IPO: TVS Supply Chain Solutions

In a nutshell

• Quality : TVS Supply Chain Solutions' three-year average return on equity (ROE) and return on capital employed (ROCE) are -5.5 and 3.2 per cent, respectively.
  
• Growth : Its topline grew 21.5 per cent per annum over FY21-23, driven by high growth in the integrated supply chain solutions segment (ISCS)
  
• Valuation : The stock will be priced at a P/E and P/B of 216.5 and 6.5, respectively, as compared to the peer median and average of 48.9 and 8.2 times, respectively
  
• Overview : The rise in cross-border trade and increase in discretionary consumption can help the company grow. However, intensive competition and volatility in freight costs remain a threat.

About TVS Supply Chain Solutions
TVS Supply Chain Solutions (incorporated in 2004) is one of the largest supply chain companies in India in terms of revenue. It offers supply chain management services, including integrated supply chain solutions (45 per cent of revenue) and network solutions (55 per cent).

Strengths of TVS Supply Chain Solutions

• Technology differentiation through constant expenditure on innovation has helped the company adapt to changing customer needs and simplify the whole supply chain process.
  
• It has maintained long-standing relationships with its top 10 clients (an average of 10 years as of FY23).

Weaknesses of TVS Supply Chain Solutions

• Exposed to adverse exchange rate fluctuations as 73 per cent of revenue is denominated in foreign currencies.
  
• Debt-to-equity stood at 4.6 times at the end of FY23.
  
• The company is a serial acquirer, undertaking more than 20 acquisitions in the last 16 years. Consequently, its goodwill as a percentage of net worth stood at 84 per cent (as of FY23). Any major impairment in goodwill could wipe out a large chunk of its net worth.

Risk report

Company and business

• Are TVS Supply Chain Solutions' earnings before tax more than Rs 50 crore in the last 12 months?
  No. The company's profit before tax for FY23 was Rs 40 crore.
• Will TVS Supply Chain Solutions be able to scale up its business?
  Yes. Logistics is a growing industry in India and increase in demand for e-commerce and decreased reliance on China in the future can help the company scale it up.
• Does TVS Supply Chain Solutions have recognisable brands with client stickiness?
  Yes. Its average relationship of 10 years (as of FY23) with its top 10 customers (by revenue) is a testament to its client stickiness.
• Does the company have a credible moat?
  No. It faces competition from domestic as well as international players
.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Promoter's stake will be 43.4 per cent post-IPO.
• Do the top three managers have more than 15 years of combined leadership at TVS Supply Chain Solutions?
  Yes. Ramachandran Dinesh (Executive Vice Chairman) has been with the company since its inception.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is TVS Supply Chain Solutions free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  No. The company's three-year average ROE and ROCE are -5.5 and 3.2 per cent, respectively. In FY23, the company's ROE and ROCE were 5.5 and 7.6 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  Yes. Cash flow from operations stood at Rs 712 crore, Rs 621 crore and Rs 712 crore in FY21, FY22 and FY23, respectively.
• Is the company's net debt-to-equity ratio less than one?
  No. The company's net debt-to-equity ratio as of March 2023 is three times.
• Is TVS Supply Chain Solutions free from reliance on huge working capital for day-to-day affairs?
  No. The company relies on short-term loans to fund its working capital requirements.
• Can the company run its business without relying on external funding in the next three years?
  Yes. It has generated free cash flows during FY23 and FY22. Moreover, it runs on an asset-light model where it leases its warehouses and national distribution centres, which helps in decreasing capex.
• Is TVS Supply Chain Solutions free from meaningful contingent liabilities?
  Yes. Contingent liabilities as a percentage of equity is 7.8 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock will offer an operating earnings yield of 1.5 per cent.
• Is the stock's price-to-earnings less than its peers' median level?
  No. The company will trade at a price-to-earnings ratio of 216.5 times as compared to the peers' median level of 49 times.
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The company will trade at a price-to-book ratio of 6.5 times as compared to the peers' average level of 8.2 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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