We are in the midst of a roaring bull market. Asset prices have been surging, and making money in equities has felt effortless. Too effortless, one might argue. The role of luck has been forgotten, while optimism dominates.
Such times call for caution. Market history reminds us: what rises with speed can fall twice as fast.
At Alphastreet, we believe this is precisely the environment to explore businesses that are currently ignored or written off. When sector rotation is fast and sentiment driven, opportunities often lie in sectors and companies that appear distressed. These firms may look unattractive today with weak balance sheets, low profitability, or challenged operating metrics yet hold signs of transformation.
Real wealth creation rarely occurs in times of calm predictability. It is forged in periods of change, when companies turn adversity into opportunity. That is why our focus extends beyond the 20%+ ROE/ROCE compounders that everyone already knows. Attractive valuations are seldom found there. Instead, we look for companies with modest current returns on capital that are poised to inflect.
The Investment Lens
From experience, five archetypes of businesses tend to offer compelling transformation stories:
- Pain Period to Recovery: Firms that endured prolonged struggles but are now stabilizing and turning profitable.
- Product Mix Upgrading: Companies shifting from commoditized offerings to higher value products or services.
- Debt Reduction: Businesses de-leveraging their balance sheets, freeing up cash flows for growth.
- Surviving Disruption: Firms that faced industry upheaval but adapted successfully and emerged stronger.
- Industry Tailwinds: Companies positioned to benefit from cyclical or structural demand growth, often tied to expanding TAM (Total Addressable Market).
Historical data confirms that firms with sub 10% ROE/ROCE that subsequently scale into double digits within a few years tend to deliver outsized shareholder returns. Markets often underestimate this operational compounding effect.
Against this backdrop, we see an interesting opportunity in TVS Supply Chain Solutions (TVS SCS).
Company Background
TVS Supply Chain Solutions, part of the TVS Mobility Group, is a pioneer of supply chain solutions in India. Established in 2004, it was one of the early players offering third party logistics (3PL) services when outsourcing supply chains was a novel idea domestically.
The company went public in FY24, becoming the first TVS Group entity to list after TVS Electronics in 1994. It now aspires to cross the $2 billion revenue mark in 3-4 years.
TVS SCS caters to a wide client base across industries: Automotive, Industrial, Consumer, Tech and Infrastructure, Rail and Utilities, and Healthcare. Its portfolio includes:
- 6,909 customers, including 78 Fortune Global 500 firms
- Over 17,000 employees across 26 countries
- 25.5 million sq. ft. of managed space
Their long-standing relationships with marquee customers (Ashok Leyland, Hyundai, Daimler India, Sony India, among others), many extending beyond 12–18 years reinforce the trust and stickiness of their solutions.
Business Model and Segments
TVS SCS is fundamentally an asset light, technology-enabled supply chain solutions provider. It does not rely on owning trucks or warehouses but leverages leased infrastructure, focusing instead on operational expertise, integration, and technology to optimize supply chains.
The business operates across two key segments:
- Integrated Supply Chain Solutions (ISCS):
- Procurement and sourcing
- In-plant logistics operations
- Warehousing and distribution of finished goods
- Aftermarket fulfillment (spares and repairs)
- Supply chain consulting
- Logistics operation centers
- Technology integration (platforms like Msys, Alpha, i-eX, E-Connect)
- Network Solutions (NS):
- Freight forwarding (air, sea, land)
- Warehousing and distribution
- Value-added services (kitting, labeling, packaging, quality control)
- Time critical final mile solutions (closed-loop logistics, break-fix, refurbishment)
- Courier and consignment management
This dual structure allows TVS SCS to address the end to end supply chain value chain, from sourcing to delivery to after sales.
The company’s ISCS business, which is higher margin, is gaining greater weight in the mix: ~57% of FY24 revenues vs. ~46% in FY23. This mix shift is expected to continue, supporting steady margin expansion.
Global Presence
TVS SCS has a well-diversified geographic footprint, with ~70% of revenues from international operations and ~30% domestic. While this global presence creates forex exposure, it also provides resilience and scale advantages.
India’s ISCS market remains nascent with manufacturers still reluctant to outsource extensively. As outsourcing adoption grows, TVS SCS, with its early-mover advantage, is well positioned to capture share.
Financial Profile
Revenue and Growth:
- FY20: ₹66.1 bn to FY23: ₹102.4 bn (11% CAGR, despite global headwinds).
- FY24 and FY25 saw some degrowth due to sharp declines in freight rates.
Profitability:
- Despite revenues exceeding ₹10,000 crore annually in recent years, profitability has lagged. Losses persisted until FY23, when TVS SCS posted ₹41 crore profit (aided by Other Income).
Leverage and Debt Repayment:
- Historically, growth was fueled by debt and acquisitions (~20 acquired businesses globally).
- IPO proceeds were used to repay long-term borrowings and pare down working capital debt.
- Interest outgo expected to reduce from ~₹200 crore levels to ~₹150 crore in FY25 and ~₹135 crore by FY26, directly improving net profitability.
Working Capital:
- Working capital days have been tightly managed (~35 days of sales; ~20 days in FY22–24).
- Further initiatives could reduce this, enhancing returns on capital.
Cash Flow:
- Operating cash flow conversion has appeared strong but partly due to factoring of receivables.
- With debt reduction, reliance on factoring should decline, leading to more sustainable CFO/EBITDA ratios going forward.
Strategic Phases
TVS SCS’s journey can be broken into three phases:
- Expansion (FY05–20): Aggressive global growth via 20+ acquisitions across Europe, UK, US, and Asia-Pacific. Built scale, capabilities, and customer base.
- Consolidation (FY20–22): Focused on integrating acquisitions, streamlining operations, stabilizing financials.
- Renewed Growth (FY22–present): Returned to topline growth, deleveraging balance sheet, pivoting to higher-margin ISCS.
Improving Return Ratios
Management expects RoCE to rise from ~4.8% currently to 16.4% by FY27, supported by:
- Margin expansion (ISCS growth, operating leverage).
- Reduced finance costs (lower debt).
- Improved working capital cycle.
Similarly, ROIC should improve given the asset-light model and minimal incremental capex needs (capex typically ~1–1.5% of revenues).
Risks and Challenges
- Forex and Global Exposure: With 70% of revenues overseas, results are sensitive to currency fluctuations. Borrowings in GBP and USD add risk.
- Freight Rate Volatility: Transportation costs form a significant expense; inability to pass on cost increases can pressure margins.
- Macroeconomic Risks: Global trade cycles, wars (Ukraine, Middle East), Brexit, and supply chain disruptions can directly impact performance.
- Customer Concentration: Dependence on a few large clients is a risk; contract losses could materially impact revenues.
- Technology Execution: Heavy reliance on digital platforms means lagging in tech upgrades could disrupt operations.
- Working Capital Management: Rapid growth requires substantial WC. Past dependence on factoring highlights the risk of liquidity strain.
Conclusion
TVS Supply Chain Solutions is at a turning point. The company has:
- A strong heritage under the TVS Group.
- Global scale with 6,900+ customers and presence across 26 countries.
- Early mover advantage in India’s integrated supply chain outsourcing market.
- A tech enabled, asset light business model.
- Ongoing deleveraging and margin expansion that could transform financial performance.
Despite weak profitability in the past, the roadmap ahead is clearer. With ISCS growth, improving returns, and disciplined capital allocation, TVS SCS could evolve from a low ROE “wallflower” into a meaningful wealth creator.
It is not without risks, global cyclicality, forex swings, and execution challenges remain. But as often seen, the biggest opportunities lie not in today’s flawless compounders but in tomorrow’s turnarounds.
For investors willing to look beyond short-term volatility, TVS SCS represents one such story.