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Gati Ltd
Q1 affected by covid; Turnaround on track
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3R MATRIX + = - Summary
Right Sector (RS) ü Š We retain positive view on Gati with an upside potential of 33-35% considering its strong
earnings growth led by a turnaround and discounted relative valuation.
Right Quality (RQ) ü
Š Q1FY2022 affected by weak demand in April-May 2021. Cost rationalization and de-
Right Valuation (RV) ü leveraging continued in Q1FY2022.
Š The management retained double digit revenue growth and double digit OPM over the
+ Positive = Neutral - Negative next two years. Non-core asset sales to materialize over 4-6 quarters.
Š Management bandwidth strengthened with newly appointed CEO having decadal
experience in the logistics space.
What has changed in 3R MATRIX
Old New Gati Limited (Gati) reported 84% y-o-y rise (27% q-o-q fall) in consolidated revenues for
Q1FY2022, impacted by the second wave of COVID led by restrictions during April-May 2021.
RS  The revenues from the express business (82% revenue share, surface, air and Supply chain
management) grew by 110% y-o-y (-27% q-o-q) at Rs. 237 crore. Revenues from surface (92%
RQ  of express revenues) grew by 120% y-o-y at Rs. 218 crore. The revenues from air express and
SCM stood at Rs. 8 crore (vs Rs. 2 crore/Rs. Crore in Q1FY2021/Q4FY2021) and Rs. 11 crore
RV  (vs Rs. 12 crore each in Q1FY2021 and Q4FY2021) respectively. E-commerce revenues stood
at Rs. 4 crore (vs Rs. 3 crore/Rs. 4 crore in Q1FY2021/Q4FY2021) while fuel station revenues
were at Rs. 51 crore (+28% y-o-y, -28% q-o-q). The consolidated operating profit stood at Rs.
2 lakh versus operating loss of Rs. 27 crore in Q1FY2021 and operating profit of Rs. 7.8 crore
Reco/View Change in Q4FY2021 on account of lower revenues affected by covid second wave. The company
provided for Rs. 13 crore severance fees payable to subsidiary Gati Kausar. Adjusting for the
View: Positive  same, its consolidated net loss stood at Rs. 6 crore versus adjusted net loss of Rs. 24 crore in
Q1FY2021 and adjusted net profit of Rs. 12 crore in Q4FY2021. The company sees near normal
CMP: Rs. 151 operations currently and has maintained its double digit revenue growth guidance along
with OPM reverting to double digit OPM over the next two years. The company appointed Mr.
Upside potential: 33-35%  Pirojshaw Sarkari as CEO from August 9, 2021. Mr. Sarkari had set up the Indian operations
for UPS, which is among the world’s largest logistics companies and is headquartered in
á Upgrade  Maintain â Downgrade
Atlanta, US. He served as its Managing Director and Country Head till 2010, after which he
joined Mahindra Logistics as CEO. The company continues to focus on four pillars 1) Balance
Company details sheet restructuring 2) Debt reduction, 3) Profitability and 4) Digitisation. Gati continued on
cost rationalization measures with the reduction of 153 employees in GKEPL. On digitization,
Market cap: Rs. 1,857 cr 30% of cash collections are now coming through digital payment. It continued deleveraging of
debt by ~Rs 11 Crores in Q1FY22 along with rationalization of interest costs by 10-60 bps. Post
52-week high/low: Rs. 180/42 the Kausar deal consolidated debt is now at Rs 176 Crores. Gati is on a high earnings growth
trajectory for the next 2-3 years, which began post the company’s acquisition by Allcargo
NSE volume: logistics in March 2020. Gati, with a strong foothold in the B2B segment has a strong double-
16.0 lakh
(No of shares) digit growth opportunity going ahead which would be led by market share gains from both
existing players and new customer accounts.
BSE code: 532345
Key positives
NSE code: GATI Š Guidance over next two years retained.
Free float: Š Cost rationalization and debt reductions continues in Q1FY2022.
5.9 cr
(No of shares) Š Management bandwidth strengthened with newly appointed CEO.
Key negatives
Shareholding (%) Š Revenues and OPM affected by weak demand in April-May 2021.
Promoters 52.2 Our Call
Valuation – Retain Positive view & upside potential of 33-35%: We believe Gati is undergoing
FII 1.2 a transformational journey led by a strong new parentage. It has been able to strengthen its
balance sheet, trim down unrelated businesses, exit from non-core assets, rationalise cost
DII 1.5 structure, which would further continue in the next two years. At the same time, we expect
Others 45.1 consolidated profit to disproportionately multiply by FY2024 led by a healthy double-digit
revenue growth and significant expansion in OPM. At CMP, the stock is currently trading
at a P/E of 28x/17x its FY2023E/FY2024E EPS, at a discount to most of its peers. We expect
Price chart valuation multiple gap vis-à-vis peers to narrow down as Gati ramps ups topline and operational
180
efficiencies. Hence, we retain our positive view on the stock with an upside potential of 33-35%.
Key risk
140
Sustained weak macro-economic environment can lead to a downward revision in net earnings.
100

60
Valuation (Consolidated) Rs cr
Particulars FY21 FY22E FY23E FY24E
20
Revenue 1,314.2 1,403.8 1,559.3 1,755.1
Dec-20
Aug-20

Aug-21
Apr-21

OPM (%) 2.1 7.4 9.1 10.8

Adjusted PAT (23.0) 29.2 71.3 115.9
Price performance % YoY growth - - 144.4 62.5
Adjusted EPS (Rs.) (1.9) 2.4 5.5 8.9
(%) 1m 3m 6m 12m
P/E (x) - 63.8 27.6 17.0
Absolute -5.3 42.9 64.7 243.6 P/B (x) 3.4 3.1 2.7 2.3
Relative to EV/EBITDA (x) 72.8 19.1 13.9 10.5
-9.2 30.3 59.5 200.4
Sensex RoNW (%) (3.6) 5.3 11.1 15.2
RoCE (%) 2.6 7.2 11.4 15.2
Sharekhan Research, Bloomberg
Source: Company; Sharekhan estimates

August 12, 2021 1

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Revenues and OPM affected by covid second wave: Gati Limited (Gati) reported 84% y-o-y rise (27% q-o-q
fall) in consolidated revenues for Q1FY2022, impacted by the second wave led restrictions during April-May
2021. The revenues from express business (82% revenue share, Surface, air and Supply chain management)
grew by 110% y-o-y (-27% q-o-q) at Rs. 237 crore. Revenues from surface (92% of express revenues) grew by
120% y-o-y at Rs. 218 crore. The revenues from air express and SCM stood at Rs. 8 crore (vs Rs. 2 crore/Rs.
Crore in Q1FY2021/Q4FY2021) and Rs. 11 crore (vs Rs. 12 crore each in Q1FY2021 and Q4FY2021) respectively.
E-commerce revenues stood at Rs. 4 crore (vs Rs. 3 crore/Rs. 4 crore in Q1FY2021/Q4FY2021) while fuel
station revenues were at Rs. 51 crore (+28% y-o-y, -28% q-o-q). The consolidated operating profit stood at Rs.
2 lakh versus operating loss of Rs. 27 crore in Q1FY2021 and operating profit of Rs. 7.8 crore in Q4FY2021 on
account of lower revenues affected by covid second wave. The company provided for Rs. 13 crore severance
fees payable to subsidiary Gati Kausar. Adjusting for the same, its consolidated net loss stood at Rs. 6 crore
versus adjusted net loss of Rs. 24 crore in Q1FY2021 and adjusted net profit of Rs. 12 crore in Q4FY2021.
Turnaround on track; Guidance retained: The company sees near normal operations currently and has
maintained its double digit revenue growth guidance along with OPM reverting to double digit OPM over
the next two years. The company appointed Mr. Pirojshaw Sarkari as CEO from August 9, 2021. Mr. Sarkari
had set up the Indian operations for UPS, which is among the world’s largest logistics companies and is
headquartered in Atlanta, US. He served as its Managing Director and Country Head till 2010, after which he
joined Mahindra Logistics as CEO. The company continues to focus on four pillars 1) Balance sheet restructuring
2) Debt reduction, 3) Profitability and 4) Digitisation. Gati continued on cost rationalization measures with
153 employees reduction in GKEPL. On digitization, 30% of cash collections are now coming through digital
payment. It continued deleveraging of debt by ~Rs 11 Crores in Q1FY22 along with rationalization of interest
costs by 10-60 bps. Post the Kausar deal consolidated debt is now at Rs 176 Crores. Gati is on a high earnings
growth trajectory for the next 2-3 years, which began post the company’s acquisition by Allcargo logistics in
March 2020.
Key Conference call takeaways
Š Focus areas: The management would be focusing on four pillars 1) Balance sheet restructuring, 2) Debt
reduction – further reduction of Rs. 11 crores in Q1FY2022 and Rs. 100 crore from sale of Gati Kausar.
Cost of borrowings reduced to 7.6% for GKEPL and 9.2% for Gati, 3) Profitability – Stringent cost reduction
measures. Expect consistency in margins from Q2FY2022 and 4) Digitisation – Whatsapp Bot Genie
receiving good response. 30% cash collection done through digital mode
Š CEO appointment: Mr. Pirojshaw Sarkari joined Gati as its CEO from August 9, 2021. Mr. Sarkari had
set up the Indian operations for UPS, which is among the world’s largest logistics companies and is
headquartered in Atlanta, US. He served as its Managing Director and Country Head till 2010, after which
he joined Mahindra Logistics as CEO.
Š Non-core asset sale: The company expects non-core asset sale to be done over 4-6 quarters.
Š Guidance: The company has maintained double digit revenue growth guidance with OPM reverting to
10.5-11% over the next two years.
Š Industry growth: The logistics industry is expected to grow at 10% CAGR over next 3-5 years while express
segment is expected to grow at faster rate.
Š Gross margins: The company’s gross margins stood at 23.6% vs 25.4% in Q4FY2021 due to impact of
weak revenues in May 2021. It would have been 28-30% gross margins in normal time.
Š OPM: Going ahead the OPM expansion would be led by increase in revenues and marginal reduction in
costs.
Š Revenue mix: Express revenues comprised 82% while fuel station comprised 18%. GKEPL express revenues
grew 139% y-o-y to Rs. 237 crore, of which surface revenues (92%) stood at Rs. 218 crore, air (3%) at Rs. 8
crore and SCM (5%) at Rs. 11 crores. The e-commerce revenues for the quarter was Rs. 4 crores.

August 12, 2021 2

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Results (consolidated) Rs cr
Particulars Q1FY2022 Q1FY2021 y-o-y% Q4FY2021 q-o-q%
Net sales 290.2 158.0 83.8% 397.9 -27.0%
Other income 1.1 5.1 -77.9% 1.8 -37.8%
Total income 291.4 163.0 78.7% 399.7 -27.1%
Total expenses 290.2 185.1 56.8% 390.1 -25.6%
Operating profit 0.0 -27.1 - 7.8 -99.7%
Depreciation 6.8 8.3 -18.3% 8.8 -22.6%
Interest 5.3 9.6 -45.0% 7.3 -27.9%
Exceptional items -15.7 -2.6 - -176.0
Profit Before Tax -26.6 -42.5 - -182.5 -
Taxes -2.5 -8.4 - -10.4 -
PAT -24.1 -34.2 - -172.1 -
Minority Interest -2.8 -7.2 - -7.7 -
Adjusted PAT -5.6 -24.3 - 11.7 -
EPS (Rs.) -0.5 -2.2 - 1.1 -

OPM (%) 0.0% -17.2% - 2.0% -195 bps

NPM (%) -1.9% -15.4% - 2.9% -
Tax rate (%) 9.2% 19.7% -1046 bps 5.7% 354 bps
Source: Company; Sharekhan Research

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Outlook and Valuation

n Sector View – Strong growth outlook led by changing consumer preferences and macro pick-up
The logistics industry had been one of the key sectors, which has showed a strong revival post COVID-19 pandemic
that affected the overall trade environment both domestically and globally. Domestic indicators such as e-way bill
generations, FASTag collections, Indian rail volumes, domestic port volumes and foreign trade are showing clear signs
of revival. Further, organised domestic logistics players have been able to improve business, led by user-industries’
preference towards credible supply chain management in wake of impact of COVID on supply chain operations.
Further, the third-party logistics (3PL) industry has seen faster improvement in operations, led by segments such as
e-Commerce, pharma, and FMCG. Hence, we have a positive view on the sector.

n Company Outlook – Strong earnings growth outlook led by business restructuring

Gati is on a high earnings growth trajectory for the next 2-3 years, which got initiated post acquisition of the company by
Allcargo logistics in March 2020. The restructuring involves divestment of subsidiaries and unrelated businesses, sale
of land and buildings, significant reduction in debt and contingent liabilities, deep rationalization of costs, streamlined
working capital and senior leadership changes which would going ahead lead to asset light focused approach on its
core businesses. It is now on path to regain its leadership positioning through accelerated sales, digitization and capacity
expansion. Gati targets to grow its revenues in double digit and achieve OPM of 10.5-11.5% over the course of next two
years.

n Valuation – Retain Positive view & upside potential of 33-35%

We believe Gati is undergoing a transformational journey led by a strong new parentage. It has been able to strengthen its
balance sheet, trim down unrelated businesses, exit from non-core assets, rationalise cost structure, which would further continue
in the next two years. At the same time, we expect consolidated profit to disproportionately multiply by FY2024 led by a healthy
double-digit revenue growth and significant expansion in OPM. At CMP, the stock is currently trading at a P/E of 28x/17x its
FY2023E/FY2024E EPS, at a discount to most of its peers. We expect valuation multiple gap vis-à-vis peers to narrow down as
Gati ramps ups topline and operational efficiencies. Hence, we retain our positive view on the stock with an upside potential of
33-35%.

One-year forward EV/EBITDA (x) band

40
35
30
25
20
15
10
5
0
Jul-14

Jul-15

Feb-16

Feb-17

Sep-18

Sep-19
Jan-18

Jan-19

Dec-19

Dec-20
Jun-16

Jun-17
Aug-13

Aug-20

Aug-21
May-18

May-19
Oct-15

Oct-16

Oct-17
Nov-13

Nov-14
Apr-13

Apr-20

Apr-21
Mar-14

Mar-15

1yr fwd EV/EBITDA Peak 1yr fwd EV/EBITDA Trough 1yr fwd EV/EBITDA Avg 1yr fwd EV/EBITDA
Source: Sharekhan Research

Peer valuation
P/E (x) EV/EBITDA (x) P/BV (x) RoE (%)
Particulars
FY23E FY24E FY23E FY24E FY23E FY24E FY23E FY24E
Gati Limited 27.6 17.0 13.9 10.5 2.7 2.3 11.1 15.2
Mahindra Logistics 52.2 39.3 17.5 13.8 6.1 5.3 13.8 15.8
TCI Express 31.5 25.9 22.5 18.4 7.7 6.1 27.6 26.4
Transport Corporation of India 15.1 13.2 9.2 8.0 2.2 1.9 15.4 15.3
Gateway Distriparks 16.7 11.9 8.9 6.8 2.1 1.8 12.5 15.9
Source: Sharekhan Research

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About company
Gati, incorporated in 1989 as an Express Distribution service provider, provides multiple services and solutions
in the logistics and distribution business. It offers services to 19,800 pincodes, covering 735 out of 739 districts
in India, operating in more than 1,900+ scheduled routes. Its integrated multi-modal transportation network
comprises air and road. After strategically acquiring Gati in 2020, Allcargo Logistics is now the promoter and
the single largest shareholder of Gati with more than 50% ownership, followed by Japan’s Kintetsu World
Express (KWE) with about 3.5% shares in the company. Gati-Kintetsu Express Private Limited (Gati-KWE) is a
Joint Venture between Gati and KWE where KWE holds 30% stake and Gati holds the remaining 70%.

Investment theme
Gati is on the path of high earnings growth trajectory over the next two to three years, which got initiated
post acquisition of the company by Allcargo logistics in March 2020. The restructuring involves divestment of
subsidiaries and unrelated businesses, sale of land and buildings, significant parring of debt and contingent
liabilities, deep rationalization of costs, streamlined working capital and senior leadership changes which
would going ahead lead to asset light focused approach on its core businesses. It is now on its path to regain
its leadership positioning through accelerated sales, digitization and capacity expansion. Gati targets to grow
its revenues in double digit and achieve OPM of 10.5-11.5% over the course of next two years.

Key Risks
Š Inability to scale up business and OPM led by competitive pressures.
Š Non-fructification of non-core asset sale and rise in working capital leading to levered balance sheet.

Additional Data
Key management personnel
Mr. Shashi Kiran Janardhan Shetty Chairman (Executive Director)
Mr. Adarsh Hegde Managing Director, Gati-KWE
Mr. Pirojshaw Sarkari (Phil) Chief Executive Officer
Mr. Rohan Mittal Chief Financial Officer
Mrs. T. S. Maharani Company Secretary & Compliance Officer
Source: Company Website

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 Allcargo Logistics 46.86
2 Agrawal Mukul 5.17
3 Kintetsu group 3.55
4 Neera and children trust 1.90
5 Agarwal Mahendra Kumar 1.29
6 TCI Finance Ltd 0.74
7 Bearers Office 0.54
8 Investor Education & Protection Fund 0.46
9 Mahendra Kumar & Sons 0.45
10 Bunny Investment and Finance Pvt Ltd 0.22
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

August 12, 2021 5

Understanding the Sharekhan 3R Matrix
Right Sector
Positive Strong industry fundamentals (favorable demand-supply scenario, consistent
industry growth), increasing investments, higher entry barrier, and favorable
government policies
Neutral Stagnancy in the industry growth due to macro factors and lower incremental
investments by Government/private companies
Negative Unable to recover from low in the stable economic environment, adverse
government policies affecting the business fundamentals and global challenges
(currency headwinds and unfavorable policies implemented by global industrial
institutions) and any significant increase in commodity prices affecting profitability.
Right Quality
Positive Sector leader, Strong management bandwidth, Strong financial track-record,
Healthy Balance sheet/cash flows, differentiated product/service portfolio and
Good corporate governance.
Neutral Macro slowdown affecting near term growth profile, Untoward events such as
natural calamities resulting in near term uncertainty, Company specific events
such as factory shutdown, lack of positive triggers/events in near term, raw
material price movement turning unfavourable
Negative Weakening growth trend led by led by external/internal factors, reshuffling of
key management personal, questionable corporate governance, high commodity
prices/weak realisation environment resulting in margin pressure and detoriating
balance sheet
Right Valuation
Positive Strong earnings growth expectation and improving return ratios but valuations
are trading at discount to industry leaders/historical average multiples, Expansion
in valuation multiple due to expected outperformance amongst its peers and
Industry up-cycle with conducive business environment.
Neutral Trading at par to historical valuations and having limited scope of expansion in
valuation multiples.
Negative Trading at premium valuations but earnings outlook are weak; Emergence of
roadblocks such as corporate governance issue, adverse government policies
and bleak global macro environment etc warranting for lower than historical
valuation multiple.
Source: Sharekhan Research
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