The Hindu Business Line : Gati: Buy

INVESTMENT can be considered in the stock of the cargo movement and logistics player, Gati, which trades at about Rs 335. Any dip in the stock price, linked to broad market movements, can also be used as an opportunity to step up exposure. The stock has moved up sharply in the recent past, a phenomenon seen across a swathe of players in the logistics space.

A few months ago, Gati had tapped the capital market with an attractively-priced rights issue to finance its warehouse expansion plans and support its investments in information technology. In our view, both these initiatives would bolster Gati's prospects to emerge as a player to be reckoned with in the third-party logistics segment.

Among the various players in the logistics space, a comparison between Gati and Blue Dart may be in order, because of the similarity of the services they offer. The Blue Dart stock has also been on a tearing run and, at the current levels, is available at 25 times its expected sustainable per share earnings for FY-06; Gati trades a shade lower, at 20 times its expected EPS for FY-06. Though the valuation levels are not modest, we believe that they are not outlandish either, seen in the context of the growth potential.

Business overview

Gati operates in three segments: Express distribution and supply-chain management (SCM), which accounts for 70 per cent of revenues and contributes in excess of 75 per cent to pre-tax profits; the shipping division, which contributes close to 12 per cent to revenues; and fuel stations, which chip in with the rest.

The express distribution/SCM is Gati's core business, addressing both the domestic and the international markets. Package delivery is accomplished by all modes — road, air (through a tie-up with Indian Airlines) and by sea (serviced by the shipping division). Gati's reach in the domestic market is strong, as it services all but 10 of the 590 districts.

The shipping division has two vessels; Gati operates on the Chennai-Port Blair route and, in the fiscal that ended in June 2005, it extended the service to Yangon in Myanmar. Gati also retails petrol and diesel, apart from motor parts and lubricants, at the fuel stations it operates at five locations, including Bangalore and Hyderabad.

Investment argument

Much like what has happened in the information technology and pharma sectors, where outsourcing has gained currency rapidly, we believe that logistics is well-positioned to capitalise on the outsourcing wave. As companies increasingly focus on their core competencies, Gati, with its comprehensive warehousing facilities and supply-chain offerings, and the attendant benefit of lowering costs for its customer, should present itself as the logistics partner of choice.

Another area that cannot be overlooked is the investment in the infrastructure sector — roads and ports. Projects such as the Golden Quadrilateral and the North-South/East-West corridor should rev up surface transport and Gati can be expected to be a major beneficiary. The upgradation of the port infrastructure should also provide a fillip to the shipping arm.

Gati's business model is relatively insulated from competition from the unorganised sector, which is a force in the document delivery business. Given the skew in the domestic market towards non-documents, Gati's wide reach, investment in information technology and its brand equity would prove formidable entry barriers.

Key user industries of Gati's services such as information technology, banking and financial services and consumer appliances, to name a few, are also quite upbeat. With India's growth rate unlikely to flag in the near term, we expect such trends to sustain.

Another sector that can speed up the logistics industry is organised retail. Growth in retail should inevitably benefit the logistics industry; further, as global retail players aim to increase their outsourcing from India, Gati should find itself in a demand sweet-spot.

Gati is also shoring up its presence in overseas markets to cash in on the India-centric demand originating from there. It already has a presence in the SAARC countries, apart from Singapore and China, through tie-ups/branch offices. It intends to set up offices in Malaysia, Taiwan and Thailand, the last-named of which should throw up some interesting business opportunities, courtesy India's Free Trade Agreement with it.

It is only a matter of time before global logistics players step into the Indian market. DHL is already present through Blue Dart and, if the manner in which the latter's stock has moved consequent to its takeover by the former is any evidence, Gati's stock could see some zing should it decide to be a participant in a consolidation exercise.

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