in the future. Moreover, the company has extended certain corporate guarantees on behalf of its subsidiaries, TVS Logistics Investment UK Ltd (TVS LI UK) and TVS Supply Chain Solutions Pte. Ltd. (TVS SCS Singapore) and pledged 100% of its shareholding in TVS LI UK, in relation to the working capital and term loan borrowings availed by TVS LI UK and TVS SCS Singapore. As of March 31, 2023, the total amount of such corporate guarantees was Rs 1629.243 crore. Moreover, the ability of the company to turnaround loss-making overseas subsidiaries needs to be seen given global economic headwinds and geopolitical risks.

In the last three fiscals an average of about 72.99% of its revenue from operations and 73.87% of its borrowings are in foreign currencies and thus any fluctuations in foreign currency will have an impact on the results of operations of the company.

Net trade receivables as of March 31, 2023, was Rs 1234.253 crore or 12.01% of its total consolidated revenue from operations.

Global economic headwinds impacting manufacturing sectors in developed countries especially Europe.

Valuation

Consolidated revenue for the fiscal ended March 2023 was up 11% to Rs 10235.38 crore with India revenue up 24% to Rs 3026.71 crore. Revenue from RoW was up 6% despite decline in global freight rates which was largely offset by new customer addition and higher volume from existing customers. But with operating profit margin expand by marginal 10 bps to 6.7%, the operating profit was up by 12% to Rs 683.65 crore. Other income was up 51% to Rs 75.63 crore and thus the PBIDT was up 15% to Rs 759.28 crore. After accounting for higher interest and higher depreciation, the PBT was down by 3% to Rs 45.28 crore. EO expense was down 72% to Rs 10 crore and thus the PBT after EO was up 204% to Rs 35.28 crore. Taxation was a write back of Rs 1.70 crore against a provision of Rs 58.43 crore. Thus, the PAT was profit of Rs 36.98 crore against a loss of Rs 46.81 crore. The share of profit from associates was up 148% to Rs 4.78 crore. Thus,PAT of continuing business was RS 41.76 crore against a loss of Rs 44.88 crore. The net profit after MI was eventually stood at Rs 39.81 crore against a loss of Rs 49.10 crore.

On post issue fully diluted equity (on upper price band) the EPS for FY23 was Rs 1.1 and the PE works out to 179.1 times. However, more established logistics players such as TCI express, Blue Dart Express and VRL Logistics quote at a TTM PE of 40.9 times, 40.7 times and 18.9 times respectively of their FY2023 consolidated EPS. Mahindra Logistics quotes at a PE of 102.7 times.

EV/Sales for the company is 1 timesas compared to 0.7, 2.5, 3.1, 4.5, 4.6 times in case of Mahindra Logistics, VRL Logistics, Blue Dart Express, TCI Express and Delhivery.