TVS Supply Chain Solutions Ltd – IPO Note – Equity Research Desk

Company Overview:

TVS Supply Chain Solutions Limited (TSCSL) stands as India’s largest and one of the fastest expanding integrated providers of supply chain solutions among the listed Indian companies in this sector, both in terms of revenue and revenue growth. The Company is an India-based multinational company that pioneered the development of the supply chain solutions market in India according to Redseer Report. It is promoted by the erstwhile TVS Group, one of the reputed business groups in India (Source: Redseer Report), and is now part of the TVS Mobility Group. TSCSL’s solutions spanning the entire value chain from sourcing to consumption can be divided into two segments: (i) integrated supply chain solutions (“ISCS”); and (ii) network solutions (“NS”). Its capabilities under the ISCS segment include sourcing and procurement, integrated transportation, logistics operation centres, in-plant logistics operations, finished goods, aftermarket fulfilment and supply chain consulting. While 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.

Objects of the Offer:

• Prepayment or repayment of all or a portion of certain outstanding borrowings availed by the company and its subsidiary, TVS LI UK.
• General corporate purposes.

Investment Rationale:

• Asset Light Model: The company operates an asset-light business wherein the warehouses (primarily comprising aftermarket warehouses, dedicated consumer product and retail warehouses, multi-client facilities and national distribution centres) and vehicles are operated through leases with their network partners. While the company do not have ownership of these assets, they have control over the capacity and fleet, and the scheduling, routing, storing, and delivery of goods are managed by them. Moreover, TVS supply chain also manage customer owned/leased warehouses. Their warehousing expansion strategy involves leasing multi-user facilities in production and consumption centres in India with appropriate infrastructure and technology enablement that enables them to serve their existing customers and expand their business through encirclement and new customer acquisition.

• Client Base: Globally, the company provided supply chain solutions to 11,546, 10,531 and 8,788 customers during Fiscals 2021, 2022 and 2023, while in India, the company provided solutions to 1,120, 1,044 and 902 customers in the same periods. It has added an aggregate of 1,179, 152 and 177 new customers in Fiscals 2021, 2022 and 2023, respectively. Its customers span across numerous industries such as automotive, industrial, consumer, tech and tech infra, rail and utilities, and healthcare. It has developed long-term relationships with a number of clients, which has provided resilience to its revenue and profitability. Some of its customers with whom it had long-term relationships as of FY23, include Sony India Private Limited (12 years), Hyundai Motor India Limited (13 years), Ashok Leyland Limited (17 years), TVS Motor Company Limited (17 years), Diebold Nixdorf (8 years), VARTA Microbattery Pte Ltd (7 years), Hero MotoCorp Limited (8 years), Torrot Electric Europa, S.A. (3 years), etc.

• Financial Track Record: The company’s revenue has grown at a CAGR of 16% from Rs.6605 crore in FY20 to Rs.10235 crore in FY23, while the net profit has shown steady growth by decreasing the losses and making profit. Though bottom line has a loss-making history, EBITDA of the company has grown at a CAGR of 39% from Rs.255 crore in FY20 to Rs.684 crore in FY23. End user Industry wise, Industrials accounts for 35% of the FY23 revenue, followed by Automotive with 23%, Tech & Tech infra with 12%, Consumer with 12%, Rail and Utilities with 6%, Healthcare with 2% and others with 10%. Geographically, India accounts for 30% of the FY23 revenue, followed by UK with 30%, EU with 13%, Australia and New Zealand with 8%, North America with 7% and others with 12%.

Key Risks:

• Forex Risk – The company is exposed to foreign exchange risks, as major portion of its revenues are generated in foreign currencies. Fluctuations in exchange rates could affect its financial performance.

• OFS – The IPO is a mix of offer for sale (OFS) and Fresh issue with OFS being 32% of the overall issue size. In the offer for sale (OFS), Investor selling shareholders named Omega TC Holdings Pte. Ltd, Tata Capital Financial Services Limited, TVS Motor Company Limited and Kotak Special Situations Fund will offload up to 1,19,19,388 equity shares. Other selling shareholders will offload up to 22,93,810 equity shares.

Outlook:

The company has a strong presence in the rapidly expanding and fragmented third-party logistics market in India. It also has a strong parentage with the management team with diverse industry experience. According to RHP, the listed peer group of the company are TCI Express Ltd, Mahindra Logistics Ltd, Blue Dart Express Ltd, Delhivery Ltd, etc. At the higher price band, the listing market cap will be around ~Rs.8615 crs and the company is demanding a P/E multiple of 205x based on post issue diluted FY23 EPS. Since, the company has started making profit in FY23 it is not fair to value the company based on the P/E. So, we took EV/EBITDA ratio for comparison and the company’s Enterprise value based on the listing market cap, closing (FY23) debt and closing (FY23) cash is around Rs.9520 crs which is resulting an EV/EBITDA of ~14x. The peers are trading at an average EV/EBITDA multiple of 19x (excluding Delhivery which is making an operating loss). When compared to its peers, the issue appears between undervalued to fairly valued category. Based on the above views, we provide a ‘Subscribe’ rating for this IPO for a medium to long-term Holding.

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