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Thursday, August 20, 2009

Gati Ltd:Future growth outlook and prospects

Scripscan: Gati Ltd
Traded in:Nse-bse

Story:On a standalone basis during FY09, Gati reported a 12% YoY growth in the topline largely led by its coast to coast business that contributes over 12% to the total revenues. The express distribution and supply chain business (80% of total revenues) grew by a subdued 9.5% YoY during the same period under consideration and thereforerestricted the overall growth in the topline. While the company has not divulged any details, the second half of the financial year was particularly bad for the company as during 1HFY09, the company reported over 20% YoY growth in the topline.Recessionary trendsimpacted overall trade and hence the performance of the company.Operating margins contracted by 0.6% YoY as costs grew at a faster pace as compared to the topline. The increase in costs was witnessed across the board.However, significant increase was witnessed in costof sales and employee costs (as percentage of sales). The same could be attributed to higher fuel charges, freight costs and inflationary trends witnessed during the beginning of the year.The freighter business dragged the overall profitability of the company as it reported loss to the tune of Rs 183 m in FY09. 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 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 movementbusiness.the PBT level, the company reported 93% YoY decline in profits.More than three fold growth in interest costs dented the profitability of the company. At the net level, the company reported a loss of Rs150 m. Despite lower tax expenses, the company reported a loss on account of an exceptional item that represented loss on derivative transactions.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 TradePolicy), 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 freightbusiness was expected to give a fillip to the company’s overall growth, which did not happen, forcing the company to exit the freighter business.A hold as of now,buy only at sub 35 levels.

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