In December 2009 I had recommended Gati at Rs 58 as a SS 2 Scriptech Stock Select with a target of Rs 80 inside Twelve Months…..Gati closed today at Rs 86 + achieving near 50% absolute returns inside eight months…what now?…….Significantly above average volumes indicate there is steam yet ahead and a price of Rs 100 is possible in the short term
However selling,even partially, can be considered in two situations
- Need to reduce Equity Component in a Portfolio Rebalancing Exercise
- Need to be Prudent and realise Profits
So you can get a sense and feel of Gati and why we had recommended it and draw your own inferences on the path ahead for it,I have reproduced below a comprehensive extraction from our Gati Recommendation Template emailed to Clients in December 2009….we yet continue to have exposure in Gati
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A SCRIPTECH SPARKLE (SS 2) SELECT
G A T I
AT RS 58 (FV RS 2)
A LOGISTIC PLAY WITH A FIRST TARGET OF RS 80 IN 2010
PROMOTER GROUP INCREASING STAKE FROM 49% TO 54%
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MARKET CAP OF BELOW RS 500 CRORES AND A PRICE TO BOOK VALUE OF UNDER 2
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PEDIGREE
This Secunderabad Company has an impressive Board of Directors…K L Chugh (ex ITC) chairs the Board that has the likes of Dr Ram Tarneja (ex Bennet & Coleman -Times of India),Sunil Alagh (ex Brittania) and N Srinivasan (ex Fraser & Ross) .This is commendable in these times where Corporate Governance is in intense focus and Independent Directors of repute are at a premium
Mahendra Kumar Agarwal is the Managing Director and CEO and will be increasing his stake in the Company through a preferential allotment of Equity Warrants
GATI was born twenty years ago in 1989 as a Cargo Management Company in Secuderabad and now has Eight Domestic Subsidiaries and Seven International ones and a strong footprint across India,Asia Pacific and SAARC Countries with ambitions to increase International coverage.
It is a pioneer and leader and a multi-modal player in Express Distribution and Supply Chain Logistics with over 2700 Employees and covering 603 of India’s 611 Districts.It has over 1100 Vehicles on the road,a fleet of refrigerated trucks,six container vessels with 43581 DWT that serve Coast to Coast from Chennai and Two Million Square Feet of World Class Warehousing Facilities all over India
Vehicles cover and aggregate of 3.4 lakh kms per day. Three million packages are delivered every month aggregating 46000 tonnes
GATI acquired Delhi based Kausar India and with it a fleet of 94 refrigerated vehicles with a total capacity of 72000 tonnes.These serve a strong clientele that includes Nestle,Amul and HUL
In the past two decades,GATI has developed strong domain expertise in Transportation Logistics and therefore commands Brand Value….The Platform has been set to take added advantage of the continuing Economic Boom in India
PATTERN OF SHAREHOLDING
PERFORMANCE : FINANCIALS
GATI has had an uninspiring past two years but the future beckons
GATI has a June ending Financial Year and has had a bad FY 2009.For the first time in five years it made a Net Loss and skipped dividend…It recorded a consolidated Loss of Rs 18.67 crs and slipped into the Red.It has blamed Derivative Transaction Losses of Rs 16.88 crs and Freighter Business Discontinuation loss of Rs 18.32 crs for this situation.
It terminated the arrangement with National Aviation Company of India,who invoked a Bank Guarantee of Rs 30 crs and also slapped a claim of Rs 56.72 crs on GATI….GATI has acknowledged only Rs 3.41 crs due to NACIL and therefore shown Rs 26.59 crs ( Rs 30 crs less Rs 3.41 crs) under Loans and Advances in Current Assets.Auditors have qualified their report for this as no provision has been made for this Amount as also for any potential liability that may arise on this dispute.
The Leverage position too has shot up and clearly the Company has been experiencing some Cash Tightness.It has enabling Powers to borrow upto Rs 500 crs and has exhausted this already…so clearly it needs to improve the Debt/Equityby bringing in further Equity or/and reducing Debt…Debt include FCCBs of over Rs 100 crs…but holders may not opt for Conversion at Rs 90 if Share Price remains unfavourable….However with upward momentum expected in the Share Price,we may just see FCCB conversions happening…this itself would deleverage the company back to a 1:1 ratio.Promoter will be subscribing to 10232400 Equity Warrants worth Rs 70.55 crs and will put up Rs 17.64 crs upfront
The Return Ratios on Networth and Total Capital Employed are not too high…in fact over the past five years the Profit has remained relatively flat…no really impressive growth rate…Capital Employed has shot up nearly six fold from Rs 110 crs in FY 2005 to Rs 740 crs in FY 2009 but the Profitabilty has just been uninspiring in the range of Rs 14.50 crs to Rs 21.50 crs
GATI realises the need to scale up in Profitability too…It has initiated serious moves by seeking top external professional advice in this regard to realign and restructure it’s business…daresay such a situation could invite some serious consideration to invite a World Logistic Major who wants to enter or consolidate in India to take a strategic or even an allout buyout equity stake in GATI
Currently Revenue Mix % Contribution on various perspectives is as below
Institutional/Retail Clients : 70/30
Flagship/Subsidiaries : 77/23….subs expected to increase contribution
Standalone Express/Air/Coast to Coast/Others : 58/15/11/16
Q1 FY 10 shows a return to profits,but just marginally so with GATI recording sales of Rs 171 crs and a PAT of Rs 2.27 crs…Margins remain under pressure
PERFORMANCE : SHARE PRICE GATI was roaring in 2006 and 2007 with the Logistics Sector being the Preferred Love of all Investors…FCCB Conversions were set at Rs 125…..then it began purring….forcing conversions to be reset down to Rs 90 Last 52 Week High Low on BSE was Rs 73 (June 5,2009) and Rs 33 (Jan 9,2009).The Current Market Price is Rs 58 giving a Market Cap of Rs 492 crs….so Returns in 2009 have kept pace with the Sensex GATI may abhi GATI aani chahiye….Rs 80 is our first target With realignment and restructuring of business,return to profitability,favourable impact of several strong growth drivers in the coming years,de-leveraging and a strong probability of inviting a World Logistics Major for a financial and operational tie-up and speed up GATI’s endeavour to scaleup significantly in business and profitability,and making Warrants and FCCB conversion options attractive,the share price is likely to cross it’s 52 week BSE High of Rs 73 (June 5,2009) and move strongly towards Rs 80 in 2010 We have rated GATI as an SS 2 Select,indicataing target to be reached inside 12 months PEER COMPARISON
Observe that BLUE DART is debt free…it’s sales are just 50% more than GATI,on a Net Block less than 50% of GATI….but it earned a Net of Rs 77 crs on a Networth of Rs 392 crs…Market rewards it well and it is quoted 20 times earnings at Rs 634 giving a Market Cap of Rs 1506 crs…that’s three times that of GATI….Adjusting for Face Value difference,GATI is just under half the Share price of BLUE DART GATI is returning to profitability and adjusting for the exceptional losses it made in FY 2009,it should soon recover to Rs 20 crs + profits and then move past Rs 30 crs…That’s an EPS of Rs 4 and a 20 Multiple would give us a target Share Price of Rs 80….That’s a simple target setting as most of you love to get one on some valid basis…this is valid enough…..but we are expecting a lot more momentum from GATI as it scales up and realigns the value add business verticals of Supply Chain Logistics and Express…segments where GATI expects 50% and 30% annual growth rates POTENTIAL IN THE LOGISTICS SECTOR There is no argument or debate that the Logistics Sector has a potentially bright future with India to continue experiencing Economic Boom Times for years ahead
GATI IS POISED TO CAPTURE THESE GROWTH OPPORTUNITIES IN THE COMING YEARS
PROBLEMS THAT BRING UP THE RISK
Mahendra Agarwal needs his strong Board of Directors to really guide him more strongly in scaling up operations and more importantly earnings in the years to come
The immediate problem is the Rs 56 crs claim filed by NACIL and the non provision of it that had the auditors qualifying their report…this has legal connotations
Then GATI needs to de-leverage back to 1:1 or even below in 2010 itself…or else Interest burden may get uglier
GATI needs to seriously consider how to scale up Profitability to increase the return ratios and justify the increased Capital being Employed in the Business…It faces strong competition in all segments…Surface Transport,Express,Shipping and Supply Chain Logistics
POTENTIAL OF A TAKEOVER
GATI was in serious negotiations in late 2005 with a World Logistics Major to tie up with it or buy it out…though GATI had denied it…but the negotiations apparently fell through because of valuations
With a current Market Cap of under Rs 500 crs or just over US $ 100 Million and with the Promoters owning nearly half of the equity valued at just over US $ 50 Million,it is unlikely that they will agree to a Valuation at current Market Price of Rs 58 when considering a full buy out by any World Major….They will ask for a much higher price to capture the Intangibles of Brand,Domain Expertise and an experienced workforce
But consider this….What if a strategic Investor is invited at a Price higher than Rs 58 to add value to GATI’s operations….or even better….what if Agarwals are tempted to part with their full stake at a three digit price !…that’s at a 72% premium to the current market price of Rs 58….not really incredulous !
What will happen to the Share Price of GATI if such a situation arises !?…..clearly we’ll reach our first fundamental target of Rs 80 much earlier in 2010….making GATI a de facto SS 1 (Scriptech Spectacular) Scriptech Select Stock !
GATI’s network and operations cannot be replicated overnight…checkout www.gati.com to gauge their Scale of Operations
On June 30,2009,GATI had 31991 shareholders….On September 30,2009 it had 35216 shareholders,an increase of 10%…..with really just around 11 % floating stock of under One Crore shares and an increasing number of shareholders,the Share Price will even get technical momentum as Volumes increase as more and more Investors begin to realise the Potential of GATI…currently the combined BSE and NSE Daily Volumes are just under Two Lakh shares…Expect these to rise along with the share price
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1 thought on “Gati reaches Rs 86…..we reach target…what now?”
i am learning a lot from ur postings.thanks sir