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Gati: Rising costs dent profitability - Views on News from Equitymaster
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Gati: Rising costs dent profitability
Apr 24, 2009

Performance summary
  • During 3QFY09, topline grows at a slower rate of 3% YoY on account of subdued performance reported by express logistics and supply chain business.
  • Higher cost of operation results in a 17% YoY decline in operating profits.
  • At the net level, the company reports loss of Rs 171 m during 3QFY09 on account of poor show at the operating level and higher interest costs and depreciation charges.
  • For 9mFY09, the topline reports decent growth of 17% YoY, while at the net level the company reports loss of Rs 165 m.


Financial performance snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 1,464 1,510 3.2% 3,980 4,657 17.0%
Expenditure 1,350 1,416 4.9% 3,627 4,350 19.9%
Operating profit (EBITDA) 114 94 -17.1% 352 307 -12.9%
EBITDA margin 7.8% 6.3%   8.9% 6.6%  
Other income 3 38 1353.8% 16 63 289.4%
Interest 36 84 134.4% 70 215 205.8%
Depreciation 33 51 56.9% 95 142 50.1%
Profit before tax/(loss) 48 (3)   204 12 -93.9%
Exceptional item (8) (166)   71 (169)  
Tax 8 2 -77.2% 52 9 -83.3%
Profit after tax/(loss) 32 (171)   222 (165)  
Net margin 2.2% -11.3%   5.6% -3.5%  
No of shares (m)       81 83  
Diluted EPS (Rs)*         (1.8)  
P/E (times)         -  
*trailing twelve month earnings

What has driven performance in 3QFY09?
  • During 3QFY09, Gati reported subdued growth of 3.2% YoY in the topline on account of poor performance of the express distribution and supply chain business that contributes 80% to the overall revenues of the company. While express distribution and supply chain business reported 2.2%YoY decline in revenues, coast to coast shipping business grew by 35% YoY during the period under consideration. The slowing economy seems to have affected the company’s growth prospects.

    Cost break up
    (as a % of sales) 3QFY08 3QFY09 9mFY08 9mFY09
    Operating expenses 67.1% 67.4% 65.6% 69.0%
    Staff cost 11.2% 12.6% 12.6% 12.5%
    Administrative expenses 12.4% 11.3% 11.4% 10.6%
    Repairs and maintenance 1.6% 2.5% 1.5% 1.3%

  • Operating costs grew at a much faster rate than the topline resulting in a 17% YoY decline in operating profits. Barring administrative expenses, all the cost heads moved northwards. Growth in operating expenses could be attributed to higher fuel charges and freight costs. Recessionary trends have impacted overall trade and hence the performance of the company.

  • The freighter business dragged the overall profitability of the company as it reported loss to the tune of Rs 19 m in 3QFY09 and Rs 183 m in 9mFY09. The company exited this business during the quarter as it had been bleeding at the net level on account of load factor issues. The company has terminated its wet lease of five Boeing 737-200 cargo freighters from Air India. However, strategic alliance with Air India will continue as usual without affecting the air cargo movement business.

  • At the PBT level the company reported net loss of Rs 3 m during 3QFY09, while at the net level the loss was higher at Rs 171 m. The loss at the net level was on the higher side on account of an exceptional item that represented loss on outstanding derivative transactions.

What to expect?
The prospects of the express industry are primarily dependent on the growth in GDP and world trade. With the Indian economy expected to grow at 6%-8% annually, coupled with an average annual growth rate of 16% in India’s global merchandise trade (Source: Foreign Trade Policy), the Indian express industry is expected to grow at an impressive rate of 20% over the long-term. Gati being one of India’s oldest and largest express distribution company providing end-to-end multi-modal logistics solutions is likely to benefit form the same. However, the medium term prospects of the company have been impacted by the economic slowdown and high cost of fuel. The air freight business was expected to give a fillip to the company’s overall growth, which did not happen, forcing the company to exit the freighter business.

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