Logical moves by Gati

Gati, a leading player in express cargo delivery and pioneer in distribution and supply chain management solutions has announced lower-than-expected results for the quarter ended September 2007 (Q1).

The company, which follows a July-June accounting year, posted a decline of 12% in its standalone revenues for Q1 year-on-year to Rs 117.07 crore, though net profit improved 16.37% to Rs 65.4 crore.

Notably, Gati’s financials for last year included numbers relating to its fuel station business, which has been transferred to four wholly-owned subsidiaries.

Accordingly, Q1 FY08 numbers are rendered incomparable with Q1 FY07. Excluding the fuel station business, revenues grew at 9.5%.

A major portion (90.57%) of revenues in Q1 came from the express distribution and supply chain business and the rest from shipping. The express distribution and supply business grew 16.28% on the back of increase in trade activity and rising trend among companies to outsource their logistics solutions.

The shipping business, however, declined by 29.84%, as Gati did not renew the lease on two ships, while a third was under dry-docking. According to analysts, revenues were also impacted by an interruption in the launch of its air freight service.

Operating margins improved by 329 basis points to 11.70%, understandably led by improvements in the express distribution and supply chain business thanks to more value added services and better utilisation of warehousing facilities and trucking fleet.

Hiving off the lower-margin fuel station business contributed, too.

Interest costs saw a good 47.2% increase on account of capital expenditure. It invested heavily in warehouse facilities and advancement of its IT system, leading to a 22.9% increase in depreciation costs.

During the quarter, Gati acquired a 53% stake in Delhi-based Kausar India, which is in the cold chain business (for perishable cargo like dairy products, meat, flowers and medicines), for Rs 14 crore — 1.5 times the company’s FY07 sales.

Analysts say the acquisition will contribute positively to Gati as Kausar enjoys around 20% margins and gives Gati a foothold in the cold chain space. It also has a good client base (Reliance, Nestle, Dabur, Amul and Cadbury, among others) and operates around 100 owned cold chain trucks.

Analysts expect Gati’s consolidated revenues to touch Rs 1,000 crore by 2008-09. At Rs 107.40, the stock trades at 22.85 times its estimated earnings for 2007-08 and is seen as attractive.

Contributed by Pallavi Pengonda