Gati

India Equity Research | Logistics Result Update

GATI INR 128

Steps in the right direction BUY

Gati’s Q2FY08 (June ending) results were below our expectations in terms of revenues and
profitability. However, extraordinary income, representing exchange gain on account of re- January 24, 2008
instatement of the FCCB, boosted the profit numbers. Revenues, at INR 1.3 bn, were down
3.2% Y-o-Y. The company transferred its fuel division to its subsidiary, which contributed Krishnakant Thakur
+91-22-2286 4318
INR 257 mn to the revenues in Q2FY07. Adjusted for the same, revenues grew 18.8% Y-o-Y. krishnakant.thakur@edelcap.com
Net profits, at INR 46.3 mn (adjusted for extraordinary gain of INR 78.6 mn), declined 33% Y-
o-Y. Lower revenue growth is attributed to the fact that one of the vessels (out of current
fleet of three) underwent up-gradation and hence was unavailable for full operations during
the quarter. The company has also undertaken delivery of one more vessel of 8,150 DWT,
which is expected to be fully operational in Q3FY08.

EBITDA for the quarter declined 19.5% Y-o-Y on account of higher expense from air freight
business (INR 50 mn) and higher repair and maintenance charges. Total expenditure
increased 23% Y-o-Y. Performance of express distribution (XPS) was satisfactory with net
revenues growth at 26% Y-o-Y (INR 1.2 bn). However, up-gradation and subsequent
unavailability of one vessel hampered the performance of coast-to-coast division; revenues
for the division declined 28% Y-o-Y, at INR 103 mn.

Further, Gati has incorporated a wholly-owned subsidiary, Gati Skyways, to provide air
freight services. The subsidiary is expected have a fleet of five freighter aircrafts in
association with Air India and run co-branded air cargo and courier services. Its express
distribution centre in Bangalore, with a capacity of 2,50,000 sq. ft., is already operational and Reuters : GATI.BO
is expected to achieve full capacity utilisation by the year end. Other warehouses at Nagpur, Bloomberg : GTIC IN
Hyderabad, Mumbai, Delhi, and Chennai are also expected to be operational in 9-12
months. Market Data
52-week range (INR) : 215 / 80
Positive outlook continues: maintain ‘BUY’
Share in issue (mn) : 75.5
We expect Gati to register consolidated revenues of INR 6.6 bn and INR 8.4 bn, and net M cap (INR bn/USD mn) : 10.0 / 244.0
profit of INR 438 mn and INR 605 mn in FY08E and FY09E, respectively. The growth is Avg. Daily Vol. BSE / NSE (‘000) : 166.9
expected to be fuelled by express distribution and new air cargo service that is expected to
breakeven by Q1FY09E. The stock is trading at a P/E of 28.7x and 20.8x our FY08E and
FY09E earnings, respectively. We maintain our ‘BUY’ recommendation on the stock. Share Holding Pattern (%)
Promoters : 50.0
MFs, FIs & Banks : 1.5
FIIs : 5.9
Others : 42.6

Financials
Year to June Q2FY08 Q2FY07 % change Q1FY08 % change FY07 FY08E
Revenues (INR mn) 1,345 1,390 (3.2) 1,171 15 5,325 6,600
EBITDA (INR mn) 101 126 (19.5) 137 (26.0) 486 824
Net profit (INR mn) 124.9 42.6 193.2 65.4 91.0 239.7 438.0
EPS (INR) 1.3 0.4 193.2 0.7 91.0 2.4 4.5
P/E (x) 45.6 28.7
EV/EBITDA (x) 23.8 16.0
ROAE (%) 14.8 13.4

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Gati

Key highlights

Š Revenue, at INR 1.3 bn, was down 3.2% Y-o-Y, as the company hived off its fuel pump
division. Adjusted for the division, revenues grew 18.8% Y-o-Y. Net profits, at INR 46.3 mn
(adjusted for extra ordinary gains of INR 78.6 mn), declined 33% Y-o-Y.

Š Revenues from the XPS division grew 26% and the margins in the division were stable at
10.5%. Revenues for the shipping division however declined 28% Y-o-Y on account of
non-availability of one vessel (due to up-gradation); margins in the division improved
140bps Y-o-Y, at 18.4%.

Š Gati has taken delivery for one more vessel of 8,150 DWT (existing fleet of 3 vessels), in line
with its expansion plan for the division. This vessel is expected to be fully operational in
Q3FY08 along with the other three vessels.

Š EBITDA for the quarter stood at INR 101 mn; EBITDA margin was at 7.5% as against
11.7% in the previous quarter and 9.1% in Q2FY07. Decline in margin is on account of
additional expenses incurred by the company to the tune of INR 50 mn for air freight
business (lease payment) and higher repair and maintenance costs (28% Y-o-Y increase).

Š Net profit, adjusted for extraordinary gain of INR 78.6 mn, declined 33% Y-o-Y and net
margin stood at 3.4%, as against 3.1% in Q2FY07.

Š Gati Skyways has been incorporated as a wholly-owned subsidiary to carry air freight
business for the company. The division is expected to have a fleet of 5 air freighters in
association with Air India.

Š It has also acquired 73.7% share of Delhi-based Kausar India. The company is engaged in
refrigerated logistics business and registered a turnover of INR 200 mn in FY07.

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Gati

Financial snapshot (INR mn)

Year to June Q2FY08 Q2FY07 % change Q1FY08 % change FY07 FY08E FY09E
Net sales 1345 1390 (3.2) 1171 14.9 5,325 6,600 8,387
Total expenditure 1244 1220 2.0 1034 20.3 4,099 5,776 7,215
- Cost of goods sold 0 258 (100.0) 0 - - -
- Employee 176 143 23.1 164 6.8 579 828 1,035
- Other 1068 819 30.5 869 22.9 3,520 4,948 6,180
EBIDTA 101 126 (19.5) 137 (26.0) 486 824 1,172
Other income 10 5 88.2 4 146.2 38 16 16
Depreciation 31 27 12.8 31 (0.6) 111 168 246
EBIT 80 104 (22.7) 110 (27.0) 413 672 942
Interest (net) 16 18 (12.5) 18 (12.5) 58 72 113
PBT 64 85 (24.9) 91 (30.0) 355 599 829
Taxes 18 16 9.9 26 (31.9) 89 161 223
Adjusted PAT 125 43 193.2 65 91.0 240 438 606
Tax rate (%) 27.7 18.9 28.4 25.0 26.9 26.9

% of sales
- Cost of goods sold - 18.2 - 13.9 - -
- Employee 13.1 9.6 14.0 10.9 12.6 12.3
- Other 79.4 63.1 74.3 66.1 75.0 73.7
Operating profit 7.5 9.1 11.7 9.1 12.5 14.0
Net profit 9.2 3.1 5.6 4.5 6.6 7.2

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Gati

Company Description

Incorporated in 1995, Gati has evolved as a leader in the fast-growing express cargo distribution
business. It provides services across the entire value chain, from traditional point-to-point
transportation to end-to-end integrated logistics and supply chain management. It operates in three
different business segments viz., logistics, coast-to-coast, and fuel stations. Logistics is the
company’s mainstay, contributing 71% to revenues.

Investment Theme

The express industry in India is expected to grow 20-25% in the next few years, driven by robust
economic growth, increased acceptability of outsourcing, and change in regulatory policies. Gati,
being one of the leading players in the Indian organised express industry, is poised to take advantage
of these trends. Currently, the company has 1 mn sq. ft. of warehousing space, which is likely to
double by June 2008. It currently operates three self-owned container vessels with 4811 MT, 6084
MT, and 6779 MT. It has also chartered one ship on the Chennai–Sri Lanka route and is in the
process of purchasing another ship worth USD 13.4 mn, scheduled to be delivered in March 2008.

Key Risks

Key risks to our investment theme include: (a) intense competition from MNCs, which could lead to
lower margins and (b) any impediments to the planned expansion.

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Gati

Financial Statements

Income statement (INR mn)

Year to June FY05 FY06 FY07E FY08E FY09E
Income from operations 3,592 4,561 5,045 6,600 8,387
Direct costs 2,525 3,200 3,259 4,224 5,321
Employee costs 397 490 637 828 1,035
Other expenses 415 484 595 724 858
Total operating expenses 3,337 4,174 4,491 5,776 7,215
EBITDA 255 387 553 824 1,172
Depreciation and amortisation 73 87 134 168 246
EBIT 182 301 419 656 926
Interest expenses 47 42 58 72 113
Other income 21 16 16 16 16
Profit before tax 156 275 377 599 829
Provision for tax 52 74 102 161 223
Reported profit 104 201 276 438 606
Adjusted net profit 104 201 276 438 606
Shares outstanding 98 98 98 98 98
Dividend per share 0.3 0.5 0.7 1.1 1.5
Dividend payout (%) 24.2 24.7 24.7 24.7 24.7

Common size metrics- as % of net revenues

Year to June FY05 FY06 FY07E FY08E FY09E
Operating expenses 92.9 91.5 89.0 87.5 86.0
Depreciation 2.0 1.9 2.7 2.5 2.9
Interest expenditure 1.3 0.9 1.2 1.1 1.4
EBITDA margins 7.1 8.5 11.0 12.5 14.0
Net profit margins 2.9 4.4 5.5 6.6 7.2

Growth metrics (%)

Year to June FY05 FY06 FY07E FY08E FY09E
Revenues 17.3 27.0 10.6 30.8 27.1
EBITDA 35.5 51.7 42.9 48.9 42.2
PBT 76.5 76.2 37.4 58.9 38.3
Net profit 72.7 93.6 37.4 58.9 38.3
EPS 72.7 93.6 37.4 58.9 38.3

Cash flow statement (INR mn)

Year to June FY05 FY06 FY07E FY08E FY09E
Net profit 145 201 276 438 606
Add: Depreciation 73 87 134 168 246
Add: Deferred tax 4 3 36 89 123
Gross cash flow 222 290 445 695 974
Less: Dividends 25 50 68 108 150
Less: Changes in W. C. 25 238 (51) 82 110
Operating cash flow 172 2 428 505 714
Less: Change in investments 25 137 - - -
Less: Capex 136 585 1,150 1,360 2,000
Free cash flow 11 (721) (722) (855) (1,286)

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Gati

Balance sheet (INR mn)

As on 30th June FY05 FY06 FY07E FY08E FY09E
Equity capital 84 142 150 187 187
Reserves & surplus 492 1,444 1,987 4,208 4,664
Shareholders funds 576 1,585 2,137 4,395 4,851
Secured loans 428 417 817 817 1,817
Unsecured loans 210 302 302 302 302
Borrowings 639 719 1,119 1,119 2,119
Sources of funds 1,215 2,305 3,257 5,515 6,971
Gross block 943 1,391 2,541 3,901 5,901
Depreciation 292 373 507 675 921
Net block 652 1,019 2,035 3,227 4,981
Capital work in progress 125 416 416 416 416
Total fixed assets 777 1,435 2,451 3,643 5,397
Investments 42 179 179 179 179
Inventories 11 20 23 29 37
Sundry debtors 420 556 559 732 930
Cash and equivalents 74 134 156 1,229 943
Loans and advances 149 290 319 335 368
Total current assets 654 1,000 1,057 2,325 2,279
Sundry creditors and others 149 177 240 304 382
Provisions 53 73 96 146 197
Total CL & provisions 203 251 336 450 579
Net current assets 451 749 721 1,876 1,700
Net deferred tax (55) (58) (94) (182) (305)
Uses of funds 1,215 2,305 3,257 5,515 6,971
Book value per share (BV) (INR) 6 16 22 45 49

Ratios
Year to June FY05 FY06 FY07E FY08E FY09E
ROE (%) 28.0 18.6 14.8 13.4 13.1
ROCE (%) 18.2 18.0 15.7 15.3 15.1
Current ratio 3.2 4.0 3.1 5.2 3.9
Debtors (days) 43 44 40 40 40
Fixed assets t/o (x) 5.0 4.1 2.6 2.2 1.9
Debt/Equity 1.1 0.5 0.5 0.3 0.4

Valuations parameters
Year to June FY05 FY06 FY07E FY08E FY09E
EPS (INR) 1.1 2.0 2.8 4.5 6.2
Y-o-Y growth (%) 72.7 93.6 37.4 58.9 38.3
CEPS (INR) 21.1 20.3 27.3 32.4 45.5
P/E (x) 121.3 62.7 45.6 28.7 20.8
Price/BV(x) 21.8 7.9 5.9 2.9 2.6
EV/Sales (x) 3.7 2.9 2.6 2.0 1.6
EV/EBITDA (x) 51.5 34.0 23.8 16.0 11.2

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 Gati

Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021, Board: (91-22) 2286 4400, Email: research@edelcap.com
Naresh Kothari Co-Head Institutional Equities naresh.kothari@edelcap.com +91 22 2286 4246

Vikas Khemani Co-Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206

Shriram Iyer Head Research shriram.iyer@edelcap.com +91 22 2286 4256

Coverage group(s) of stocks by primary analyst(s): Logistics:

Allcargo, Concor, Dredging Corp Of India, Gateway Distriparks, Gati, SICAL and Transport Corporation of India

Gati Recent Research

220 Date Company Title Price (INR) Recos

190 02-Nov-07 All Cargo Soft quarter; 919 Buy

Result Update
160
(INR)

130 2-Nov-07 Sical Growth by offshore; 233 Buy

Buy
Buy Logistics Result Update
Buy
100 Buy
22-Oct-07 Gateway Robust volume growth; 134 Buy
70 Distriparks Result Update
Sep-07
Jan-07

Feb-07

Oct-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07

Nov-07
Dec-07
Jan-08

18-Oct-07 Gati Softer quarter; 106 Buy

Result Update

Distribution of Ratings / Market Cap Rating Interpretation

Edelweiss Research Coverage Universe
Rating Expected to
Buy Accumulate Reduce Sell Total
Buy appreciate more than 20% over a 12-month period
Rating Distribution* 108 44 16 3 188
Accumulate appreciate up to 20% over a 12-month period
* 12 stocks under review / 5 rating withheld
Reduce depreciate up to 10% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn

Market Cap (INR) 103 66 19 Sell depreciate more than 10% over a 12-month period

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