Gati Ltd :Results were below our expectations. Signs of Improvement visible!: Nirmal bang

Results were below our expectations. Signs of Improvement visible!
The company reported Total Income of Rs. 298 crore which was up 3.6% QoQ and down 7% YoY on the back of sluggish performance in the shipping segment. However, EBIDTA margins in Gati KWE saw a significant jump to 10.6% in the quarter and are expected to sustain going forward. The company has sold off one of the vessels in the shipping business and is expected to return to profits in the coming quarters. With synergies in the Gati KWE JV unfolding and management’s thrust on building up the e-commerce business, we expect the EDSC segment to grow by 15% in FY13E. At CMP, the stock is trading at 10.5x its FY13E expected earnings and we continue to have a positive outlook on the stock.

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Highlights of the Quarter
The newly formed JV Gati KWE which now consists of the company’s core business “Express Distribution and Supply Chain” saw a QoQ growth of 5.6% at Rs.209.5 crore. EBIDTA margins of this business grew 290 bps QoQ to 10.6%. Debt in the JV stands at Rs.194 crore (Rs. 330 crore of debt was transformed to this JV; out of which Rs. 136 crore has been paid). Company expects a 20% growth in this JV for FY13E.
Shipping segment made revenues of Rs.6.4 crore for the quarter and incurred losses of Rs.14 crore (Rs. 8 crore of operational loss and Rs.6 crore loss on sale of one of the vessels). Management is expecting this segment to reach a breakeven point by the next quarter. Consequently, company is also looking for a strategic partner into this business.
The total fleet size in the cold chain (Kausar) segment stands at 165 and the company plans to expand the same to 200 in the current fiscal. It also would add up 2-3 cold storage units in the same period. For the quarter, this business clocked revenues of Rs.9.7 crore and EBIT margin of 14.8%
E-Commerce business of the focus is a profitable business and remains the focus of the management going forward. In the current quarter, this segment clocked revenues of Rs.4 crore and the company expects to post revenues of Rs.40 crore in FY13E.
Gati International (including Asia Pacific business) clocked revenues of Rs.26 crore in the current quarter and has neared breakeven position.
Company has re-payed Rs.125 crore of debt so far and plans to repay another Rs.25 crore in the coming quarter. Interest component in FY13 is expected to come down by Rs.20 crore from Rs.62 crore in FY12.


Valuation & Recommendation
The company reported Total Income of Rs. 298 crore which was up 3.6% QoQ and down 7% YoY on the back of sluggish performance in the shipping segment. However, EBIDTA margins in Gati KWE saw a significant jump to 10.6% in the quarter and are expected to sustain going forward. The company has sold off one of the vessels in the shipping business and is expected to return to profits in the coming quarters. With synergies in the Gati KWE JV unfolding and management’s thrust on building up the e-commerce business, we expect the EDSC segment to grow by 15% in FY13E. At CMP, the stock is trading at 10.5x its FY13E expected earnings and we continue to have a positive outlook on the stock.