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Gati: Margin pressure - Views on News from Equitymaster
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Gati: Margin pressure
Aug 4, 2007

Performance summary
  • Consolidated revenues for the fiscal (June end) grows by 24% YoY.

  • Operating margins contract by 60 basis points to 7.6%, mainly on account of startup cost incurred on foreign subsidiaries.

  • Increase in depreciation along with contraction in margins leads to a relatively lower 12% YoY growth in the bottomline.

Note: Gati has demerged its fuel station business into separate subsidiary; standalone numbers are therefore not comparable.

Standalone numbers Consolidated
Particulars (Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change FY06 FY07 Change
Net Sales 1,241 1,220 -1.7% 4,561 4,574 0.3% 4,599 5,680 23.5%
Expenditure 1,148 1,070 -6.8% 4,174 4,092 -2.0% 4,221 5,246 24.3%
Operating Profit (EBIDTA) 93 150 61.9% 387 482 24.4% 378 434 14.8%
EBITDA margin (%) 7.5% 12.3%   8.5% 10.5%   8.2% 7.6%  
Other income 9 22 131.2% 16 37 128.8% 25 42 66.8%
Interest 9 15 79.1% 42 58 36.7% 51 59 15.1%
Depreciation 31 31 0.0% 87 111 28.3% 87 112 28.9%
Profit before tax 63 126 100.3% 275 350 27.4% 265 305 15.0%
Extraordinary items - -   - (30)   - -  
Tax 20 26 29.1% 74 87 17.1% 74 90 21.6%
Net profit 43 100 133.4% 201 234 16.4% 191 215 12.4%
Net profit margin (%) 3.4% 8.2%   4.4% 5.1%   4.2% 3.8%  
Effective tax rate 31.7% 20.5%   26.9% 24.7%   27.9% 29.5%  
No. of Shares (m)       72.4 72.4   72.4 72.4  
Diluted earnings per share (Rs)*       2.8 3.2   2.6 3.0  
Price to earnings ratio (x)*       37.9 32.5   39.8 35.4  

What is the company’s business?
Incorporated in 1995, Gati is India’s largest express distribution company. It provides integrated logistics services, offering end-to-end multimodal solutions through air, rail, surface and sea. Gati generates its revenues from three segments, namely, express distribution & supply chain (71%), coast to coast shipping (11%) and fuel stations (17%). Express distribution and supply chain (EDSC) business comprises of surface cargo movement (express), priority service (air-multimodal), supply chain solutions, courier (ZIPP), trucking solutions and international services. In the coast-to-coast shipping (C2C) business, Gati operates five container vessels (3 owned and 2 in-chartered) on the Chennai-Port Blair-Yangon sector. Besides, the company owns and operates four fuel stations spread over three states. The fuel business has been transferred to four wholly owned subsidiaries and is expected to be disposed off in the near future.

What has driven the performance in 1QFY08?
Topline growth in line with expectations: Gati has reported a 24% YoY growth in consolidated revenues for the fiscal, against our estimates of 25% YoY growth. As can be seen in the table below, the ESDC business grew by 23% YoY, followed by a 30% YoY growth in the shipping business. The fuel station business, which has been transferred to a separate subsidiary, grew by 21 YoY. The company has planned a capital expenditure of Rs 4,500 m, to be invested over the next three years. A significant portion of this investment will be towards expanding warehouse capacity. Currently, Gati has 1 m sq. ft. of warehouse space, which it plans to double by FY09. The expansion entails the development of 25 new warehouses at various locations across India. Though the contribution of warehouse business to the overall revenues is insignificant at 1%, the proposed expansion will have a considerable impact on company’s express distribution business.

Segmental performance (consolidated)
(Rs m) FY06 FY07 Change
Express distribution & supply chain (EDSC)
Revenue 3,294 4,059 23.2%
% share 71.6% 71.4%  
PBIT 308 406 31.6%
PBIT margin 9.4% 10.0%  
Coast to coast shipping (C2C)
Revenue 491 636 29.5%
% share 10.7% 11.2%  
PBIT 94 102 8.8%
PBIT margin 19.1% 16.1%  
Fuel Station
Revenue 815 989 21.4%
% share 17.7% 17.4%  
PBIT 8 11 42.9%
PBIT margin 0.9% 1.1%  
Total
Revenue 23.6%
PBIT 26.6%
PBIT margin 8.9% 9.1%  

Margin contraction impacts operating profits: Gati witnessed a 60 basis points contraction in operating margins in FY07. As a result, operating profits grew by mere 15% YoY as compared to a 24% YoY increase in topline. The contraction in margins is attributable to the start-up cost relating to its foreign subsidiaries and dry-docking cost of its container ships. PBIT margins for the shipping business stood at 16.1% in FY07, against 19.1% in the previous year. On the other hand, express distribution business witnessed 60 basis points expansion in PBIT margins.

Higher depreciation and interest cost roils bottomline: Despite an increase of 67% YoY in other income, Gati reported a 12% YoY increase in bottomline. This was mainly due to increase in depreciation expenses and a contraction in operating margins.

What to expect?
At the current price of Rs 105, the stock is trading at 18 times our estimated FY10 earnings. Though we expect Gati to post strong performance in the coming years, we believe that the same has been factored in the current market price. We stick to our ‘SELL’ recommendation on the stock.

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