Shares of Gati surged 14 percent on Monday after the company announced its latest business updates for the September quarter (Q2FY24). Meanwhile, bullish comments from brokerage house Nuvama also added to the positive sentiment.

The company announced that it witnessed strong pre-festive orders, leading to a Q2FY24 volume of 333kt, up 18 percent YoY. Meanwhile, for September 2023, the firm’s total volume, including surface and air express, came in at 109kt, recording an increase of 8 percent as compared to September 2022 and lower by 3 percent as compared to August 2023, it informed in a press release.

The growth momentum continued despite a high base in the same month last year and Gati expects the momentum to continue in the current month.

Meanwhile, brokerage house Nuvama also initiated coverage on the stock with a ‘buy’ call and a target price of ₹234, implying an upside of almost 59 percent.

“We are optimistic on Gati’s long-term growth story due to capacity expansion, improving efficiency and service levels, strong growth in profitability, a strengthening Balance Sheet, and favourable industry dynamics. We expect valuations to catch up with peers as its margin and market share improve. The muted realisation on higher competition and slower-than-expected volume growth due to a weak macro environment are the key risks to our assumptions,” it explained.

Stock price trend

The stock jumped 14 percent to its day’s high of ₹168.10. It is now less than 9 percent away from its 52-week high of ₹184.45, hit on October 27 last year. Meanwhile, it has advanced over 72 percent from its 52-week low of ₹97.65, hit on March 27, 2023.

The stock has lost over 15 percent in the last 1 year but has recovered this year, up over 16 percent in 2023 YTD. The stock has gained 8.5 percent in October so far, extending gains for the 5th straight month since June. In these 5 months, the stock advanced over 46 percent. However, in the first 3 months of the year, it was in the red, down over 30 percent between Jan and March.

Incorporated in 1989, Gati (GTIC) has emerged as one of India’s leading multi-modal express logistics players. It operates in two segments — express logistics and fuel stations, which contribute 85 percent and 15 percent to total revenue, respectively.

Transformation

The brokerage noted that declining service quality, scattered business operations, and heightened competition, led to performance declining over FY16–20, with EBITDA margin contracting to 2.1 percent from 7.8 percent. Allcargo Logistics (AGLL) acquired a majority stake in FY21 and: i) revamped Gati’s management bringing in experienced professionals; ii) divested stake in non-core operations (international cargo, logistics parks, and cold chain) and identified non-core assets to sell (fuel station, non-core land and buildings), thus freeing up capital; iii) switched to an asset-light model, iv) utilised the freed up capital to pare off debt; and v) cleaned its Balance Sheet (rectified legacy contracts and cleared contingencies).

Owing to these efforts, volumes saw a sharp uptick after the lifting of COVID-related restrictions, registering a 20.4 percent CAGR over FY21–23. While costs surged on higher provisions (bad debts and contractual deductions) and turn-around-related expenses (consultancy charges and employee cost), the margin recovered to 4.1 percent in FY23 from 2.1 percent in FY20 on higher volume and efficiency. Asset turnover also improved to 3.9x in FY23 from 2.2x in FY20, respectively, said Nuvama.

Estimates

Going ahead, Nuvama expects revenue CAGR of 13.8 percent over FY23–26E to ₹2,542 crore. The shift in focus to the core express business has led to improved service quality, improved load handling capacity, and lower turnaround time at its hubs. The full impact of these measures, expected to be visible from FY25E, will drive customer additions and enhance wallet share from existing customers, it said.

Meanwhile, it estimates EBITDA growing to ₹218 crore in FY26E from ₹70 crore in FY23 at a 45.9 percent CAGR, led by: i) operational efficiency (the newly commissioned hubs are fully automated with cross bays and higher capacity, improving turnaround and efficiency); ii) volume growth (more than 80 percent of indirect operating costs is fixed in nature, which will see improved absorption on higher volume); and iii) cost optimisation (it expects non-core one-off expenses such as consultancy charges and bad debts to decline with a cleanup of the Balance Sheet).

It also sees EBITDA margin expanding 449 bps over FY23–26E to 8.6 percent and EBITDA/kg to clock 28.5 percent CAGR to ₹1.3. With an asset-light capacity expansion, it forecasts depreciation to stay rangebound. It also expects a PAT of ₹98 crore in FY26E as against of ₹13 crore in FY23.

“With no long-term debt, we expect the net D/E ratio to improve to -0.39x in FY26 from 0.05x in FY23 on healthy FCF, led by strong EBITDA growth and minimal capex needs. We expect RoACE/RoAE to expand to 24.9 percent/12.7 percent from 2 percent/-2.1 percent over FY23–26E,” it predicted.

Gati vs TCI Express

With a similar range of annual volume as well as average realisation, TCI Express (TCIEXP) generates a margin of 16 percent as against 4 percent for Gati owing to operating efficiency and an asset-light model, noted the brokerage.

“Over FY17–22, TCIEXP saw a significant uptrend in the margin to 16 percent from 8 percent on increasing volume and improving cost rationalisation, whereas Gati saw a decline to 2 percent from 6 percent. As a result, TCIEXP outperformed Gati by 314 percent. In FY23, TCIEXP saw its margin stagnate owing to higher operating costs (driven by rising fuel prices), whereas Gati saw a significant improvement led by a greater focus on its core business, higher volumes, operational efficiency, and optimisation of indirect operating costs. TCIEXP’s margin remained at 16 percent in FY23 while Gati’s margin improved by 176bp to 4 percent. Gati has outperformed TCIEXP by 8 percent since the start of FY23,” analysed Nuvama.

Owing to GTIC’s efforts to turn around, which includes a focus on the core express business, divestment of non-core assets, improvement in service quality, enhancement of hub capacities, and consolidation of hubs in key locations, Nuvama expects greater operational efficiencies, which will drive margin going forward. In FY25E, it expects the margin to touch 7.2 percent, a sharp improvement of 315bp over FY23. While for TCIEXP, it sees the margin staying relatively muted and settling at 17 percent in FY25E.