Gati reaches Rs 86…..we reach target…what now?

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

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%
 

  MARKET CAP OF BELOW RS 500 CRORES AND A PRICE TO BOOK VALUE OF UNDER 2 

 
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
 

As on September 30,2009

Group

No of Shareholders

No of Shares

% of Total Shares

Promoters

8

41758918

49.2

Public

35208

43117132

50.8

 

35216

84876050

100

On a Fully Diluted basis on Conversion of Warrants,ESOS and FCCBs too the Shareholding will remain under 11 crore nos of shares=> Equity of under Rs 22 crs…currently it is Rs 16.98 crs

 

PROMOTER GROUP…. as on September 30,2009

Shareholder

No of Shares

% of Total Equity

%  Pledged

TCI Finance Ltd

13324350

15.70

91.31

Mahendra Investment Advisors Ltd

9932760

11.70

75.76

Mahendra Agarwal

2071690

2.44

67.58

Other  Five

16430118

19.36

Most

 

41758918

49.20

Most

There is a preferential allotment coming up of  10232400 Warrants to Mahendra Agarwal …These will have an option for conversion into Equity Shares within 18 months at a Price of Rs 81 (4872000) and Rs 58 (5360400) raising the Promoter Group Stake to past 54% 

 

PUBLIC SHAREHOLDING…as on September 30,2009

Shareholder

No of Shares

% of Total Equity

The Infrastructure Fund of India LLC

10477120

12.34

Somerset Emerging Opportunities Fund

1493500

1.76

Fidelity India Speciality Situations Fund

1168630

1.38

Others

29977882

35.32

 

43117132

50.80

 

DISTRIBUTION OF SHAREHOLDING…..as on June 30,2009

No of Shares Held

No of Shareholders

% of Total Shareholders

Aggregate Shares Held

% of Total Shares

upto 5000

31561

98.65

5529234

6.51

over 100000

40

0.13

75759653

89.26

5001 to 100000

390

1.22

3587163

4.23

 

31991

100

84876050

100

This 89%+ shareholding of 40 shareholders has remained at this level past few years indicating that there are less than One crore shares in floating stock

 

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       

CONSOLIDATED FINANCIALS OVER THE YEARS IN RS CRS

Head

FY 2005

FY 2006

FY 2007

FY 2008

FY 2009

Total Income

361.27

461.52

572.14

741.15

802.96

EBIDTA

27.61

39.46

47.55

72.89

62.20

Interest

4.73

4.22

5.87

11.33

36.56

Depreciation

7.3

8.68

11.21

18.55

26.38

Profit before Tax

15.59

26.56

30.47

43.02

(0.74)

Profit after Tax

14.49

19.17

21.43

19.78

(18.67)

 

 

 

 

 

 

Cash Profit

21.79

27.85

32.64

38.33

7.72

 

 

 

 

 

 

EPS

4.72

3.75

4.21

1.17

(2.21)

 

 

 

 

 

 

EBIDTA  %

7.64

8.55

8.31

9.83

7.75

PAT %

4.04

4.17

3.77

2.76

(2.36)

 

 

 

 

 

 

Equity

4.18

14.17

14.47

16.93

16.98

Reserves

42.25

137.40

153.24

273.57

246.25

NETWORTH

46.43

151.57

167.71

290.50

263.22

 

 

 

 

 

 

Loan Funds

63.89

71.93

190.17

236.18

476.77

TOTAL CAPITAL EMPLOYED

110.32

223.50

357.88

526.68

739.99

Gross Block

94.33

139.13

201.33

324.37

537.24

Net Block

77.67

143.47

226.10

318.80

481.63

 

 

 

 

 

 

Market Cap/Net Worth

 

 

 

 

1.87

Debt/Equity

1.38

0.47

1.13

0.81

1.88

 

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

GATI v/s BLUE DART (Standalone in Rs Crs)

Head

GATI

BLUE DART

Equity

16.98 (FV Rs 2)

23.76 (FV Rs 10)

Reserves

258.01

368.11

Networth

274.99

391.87

Book Value in Rs

32.40

165.15

 

 

 

Loans

470.11

Net Block

433.07

173.18

 

 

 

Share Price in Rs

58

634

Market Cap

492

1506

 

 

 

 Sales

630

979

 Net Profit

(15)

77

EPS in Rs

32

P/E

20

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     read more