Gati: Great run at a price

The rising tide of e-commerce has lifted the fortunes of companies in allied industries, such as logistics. Gati’s revenue from the e-commerce segment increased 164 per cent in 2014-15 and has averaged 125 per cent annual growth in the last four years.

Being among the top five e-logistics players in the country, the company is set to benefit from the robust growth expected in this segment.

Additionally, the introduction of GST and the expected pick-up in GDP growth should help the company.

These factors have boosted Gati’s stock price — it is up over 40 per cent last year and trades at a trailing 12-month earnings multiple of 48 times.

While this is cheaper than its competitor Blue Dart Express (price-earnings multiple of 110 times), Gati’s current valuation is far higher than its three-year average multiple of 20 times.

There are also equity dilution concerns with regard to the company’s foreign currency convertible bonds (FCCBs).

There is an ongoing legal issue with the bondholders who want to convert the debt into equity.

Shareholders can stay invested but avoid fresh exposure to the stock. Business prospects seem quite promising, but the high valuation and possibility of over 30 per cent equity dilution if the FCCBs are converted into equity, could limit any upside.

Gati’s consolidated revenue in 2014-15 increased 14 per cent to ₹1,663 crore. Profit increased 59 per cent to ₹57 crore in the same period, helped by margin improvement.

Growth is expected to continue over the next few years, thanks to its expansion plans and larger share of revenue from high-margin businesses.

Express distribution and supply chain division is the company’s mainstay business, accounting for 80 per cent of its revenue. Gati holds a 70 per cent stake in this venture with Kintetsu World Express.

The subsidiary with a 16 per cent market share has a fleet strength of 4,500 vehicles, warehousing capacity of 2.6 million sq ft and presence in 667 of the 676 districts in the country.

Gati’s management expects this segment to grow 15 per cent annually. Also, cost-saving initiatives are expected to boost operating margins by one percentage point, from the 8-9 per cent levels currently.

The e-commerce segment, with margins of 12-13 per cent, accounts for about 8 per cent of the company’s revenue; this is expected to increase to over 10 per cent within the next two years. The company delivered nearly 70 million packages in 2014-15, with 14 per cent (about 10 million) from e-commerce.

Gati’s daily e-commerce package handling capacity has increased to 40,000 in March 2015 from 30,000 in October 2014; it plans to increase it to 60,000 packages a day by June 2015.

Besides delivery, Gati provides value-added services, such as cash on delivery, packing, reverse logistics and has five e-fulfilment centres.

Dilution concerns

The company’s cold chain solutions segment (Gati Kausar) revenue was flat in 2014-15, at ₹46 crore. However, planned capital investments of ₹250 crore to set up 17-18 warehouses in the next three years should boost earnings; operating margins from this segment are high at around 27 per cent.

Even as profits may improve, there are concerns about fall in per share earnings due to equity dilution. The company has issued FCCBs for $22 million, due for repayment in December 2016. Given the attractive conversion price (₹38.5 a share), the bondholders are opting to convert these bonds into equity.

The matter is under review by the RBI for clarifications on price clauses. If converted, there can be stake dilution of over 30 per cent.

Debt decreased marginally to ₹472 crore as of March 2015 from ₹480 crore a year ago.

The company’s debt-to-equity ratio of 0.6 times is not likely to worsen over the next few years, given the plans to issue equity to fund expansions.

The company raised ₹30 crore from a private equity fund in October 2014 through a stake sale. It has also received approval from its board in January 2015 to raise ₹120 crore to expand its e-commerce business.

Another concern regarding the high share of promoter holdings being pledged — over 94 per cent as of March 2013 — is easing.

However, currently pledged shares are at 49 per cent and this is expected to fall further in the next 18 months.

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