GATI Delivering Express Returns

Mr. Sanjeev Jain, Director- Finance, Gati Ltd.

The logistics sector is closely related to GDP growth and trade growth. With the Indian economy in a tepid phase over the past few quarters, the scenario has remained challenging for the logistics players too. Declining trade activities, especially in a scenario when exports also took a nosedive, resulted in organised players witnessing pressure on margins and slower topline growth. The rise in fuel prices added to the stress. As a result, the stocks of leading logistics companies saw a significant decline on the bourses.

Now, optimism is back on the street and the macroeconomic scenario is also likely to change. Apart from the change in the domestic macro situation, even the global economic environment has started to show some momentum. Traction is being seen in the leading logistics stocks, with the stock of supply chain major Gati registering the biggest move.

Along with the larger changes, there are quite few developments expected at the micro levels as well. We got some details on this from our conversation with Sanjeev Jain (Director – Finance, Gati) about the strategy the company is seeking to adopt going ahead. In this context, let us take a look at the company’s business interests and how it is faring in regard to each of these. 

Understanding The Business

Express Delivery – Gaining Synergy Benefits

Gati’s business can be segregated into four main segments. First is its joint venture with KWE known as Gati-Kintetsu Private Limited (Gati-KWE). This segment has an intrinsic network that spans the length and breadth of India. GATI-KWE has a reach of 99.3 per cent, covering 657 out of 660 districts in India. It has a large fleet of 4500 vehicles, of which it owns 400 and the rest are on long-term lease. Today, GATI-KWE is the most preferred express distribution and supply chain solutions provider on account of its ability to handle the distribution needs of its customers.

The JV started three years ago when KWE bought 30 per cent stake at Rs 268 crore and Gati holds the 70 per cent. This is the flagship business of the company and contributes around 75 per cent to its revenues. The performance of the segment for the first quarter of FY14 has been quite good (company follows a June year ending), with the company crossing the Rs 250 crore mark. It registered 4.5 per cent sequential growth and 20 per cent growth on a yearly basis. The Director said here, “The second quarter performance of the company has also been good, and the revenue growth for the first half is around 17 per cent”. He further added that, “We are expecting the business segment to attain better growth in the second half of FY14 also, with EBITDA margins of around 10 per cent”.

Gati-KWE has a debt of around Rs 189 crore on its books. With the economy in a turnaround, we also see it to sustain revenue growth going ahead. However, we are quite skeptical about its margins in the backdrop of higher fuel prices. If the company manages to pass-through the costs, the margins may be sustained. Apart from that, it expects to get the benefits of its synergy with KWE from the next quarter onwards.

E-commerce - Best In Class

Under its standalone businesses, Gati has the E-commerce segment, which is also one of the fastest growing segments. The company is into the business of package delivery systems for online retail players. Except for Flipkart, all other online retailers are on the company’s client list. It specialises in on-time delivery, and specifically in the Cash on Delivery (COD) system. The management sees the highest growth here. Jain told us, “We are expecting this segment to see more than 100 per cent growth and sustained EBITDA margins”. The company posted a topline of Rs 12 crore in FY12, Rs 25 crore in FY13, and expects to see a figure of Rs 70-75 crore for FY14.

When asked about the sustainability of the business, the management clarified that the online shopping market is expected to growth at significant pace, and Gati has a first mover advantage therein. With its specialisation in COD and hardly any competition in the field, we also believe that the growth rate is sustainable. The opening of FDI in E-commerce for the business-to-consumer segment would be an additional growth driver. The company also has a freight and forwarding segment under its standalone business, but the margins here are as low as 1.5 per cent and the debt is to the tune of Rs 198-200 crore.
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Cold Chain – Increasing Its Spread

As stated by the government, the non-availability of cold storage systems is one of the prime reasons of inflation in the Indian markets. Gati is making a good amount of progress in providing cold storage systems through its venture ‘Gati Kausar’. This business is an undisputed leader in the industry, specialising in fast and reliable solutions in cold chain logistics. It provides customised temperature-sensitive services for the consumer foods, pharmaceuticals, retail and agri-foods sectors. 

The company is planning to divest some of its stake in this business for further infusion of funds. The management is planning a good amount of investment in the next one year’s time. “We are in advance talks with many players and divestment may occur soon”, Jain told DSIJ. The expansion would be a combination of debt and equity. The company would also be commencing operations of two cold storage warehouses soon, he added. “We have identified the location. This is near Gurgaon, and we are in discussions with multiple partners who are helping us on the real estate and the technology side. We are talking to a large private equity firm which creates such warehouses and gives them on lease. Those discussions are at an advanced stage. Our first cold chain warehouse should be completed in the next two quarters. Our investment plans are also on, and the discussions for growth capital are at an advanced stage. Here, the management is expecting a topline of Rs 55-60 crore and the EBITDA margins are estimated at 14 per cent.

Shipping – Looking To Jettison

With the shipping cycle being in downward trend, this segment of the company has been making losses and has been a drag on its consolidated revenues. As a result, Gati has scaled down its shipping operations and has also sold two ships. It now has only two vessels named Pride and Majestic. Majestic is being run in partnership with International Shipping and Logistics (a Tata Group company) on the west coast of India (Kandla-Cochin) and the second vessel, Pride, is being run on its traditional sector (Chennai-Port Blair).

For the September 2013 quarter, the income from this business stood to the tune of Rs. 8.7 crore, with a negative EBITDA of around Rs 1 crore and a total loss of Rs 4.7 crore at the PBT level. While there is growth in the income to the extent of over 100 per cent on a Quarter-on-Quarter basis and 35 per cent on a Year-on-Year basis, the company is still incurring losses overall. The management is looking for a divestment or may exit this business completely, though there are no details on this as yet.

Import & Export – The Next Big Thing

One emerging segment for the company is Gati Import and Export. Here, the company manages the import and export requirements of the Taj Group of Hotels (except in south India). The management is quite confident of scaling up this segment and adding strongly to its clientele. As of now, the business is in a nascent stage, and it would be too early to comment on the same.

Financial Performance

Gati posted a topline of Rs 1274 crore and a bottomline of Rs 100 crore for FY13 on a consolidated basis. For FY14, the management is expecting growth of around 16-18 per cent. This would take the topline for the fiscal to Rs 1500 crore and the EBITDA to around Rs 125-130 crore. As regards the debt repayment, the company has a total liability of Rs 389 crore. Of this, it has an immediate liability of Rs 75 crore in the next one year, but with good cash flows, this would not affect the company’s performance. Therefore, Gati has no repayment pressures in the near future.

Considering all the factors, the scrip seems to be a good buy with a one-year horizon. At the current levels, the CMP discounts its trailing four quarter earnings by 16x. With the second half of the fiscal expected to be positive due to the changes in the economic cycle, FDI benefits expected to seep in and growth in its cold chain segment, we expect good scope for the scrip to see an up-move. We recommend a ‘buy’ on the counter, with a target price of Rs 65 in the next one year’s time.