Gati Ltd: Initiating Coverage
Rating: ACCUMLATE Target Price: Rs.332
Investment Rationale
India, with 16% of the global population, prospective strong GDP growth and increasing E-commerce penetration is likely to present huge business opportunity for the logistics sector. This is also apparent from the fact that international giants like UPS & DHL see significant growth in their business being driven by India and China.
Well-geared to capitalize on emerging economy
In India, nearly 40% of the logistics market is unorganized. We expect consolidation in the sector and the share of unorganized sector to reduce further. With a market share of ~16% in surface segment, Gati is all set to emerge as one of the key beneficiaries of the overall GDP and trade growth.
Positive synergies from Kintetsu World Express
KWE caters to supply chain requirements of a wide base of global customers. Indian operations of these customers will be served by Indian JV (Gati-KWE), due to which it has recently signed couple of large Japanese customers like Sharp, Idemitsu, Sony, Pioneer etc. One of the key strategies for KWE is to expand its presence in emerging countries and India is most preferred.
Vast domestic reach to capitalize on E-Commerce Logistics
Gati is one of the largest players in road segment with a pan India network present in 667 districts out of 675 districts. Additionally, it offers Cash on Delivery which is essential for E-commerce service and is offered in more than 10000 pin codes. Moreover, additional services like Gati e-Pack, Gati e-Pick, Gati Reverse Pick-up and warehousing will take its scale of operations to a higher level going ahead.
Broad-based growth to perk up revenues
Opportunities in Gati Kausar & e-Tailing and synergies from KWE will provide a broad based growth across business segments. We expect the E commerce business to lead the earnings growth with ~70% CAGR over FY14-FY17E, followed by Gati Kausar and Gati KWE growing 28% and 27% respectively. Furthermore, growth in high margin business and winding down losses from Gati Ship will propel profitability. The consequent revenue growth is estimated at ~31% CAGR over FY14-FY17E, and likely to be broad-based with all businesses contributing.
Growth in high margin business, buoy return ratios
In Q2FY15 the company has sold its ~30% stake in Gati Kausar for Rs.150 crore. These funds will primarily be utilized to construct 10 cold chain warehouses. Going ahead the company intends to increase the package delivery capacity. Capitalizing on the economies of scale, we expect the company to improve its ROE from 3% to 10% over CY14-17E.
Valuation:
At CMP the stock trades at 26x FY16E earnings of Rs. 10.7 and 19x FY17E earnings of Rs. 15. We recommend a “BUY” with a target price of Rs. 332.