Equity Research INDIA

February 8, 2022
BSE Sensex: 57621
Gati BUY
ICICI Securities Limited Maintain
is the author and
distributor of this report Several levers for margin expansion in
express business yet to play out Rs192
Q3FY22 results concall
Management continues to reiterate its EBIDTA guidance of ~12% in the express
update
business, which is the core focus of the company. Gati has ~16% market share in
Logistics the organised express logistics business. It continues to revamp the business
through a strategic plan, GATI 2.0, which includes: i) digitisation, ii) sales
Target price Rs288 acceleration, iii) infrastructure, iv) operations, and v) talent. Management has
identified the key pillars for sustainable/profitable growth, of which ‘sales
Shareholding pattern acceleration’ and infrastructure’ are key (according to us). The actions taken, under
Jun Sep Dec the new management team, to stem past 7-8 years of market share loss appear
’21 ’21 ’21
Promoters 52.2 51.9 51.8
promising. We concur with the management vision of ~3x revenue growth with
Institutional improved margin profile over the next three years. This will potentially allow
investors 2.7 4.0 5.5
MFs and others 0.0 0.0 0.0 expansion of profitability, earnings as well as valuation multiples over FY22E-
FI/Banks 0.1 0.2 0.1 FY24E. Maintain BUY.
FIIs 2.6 3.8 5.5
Others 45.1 44.1 42.7
Source: NSE  Transformation programme and strategic direction to boost revenues ~3x and
improve margins. Management highlighted the key pillars of Gati 2.0: i) digitisation,
Price chart ii) sales acceleration, iii) infrastructure, iv) operations, and v) talent. ‘Sales
250 acceleration’ and ‘infrastructure’ excite us. Under the ‘sales acceleration’ programme,
200
territorial mapping has been implemented and the company has identified 30 new
150
territories across three zones for market entry, with particular focus on MSMEs. There
has been realignment of teams on the basis of new territories. Thus, Gati has adopted
(Rs)

100
new centralisation model through a territory-centric approach vis-a-vis the earlier
50
customer-centric. Several new programmes like ‘customer loyalty’ and ‘customer
0
incentives’ have been chalked out for higher wallet share of existing customers
Feb-19

Feb-20

Feb-21

Feb-22
Aug-19

Aug-20

Aug-21

and faster onboarding of SME customers. Under ‘infrastructure,’ Farukhnagar

mega hub has been commissioned. With 0.1mn-sqft (though area is not of significance
for surface express), the Farukhnagar hub has showcased faster turnaround with 89
docks simultaneously handling >100 trucks. There are four upcoming hubs (Mumbai,
Nagpur, Indore and Pune) in the west zone and three (Bengaluru, Hyderabad and
Cochin) in the south, which will progressively come up for commissioning by Q2FY24.
 Wide coverage and focus on asset-light model: Gati covers ~99% of the PIN codes
in India with its unique integrated network. Company operates a centralised line
hauling system, which includes 19 express distribution centres, 23 surface
transshipment hubs and 84 distribution warehouses spread across the regions.
Further, the company has a strong network of partners and vendors. Additionally, it is
focused on an asset-light model for its expansions, hence capex requirement will be
very low.
Market Cap Rs23.6bn/US$316mn Year to Mar FY21 FY22E FY23E FY24E
Reuters/Bloomberg GATI.BO/GTIC IN Revenue (Rs mn) 13,142 15,378 19,109 22,988
Shares Outstanding (mn) 123.0 EBITDA(Rs mn) 271 738 1,703 2,360
Research Analysts: 52-week Range (Rs) 217/89 Net Income (Rs mn) (2,429) 184 767 1,179
Free Float (%) 48.2 EPS (Rs) (19.9) 1.4 5.9 9.6
Abhijit Mitra
[email protected] FII (%) 5.5 P/E (x) (10.3) 145.9 35.0 21.5
+9122 6807 7289 Daily Volume (US$/'000) 3,136 EV/E (x) 100.7 36.1 15.3 10.6
Mohit Lohia Absolute Return 3m (%) 22.5 RoCE (%) 0.3 3.7 9.8 13.6
[email protected] Absolute Return 12m (%) 100.8 Adjusted RoCE (%) 1.3 13.8 35.2 46.7
+91 22 6807 7510
Sensex Return 3m (%) (4.0) RoE (%) (46.3) 3.3 11.4 14.1
Pritish Urumkar
[email protected] Sensex Return 12m (%) 14.8 Adjusted RoE (%) NM 19.4 44.7 40.7
+91 22 6807 7314
Please refer to important disclosures at the end of this report
 Gati, February 8, 2022 ICICI Securities
 MSME and retail-focused growth: Currently, key enterprises account for ~58% of
the overall revenues. Going forward, management plans nearly 50% contribution
from key enterprise accounts, 30% from MSME and remaining 20% from retail.
Further, management highlighted the growth will come from: 1) shift to organised
from unorganised players, and 2) market-driven growth.
 Price hike expected in Feb’22: Management mentioned the company will increase
freight rates across services in Feb’22, which will help improve realisation and
margins.

Table 1: Q3FY22 result review

% Chg % Chg
(Rs mn) Q3FY22 Q3FY21 YoY Q2FY22 QoQ
Revenues 4137.6 4008.4 3.2 3993.8 3.6
Purchases of stock-in-trade 566.3 677.9 (16.5) 609.5 (7.1)
Changes in inventories of finished goods, work-in-
progress and stock-in-trade 8.3 (1.9) 3.1
Operating expense 2648.2 2340.8 13.1 2441.8 8.5
Gross Margins 914.8 991.6 939.4
Gross Margins (%) 22.1 24.7 23.5
Employee benefit 390.3 438.5 (11.0) 407.5 (4.2)
Other Expenses 383.6 307.0 25.0 371.0 3.4
Total Expense 3996.7 3762.3 6.2 3832.9 4.3
EBITDA 140.9 246.1 (42.7) 160.9 NM
Margin (%) 3.4 6.1 4.0
Other Income 22.5 4.5 400.0 19.3 16.6
Interest Expense 57.8 104.2 (44.5) 53.1 8.9
Depreciation 70.3 97.8 (28.1) 71.0 (1.0)
Exceptional 0.0 (206.5) 474.1
PBT 35.3 (157.9) NM 530.2 (93.3)
Tax (15.2) 106.9 NM 66.2 NM
PAT 50.5 (264.8) NM 464.0 (89.1)
Surface Express volumes (te) 262,828 238,805 10.1 258,792 1.6
Surface Express realisation (Rs/te) 12,251 12,269 (0.1) 11,901 2.9
Gat KWE EBITDA/te 761 900 (15.5) 866 (12.1)
Source: Company, I-Sec research

Chart 1: Business mix for Q3FY22; surface express continues to account for
90% of revenues
KEA* +12.9%
SME
Surface Express Revenue

3080 3220
Retail 2850
Client-wise Share

50% 56% 58%

(Rs mn)

27%
22% 22%

23% 22% 21% Mix % 92% 90% 90%

Q3FY21 Q2FY22 Q3FY22 Q3FY21 Q2FY22 Q3FY22

+41.6%
-11.2%
Air Express Revenue

170 150
130 130
SCM Revenue

130
(Rs mn)

120
(Rs mn)

Mix % 3% 4% 5% Mix % 4% 4% 4%
Q3FY21 Q2FY22 Q3FY22 Q3FY21 Q2FY22 Q3FY22

Source: I-Sec research, Company data

* Key Enterprise Accounts

2
 Gati, February 8, 2022 ICICI Securities
Chart 2: Gati Kintetsu (GKEPL) performance – Adjusted EBITDA of Rs200mn
should trend up in coming quarters
Volumes (‘000 te) Revenue (Rs mn)
+10.9% +20.5%

Growth remains the key 250 260 265 2930 3000

3340 3530

focus. With potential 20%

239
2370
178

growth for the organised

sector participants and an
increase in market share Q3FY21 Q4FY21 Q1FY22 Q2FY22 Q3FY22 Q3FY21 Q4FY21 Q1FY22 Q2FY22 Q3FY22

for Gati, management

Adjusted EBITDA* (Rs mn) No. of Employee (Consolidated)
expects significant -9.1%
tailwinds in the express 220 220
3,750
3,583
business.
200 167
206 3,377
140

(10)
Q3FY21 Q4FY21 Q1FY22 Q2FY22 Q3FY22* 31-Mar-21 Reduction 30-Jun-21 Reduction 31-Dec-21
* Adjusted for one-offs

Source: I-Sec research, Company data

Chart 3: Market assessment and key management guidance

Surface + Air + Ecommerce + Contract Logistics

Total Available Market is ~Rs 525bn

Niche Contribution in Logistics Industry Accelerated growth Opportunities

218 Short Term

Rs bn ACHIEVED Maintained
market share in
115 FY21
₹ 51k crore Rs 2460bn
FY25 FY25 20 28

₹ 25k crore Rs1350bn FY20 FY25 Medium Term

FY20 FY20
Air Ground Launchpad
Grow > Market
FY21
+ Industry margins
₹ crore
177

We highlight the key 47

87
69

tenets of ‘sales
Long Term
Total Logistics Express Industry E-commerce B2B (Excluding E-commerce) Attain Market
FY20 FY25 Leadership

acceleration’ and Regional National

‘infrastructure’ in the Management Express contributes 2.5% (approx.) to Indian Logistics Sector.
Market share gains
National players would grow at a faster pace of ~20%
CAGR compared to regional players. Exciting growth in
Logistics sector poised to grow 10-12% CAGR by CY25, mere
roadmap (Gati 2.0) as speak 100 bps market share could double market opportunity for
Express Industry
in growing industry B2C segment however profitable. Growth remains key focus
12

highlighted by the
Source: I-Sec research, Company data
management.

MSME is the key focus Chart 4: Gati 2.0 – roadmap to profitable growth
area for sales
acceleration. Gati has
moved to a territory- DIGITIZATION INFRASTRUCTURE TALENT
centric approach from a Key Focus Areas: Enhance customer Key Focus Areas: Accelerating
experience and operational excellence capacity creation to manage higher Key Focus Areas: Strengthen 2nd level to
loads in most efficient manner. Hub mid-level capabilities through lateral
customer-centric
on front-end. Seamless integration
across various business verticals on modernization and higher automation hiring. Attracting best talent locally and
the back-end globally across all domains

approach before, with

Target: Industry leading turnaround
Target: Offer differentiated value times and improved service levels Target: Decentralized decision making.
Foster entrepreneurial spirits

several new programmes

added services to customer. Adapt
to technology-based decision OPERATIONS across the entity
making SALES ACCELERATION Key Focus Areas: Streamlining and
for customer loyalty (lost Key Focus Areas: Realignment of
sales team structure and targeted
assessing each line item of P&L.
Focused improvement in line-haul and

customer conversion) or
approach towards Key Account delivery costs through transformation
Management, MSME and Retail.
Target: Aim to reduce CPK (cost per
incentive policy for Target: To increase market share &
ensure highest standards of
kg) and profit maximization. Attain
industry level margins

onboarding.
customer service

Source: I-Sec research, Company data

3
 Gati, February 8, 2022 ICICI Securities
Chart 5: Key tenets of the ‘sales acceleration’ strategy
INDIA REGISTERED MSMEs
There are four new “FOCUS PYRAMID” Empowering MSME’s to distribute products pan India
63.3 mn
upcoming hubs in west MSME • Expand Reach and Jurisdiction

zone and (FY23-H1FY24) RETAIL Urban

• Catalyze Time-to Market

and three in the South

49% • Reduce volume of Inventory handled
Rural
STRATEGIC ACCOUNTS 51%
zone (H2FY23-Q1FY24).
• Leverage strong networks of Gati

KEY ACCOUNT MANAGEMENT •

Gati, as was
Outsource Supply Chain Management

communicated by the
Sales Acceleration Strategy - Collective Intelligence
CEO earlier, wants to
achieve 95% TAT Market Identification Market Penetration Lost Customer Conversion Faster Customer On-Boarding Customer Stickiness

performance, hence Territorial mapping implemented

and identified 30 new territories
Centralisation through territory
centric approach vs. earlier
Customer loyalty program which
has led to higher wallet share
Redesign SME incentive policy for
faster on-boarding. Incentives
Detailed product wise potential
& market level understanding

infrastructure is critical to across 3 zones for market entry customer centric approach and reduce customer attrition directly aligned to BDMs. for each customer/market

achieve the target.

Realignment of team basis new Market combing re-conducted Escalation/consequence Digital on-boarding and faster Customize products/offerings
territories for 15 existing markets mechanism providing clarity activation and focus on higher wallet share

17

Source: I-Sec research, Company data

Chart 6: Phased expansion in infrastructure underway

Farukh Nagar Mega Hub
Unmatched connectivity strengthening leadership

Upcoming Hubs

Location Tentative Timeline

“Future Ready” “Gati Nivas”
West Zone
1 lakh + sq.ft. providing economies of scale Quality of life for workers and drivers
Mumbai Q1FY23
Nagpur Q3FY23
Indore Q3FY23
Pune Q2FY24

South Zone
Bangalore Q2FY23
Hyderabad Q3FY23
Cochin Q1FY24
“Improved Turnaround” “Automation”
89 docks simultaneously handling 100+ trucks Ensuring faster loading & unloading

Source: I-Sec research, Company data

4
 Gati, February 8, 2022 ICICI Securities

Valuation methodology and key risks - maintain BUY

We maintain BUY on Gati with a target price of Rs288/share, at 30x FY24E earnings.
We see the potential of a sharp improvement in return ratios as revenues and margins
reach their potential. Currently, goodwill in Gati (from past) is ~Rs4.3bn and the assets
held for sale stand at ~Rs1.8bn. We show the RoCE trajectory in chart-7 adjusting for
the same. Adjusted FY24E RoCE (ex-goodwill and ex assets held for sale) comes
to ~47%. Charts-3&4 below highlight the P/E band charts of peers TCIE (average listed
P/E of 30x, currently trading at ~45x 1-year forward) and BDE (average listed P/E of
68x, currently trading at similar value).

Chart 7: How underlying ratios are expected to improve

RoCE RoCE (Ex Goodwill Ex Assets Held for sale)
50.0 46.7

40.0 35.2

30.0
(%)

20.0 13.8

10.0 6.4
4.0 13.6
1.3 9.8
6.4 -1.9
- 4.0 3.7
0.3
-1.9
-10.0
FY18 FY19 FY20 FY21 FY22E FY23E FY24E
Source: I-Sec research, Bloomberg

Table 2: Peer express valuations (when they were growing)

(x) CY97 CY98 CY99 CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 Average
Fedex
P/E 16.6 26.2 19.1 18.3 17.9 20.8 24.7 25.2 25.2 20.3 18.4 21.1
P/B 2.0 2.8 2.8 2.7 2.5 2.4 2.4 2.8 3.3 3.1 2.9 2.7
EV/EBITDA 4.7 6.1 6.1 6.1 5.8 6.8 6.7 7.8 9.0 7.9 7.5 6.8

UPS CY99 CY00 CY01 CY02 CY03 CY04 CY05 CY06 Average
P/E 42.3 29.1 23.6 28.8 29.9 30.4 25.2 22.0 28.9
P/B 10.3 5.8 6.5 6.7 5.8 5.6 5.0 5.0 6.3
EV/EBITDA 19.3 12.9 11.3 13.3 13.2 13.9 12.4 10.8 13.4

ZTO Express CY16 CY17 CY18 Average

P/E 28.9 23.3 20.8 24.3
P/B 62.2 4.8 5.2 24.1
EV/EBITDA 42.3 19.1 18.2 26.6

CJ Logistics CY94 CY95 CY96 CY13 CY14 CY15 CY16 CY17 CY18 Average
P/E 9.9 8.5 9.7 25.4 67.9 65.0 65.4 53.1 84.4 43.3
P/B 0.8 0.6 0.2 0.8 1.1 1.5 1.5 1.3 1.1 1.0
EV/EBITDA 6.1 6.2 12.8 31.6 19.6 19.1 15.7 14.9 15.8

Nippon Express CY93 CY94 CY95 CY96 Average

P/E 29.2 38.2 38.3 32.1 34.4
P/B 3.9 5.1 4.5 3.6 4.2
EV/EBITDA
Source: I-Sec research; Bloomberg

5
 Gati, February 8, 2022 ICICI Securities
Chart 8: TCI Express P/E band chart Chart 9: Blue Dart Express P/E band chart
PE Average +1 StdDev -1 StdDev PE Average +1 StdDev +1 StdDev
45.0 200.0
180.0
40.0 160.0
140.0
35.0 120.0
100.0
30x
30.0 80.0 68x
60.0
25.0 40.0
20.0
20.0 -

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20

Jan-21

Jan-22
May-19

May-20
Jun-17

Jan-18

Jan-19

Jun-21

Jan-22
Mar-17

Mar-21

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19

Jul-20

Jul-21
Feb-20
Jul-18
Oct-17

Apr-18

Oct-18

Aug-19

Sep-20

Sep-21
Dec-16

Nov-19

Dec-20
Source: I-Sec research; Bloomberg Source: I-Sec research; Bloomberg

Risks to investment thesis

Competition. Delhivery has acquired Spoton as it wants to make a deeper dent in the
express logistics industry. The addressable market that Delhivery has highlighted in its
DRHP has potential of 45% CAGR for organised players between FY21-FY26E. The
addressable market size is also much higher that what is being perceived by the
traditional express logistics players. One reason of difference can be the B2B e-
commerce market, which can attribute scale to the operations of new-age startups
looking for aggressive growth. This is an expanding market and GMV is expected to
reach US$1trn in FY24 (Link) and its transport needs are majorly addressed by
unorganised operators at present. There will be enough opportunities for everyone, in
our view.

Corporate action. The single biggest risk we see can emanate from corporate
restructuring. Gati should be left alone as a separate business to allow value unlocking
and not be merged with Allcargo, in our view. We have asked this question repeatedly
to management in various conference calls and management has been categorical in
its assessment that Gati will be left as a separate business entity. Also, Allcargo is
mindful of the current holding company discount that Gati attracts for Allcargo – as
clarified by Mr. Shashi Kiran Shetty in latest investor interaction. As value unlocking
starts happening in Gati, a revised structure will be thought of – we hope the corporate
action then will be a demerger rather than merger.

The process of acquiring the residual stake in Gati should be accelerated. We do

expect the management to attempt buying out residual stake in Gati KWE and
eventually merge Gati KWE in Gati. The acquisition and merger should happen before
value unlocking. This, nevertheless, can relever the balance sheet.

Board has proposed ESOP to allow suitable incentives to management to ramp

up the express business profitably. This will come up for shareholder approval. We
believe ESOP is a suitable incentivisation scheme for the new onboarded executive
team (CEO and the recruitment he has done, including a new CFO who is expected to
join from 1st Feb’22). Failure to suitably incentivise management can lead to attrition,
especially given the increasing aspirations of new-age startups.

6
Gati, February 8, 2022 ICICI Securities

Financial summary
Table 3: Profit and Loss statement
(Rs mn, year ending Mar 31)
FY20 FY21 FY22E FY23E FY24E
Net Sales 17,117 13,142 15,378 19,109 22,988
Total Revenue 17,117 13,142 15,378 19,109 22,988
Operating Expenses 13,234 9,894 11,375 13,461 16,168
EBITDA 356 271 738 1,703 2,360
% margins 2.1 2.1 4.8 8.9 10.3
Depreciation & Amortisation 437 401 321 298 262
Gross Interest 536 451 176 101 6
Other Income 133 104 111 160 160
Recurring PBT (484) (477) 351 1,464 2,251
Less: Taxes 358 (67) 88 368 567
Minority Int. & Asso. Profit (60) (30) (79) (329) (505)
Net Income (Reported) (783) (2,429) 184 767 1,179
Source: Company data, I-Sec research

Table 4: Balance sheet

(Rs mn, year ending Mar 31)
FY20 FY21 FY22E FY23E FY24E
Assets
Total Current Assets 3,414 2,556 2,803 3,271 3,884
of which cash & cash eqv. 1,264 563 448 354 382
Total Current Liabilities & Provisions 1,943 2,793 2,085 2,489 2,960

Net Current Assets 1,471 (237) 718 782 924

Investments
Net fixed assets (including CWIP) 9,487 5,694 4,722 4,724 4,762
Deferred Tax Asset
Other non-current assets 1,486 3,405 3,405 3,405 3,405
Total Assets 12,444 8,861 8,845 8,911 9,091

Liabilities
Borrowings 3,972 - - - -
Deferred Tax Liability
Advance from customers
Minority Interest 1,035 847 768 440 (66)
Equity Share Capital 244 244 246 246 246
Reserves & Surplus 7,187 5,007 5,367 6,463 8,148
Net Worth 7,431 5,251 5,613 6,709 8,394
Total Liabilities 12,444 8,861 8,845 8,911 9,091
Source: Company data, I-Sec research

Table 5: Cashflow statement

(Rs mn, year ending Mar 31)
FY20 FY21 FY22E FY23E FY24E
Net Profit before tax (484) (477) 351 1,464 2,251
Depreciation 437 401 321 298 262
Working Capital Changes (43) 118 (1,070) (159) (113)
Taxes Paid (266) (78) (88) (368) (567)
Cashflow from Operating Activities 283 489 (421) 1,175 1,680
Capital Commitments (324) (50) 650 (300) (300)
Free Cashflow (41) 440 229 875 1,380
Other investing cashflow (508) 1,397 111 160 160
Cashflow from Investing Activities (832) 1,348 761 (140) (140)
Inc (Dec) in Borrowings 237 (1,221) (1,000) (700) (1,000)
Other financing activities 481 (323) 545 (430) (511)
Cashflow from Financing Activities 718 (1,545) (455) (1,130) (1,511)
Chg. in Cash & Bank balance 169 292 (115) (94) 28
Source: Company data, I-Sec research

7
 Gati, February 8, 2022 ICICI Securities
Table 6: Key ratios
(Year ending Mar 31)
FY20 FY21 FY22E FY23E FY24E
Per Share Data (Rs)
Basic EPS (6.4) (19.9) 1.4 5.9 9.6
Diluted EPS (6.0) (18.5) 1.4 5.8 9.0
Cash EPS (Fully Diluted) (2.4) (15.2) 3.9 8.1 11.1
OCF per share (Fully Diluted) 2.3 4.0 (3.2) 9.0 13.7
Book Value per share (Fully Diluted) 60.9 43.1 42.8 51.2 64.0

Growth YoY (%)

Net Sales (8.1) (22.9) 17.0 24.3 20.3
EBITDA (62.2) (23.9) 171.9 130.7 38.6
PAT (465.9) 191.8 (110.7) 317.4 53.8

Valuation ratios
P/E (18.5) (10.3) 145.9 35.0 21.5
P/CEPS (49.9) (13.5) 53.2 25.3 18.5
P/BV 2.0 4.8 4.8 4.0 3.2
EV / EBITDA 48.3 100.7 36.1 15.3 10.6
EV / FCF 532.1 123.3 19.2 18.6 12.1

Operating Ratios (%)

Raw Material/Sales 77.2 75.3 74.0 70.4 70.3
Other Income / PBT (27.4) (21.8) 31.5 10.9 7.1
Effective Tax Rate (74.0) 13.9 25.2 25.2 25.2
NWC / Total Assets 11.8 (2.7) 8.1 8.8 10.2
Inventory Turnover 13,747.2 25,901.3 29,777.5 35,237.1 42,325.8
Asset Turnover 137.0 148.3 173.9 214.4 252.9
Net D/E Ratio (x) 0.4 0.4 0.2 0.1 (0.0)

Profitability Ratios (%)

Rec. Net Income Margins (4.6) (18.5) 1.2 4.0 5.1
RoCE (1.9) 0.3 3.7 9.8 13.6
RoNW (10.5) (46.3) 3.3 11.4 14.1
EBITDA Margins 2.1 2.1 4.8 8.9 10.3
Source: Company data, I-Sec research

8
Gati, February 8, 2022 ICICI Securities
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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise)
BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

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I/We, Abhijit Mitra, MBA (Finance), BE; Mohit Lohia, CA; Pritish Urumkar: MBATech (Finance) authors and the names subscribed to this report, hereby certify that all of
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