>GATI LIMITED

Valuation & Recommendation
We had initiated coverage on the company on 29th May 2012 with a price target of Rs.46 after which the stock touched a high of Rs.45. Post discussion with the management; we have altered interest rate projections in our model for FY13E. Interest burden for FY13E now comes to ~ Rs.44 crore (earlier Rs.25 crore). The company is partly paying the debt and utilizing the rest for working capital needs and up gradation of infrastructure in the express division.

We believe worst is over for the company and we can expect revival in its core business of express distribution. In addition, its loss making shipping business is also expected to get into profits in FY13E. Stock remains subdued due to concerns in the overall economy and Gati’s shipping business which made heavy losses in FY12. We believe any signs of improvement in these two factors should see momentum in the stock price. At CMP, the stock is trading at 10.6x itsFY13E and we remain positive about the prospects of the company.

Company Overview
Gati Ltd is India’s largest express distribution and supply chain (EDSC) company operating through a fleet of more than 4000 vehicles and 64 Distribution Warehouses. Apart from the surface express, the company also operates in the supply chain management, freighter and coast to coast shipping businesses. Recently, Company has formed a Joint venture with a Japanese Company KWE and has transferred its EDSC business and a debt of Rs 330 crs to the JV Company Gati Kinetsu Express Private Limited wherein Gati Ltd. would hold 70% of the holding. KWE would be investing Rs 267 crore in this joint venture.

Gati Ltd enjoys early entrant benefits and is the leader in the express distribution segment which includes movement of goods in the commercial segment catering to the Auto, Consumer Durables, Telecom and Technology sector. Within the EDSC segment, Road transport consists of almost 80% means of business, the rest being equal between Rail and Air. In the rail segment, Gati runs 7 dedicated parcel trains on long term lease from railways.

EDSC is the core business of the company and historically has grown at a CAGR of 20-25% yearly. However, with the slowing economy the growth of this segment was lower at ~ 9% in FY12. However, with synergies with KWE JV unfolding and addition of focus on the SME sector as well, the company expects this division to grow over a CAGR of 15% during FY12-FY15 period. Moreover, the company expects implementation of GST and Postal Bill to boost the logistics industry.

Kausar India (cold chain division which was acquired in 2007) grew by 33% in FY12 to Rs.40 crore. Company has plans to expand the fleet size from the current 162 to 350 by 2015. Cold Chain industry is estimated to be growing at a CAGR of 20-25% and is receiving sector friendly policies from the government.

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