The Hindu Business Line : GATI: Invest

AN INVESTMENT can be considered in the rights offer of the Hyderabad-based cargo mover and logistics provider, GATI. The rights offer, priced at Rs 54, is at a 75 per cent discount to the prevailing market price of Rs 210.

Object of the issue

The proceeds of the issue are to be utilised for the acquisition of land and associated equipment to set up warehouses, apart from investing in the company's IT requirements. GATI also intends to use part of the funds raised through this issue to repay short-term loans.

Business profile

For the year-ended June 2005, GATI derived 72 per cent of its business from the cargo moving business, 7 per cent from shipping and the rest from fuel retailing.

Operating margins over the past three years have been in the 6-8 per cent range , with an upward bias. Though the fuel retailing business accounts for 20 per cent of sales, its contribution to operating profits is under 3 per cent, as margins in this business are minuscule. The cargo and the shipping business operate at margins of 10 per cent and 9 per cent respectively.

Investment rationale

The cargo moving business is usually made up of two components: Document and non-document business.

The former is more prone to price competition, largely due to the emergence of several players belonging to the unorganised sector and those with a regional focus.

In GATI's case, almost its entire cargo moving business is non-document-based, a domain that is largely unaffected by the unorganised sector by virtue of the investment it entails. A strong presence in this segment is, therefore, a source a comfort.

We have a positive view of the logistics industry, given the pivotal role it plays in bolstering the supply chains of organisations. With time-to-market gaining importance, an efficient supply chain has become a pre-requisite.

With rapid expansion in the retail industry, GATI, in our view, is well-placed to capitalise on the opportunities that open up. Another area that would be a positive for GATI would be the thrust on infrastructure spending, primarily road projects such as the Golden Quadrilateral and the N-S-E-W corridor. Such projects should provide an impetus to surface transport and, GATI, with a large vehicle fleet and an extensive network that covers almost every district in the country, should be a beneficiary.

One must watch out for consolidation in the logistics industry, the beginning of which was marked by DHL's take over of Blue Dart Express. Should GATI also become a participant in a consolidation exercise involving a global major, it could turn out to be positive for shareholders.

Offer details

GATI intends to raise Rs 22.5 crore by offering 41.7 lakh equity shares at Rs 54 per share to existing shareholders in the ratio of one share for every two held.

The issue, which opened on July 18, closes on August 19. IL&FS Investsmart and Karvy Investor Services are the lead managers to the issue.

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