GATI – aiming to be “ahead in reach” again

Anyone driving on highways would have come across a GATI logistics truck, painted pastel blue, bearing the tagline “Ahead in reach”.

GATI is one of the oldest players in the domestic express logistics space with nearly 3 decades of existence. GATI was originally part of the assets of TCI (Transport Corporation of India), which was split between Mahendra Agarwal and his three brothers in 1998. 

But in the last decade, GATI has significantly fallen behind its counterparts as debt burden and family disputes put it on the backfoot. It eventually led to ownership change, with Allcargo Global Logistics acquiring a 47% stake. GATI is now crafting a turnaround, playing on its strengths to build scale and market share, improve financial strength, and gain from the growth potential in the logistics sector.

With the competition in the listed space limited to a few companies, success on this front can see the GATI stock be re-rated or gain market favour. However, given that its plans are still in the very early stages, execution becomes the key factor to watch.

In this report, we review where GATI stands, the steps it is taking, and the signs pointing to a successful execution.

Logistics sector – leaping ahead

Let’s start with exploring why the logistics sector shows promise and where growth can come in. The logistics sector in India is primarily comprised of transportation and warehousing, of which transportation accounts for majority of the share. Organized players accounted for only ~10% of the logistics market. The express logistics segment commands a smaller share. 

Organized players are expected to grow at a CAGR of >25% between FY20 and FY26, taking their share to 17% of the logistics market (road transportation, warehousing & supply-chain services). This is primarily being driven by the following:

• These players hold the ability to offer integrated services, network and scale-driven efficiencies and larger investments in technology, resulting in higher share of wallet with customers. 
• This edge that these players possess come into play with the emergence of new digital-native segments, new distribution channels and go-to market strategies such as direct-to-retail (D2R) and direct-to-consumer (D2C). These trends are driving the need for innovation in the traditional B2B supply chain, with greater demand for value-added services.  
• Faster growth of e-commerce activity in the tier-2 and tier-3 cities and consumer expectations of shorter delivery time, smooth return policy and cheaper pricing has also resulted in faster growth of new-age logistics players like DelHivery and E-com express.

While legacy players missed out on the e-commerce boom, what is throwing up opportunities for them are the broader economic revival along with revival in international trade and the pick-up in MSME sector. 

This apart, the following developments also augur well for legacy players:

• Govt’s thrust to increase share of manufacturing GDP. Manufacturing accounts for 17% of India’s GDP and is emerging as a high-growth sector on the back of Govt initiatives like Make in India, production linked incentives (PLI), Govt tenders for domestically manufactured goods etc. 
• Corporate tax cut, import duties, and China +1 are giving a boost to domestic manufacturing in segments such as electronics, electricals, chemicals, apparels, etc apart from traditionally strong segments such as auto, engineering and pharma.  As a result, manufacturing has been transitioning from bulk commodities to non-commodity and consumption focused products which need faster go-to-market and more reliable and efficient logistics operations.  The recently announced National Logistics Policy (NLP) is also a shot in the arm for the sector that will further make end-to-end movement of goods hassle-free. The policy aims at digital integration of various ministries involved in transportation of goods through various modes (road, rail, air, water) thereby enabling faster movement of goods with minimum documentation, also digital. 
• With the commissioning of dedicated freight corridor (DFC), improving highway network, higher axle load norms for trucks and implementation of GST (removing check-posts), multi-modal transportation (i.e., integrating different modes of transportation to deliver a consignment) has been catching up fast that provide better economics and delivery time. A shift from road to rail and water-ways would also bring down logistics cost, which is higher in the case of India.

GATI – Business and Ownership

Allcargo Global Logistics acquired GATI amid family dispute. It made an initial acquisition of 13% stake in December 2019 and concluded the acquisition of a total of ~47% stake by March 2020 for an enterprise value of close to Rs.1,000 crore. During FY22, Allcargo also subscribed to warrants on preferential basis at Rs.97 per share, which upon conversion will result in 50.20% stake.

In logistics, there are different categories of players:

• Transportation/ freight movers (road, rail)
• Multi-modal logistics players (use a combination road, rail, sea & air)
• Express logistics players
• Supply chain solution providers
• Warehousing companies

GATI is one of India’s leading express logistics players. It provides end-to-end logistics solutions under the brand – GATI-KWE. The express logistics business is housed under a subsidiary Gati-Kintetsu Express Private Limited (GATI-KWE). This subsidiary is a JV between GATI (70%) and KWE (30%); KWE (Kintetsu World Express). Outside the subsidiary, GATI has no meaningful revenue; its business overhaul saw it exiting most other businesses to focus on the express logistics segment (explained below).

GATI has expertise in surface express logistics as well as customized solutions for retail and MSME segments. It also has a minor presence in air express and supply chain solutions contributing 4% each to the revenues. It has a pan-India network with access to more than 19,800 PIN Codes and 735 of 739 districts and a distribution infrastructure of 4.1 million square feet comprising 30 hubs, including 10 air hubs.  

Express logistics is a niche segment where the players differentiate themselves on their physical and digital infrastructure to provide quicker turnaround and delivery of consignment, with proper tracking and updates to the end-customer. It is also a less fragmented space compared to transportation or warehousing while technology adoption is high.

As a subsidiary of Allcargo, GATI can in turn leverage Allcargo’s network to offer its customers the opportunity to explore Allcargo’s services including Container Freight Stations and Inland Container Depots, Project Logistics, and Contract Logistics to tap into the strengths of Allcargo’s global network that operates through more than 300 offices in over 180 countries. This will help GATI to augment its end-to-end logistics capabilities beyond borders as well.

GATI’s come-back plan

Though Allcargo acquired GATI in 2020, it got a new CEO only in August 2021. The new CEO brings in decades of leadership experience, is known for setting up the business and organisation of UPS (US MNC) in India, and also served as CEO of Mahindra Logistics. 

The come-back plan is chartered under his leadership with: one, augmentation of capabilities and customer acquisition, two, building on top of the nation-wide presence and sticky client relationships that GATI has built and three, eventually delivering on financial performance as well.

#1 Augmentation of capabilities

The first set of initiatives under business transformation was hiving-off of non-core businesses, cutting down on debt and making the business asset light. In the last 2 years, management has executed this by sale and lease back of its truck fleet, warehousing space and the sale of its cold chain business, GATI Kausar. The only remaining non-core asset is its fuel station business which is facing delays pending clearance from PSU OMCs. Through these initiatives, the management has cut down debt from Rs. 476 Crore in FY20 to Rs. 155 Crore at the end of FY22.

Having become asset light, the next set of priorities is to augment its capabilities on infrastructure and digitization to provide best in class services that match competition to grow the business. In express logistics, what matters is quicker turnaround of the consignment while offering proper tracking and timely delivery to the end-consumer. This requires robust physical and digital infrastructure to cater to the needs of its customers at both ends. The management has also drawn an ambitious growth plan to achieve revenue of Rs. 3,000 crores by FY26, ~2.5X the FY22 logistics business revenues on the back of these investments. Accordingly, GATI’s plans to improve its offering are as follows: 

One, infrastructure expansion. In the second half of FY22, GATI inaugurated its first surface transhipment hub at Farukh Nagar, Haryana. This hub is spread over 1 lakh + sq. ft with 89 docks which could load approximately 100 trucks and provide economies of scale and faster turnaround time. The plan is to build seven such mega hubs in the next two years across the country to strengthen its leadership. 

GATI will use a lease/asset light model to set up these hubs, which will help keep debt levels in check. These hubs will be providing automated and paperless processes with enhanced cargo handling abilities with higher throughput, replacing the older ones. The next two hubs with similar facilities and scale will be operational in Mumbai and Bangalore by H1FY23 followed by Nagpur, Indore, Hyderabad in H2FY23, and then Cochin and Pune in H1FY24.  This infrastructure will form the backbone in providing best in class service to customers and match competition.

Two, improving digitization. This translates into value-added services, which are increasingly becoming a necessity. It includes picking, packaging, MIS reports, analytics service, mobile updates and online GPS enabled tracking, e-mail alerts and so on.  Gati-KWE has recently implemented the CRM tool Drishti, powered by Salesforce, which enables the sales team to automate every process and allows them to instantly share dashboards with customers. GATI Genie, the WhatsApp chatbot allows businesses to check PIN Code serviceability, register for pick-ups, calculate the rate and transit time of the prospective cargo movement and track and trace it as it makes its way across India’s many highways, and even address concerns and queries, all on WhatsApp. 

GATI is already ahead in geographical reach; its initiatives serve to further strengthen its position. This apart, the blend of infrastructure and digitization that is the hallmark of the express logistics business is harder to replicate by smaller players. This can therefore both keep competition in check and help GATI add and retain clients, with better pricing.  

Three, customer acquisition in the promising MSME segment. The sales acceleration strategy involves initiatives like market identification, market penetration, lost customer conversion and ensuring customer stickiness. However, the segment which GATI sees enormous potential going forward is the micro small and medium scale enterprises (MSME). GATI has designed a special sales task force targeting MSMEs. GATI will help them devise their time to market as well as go to market strategy that will not only help them to expand their reach but also to optimize their inventory level.

#2 Building on top of a sticky client base

While the MSME segment can form the source of new customer additions, GATI has a strong client base already which it can continue to leverage on. Its client base boasts 8 out of top 10 auto companies, 8 out of top 10 pharma companies, 7 out of top 10 retail/textile companies besides some of the major e-commerce players. 

Despite going through a tough phase in the second half of the last decade and competition heating up from start-ups, GATI has been able to retain its top customers. The key enterprise large accounts contribute 57% to overall revenues.  The strategy is to maintain key enterprise accounts at 50% while focusing on MSME and retail to contribute to the remaining 50% over the next few years. GATI should also benefit from the parentage of Allcargo to offer end-to-end logistics solutions to its customers who are looking beyond borders.

GATI’s focus on express logistics also comes at an opportune time, with the growth potential of the sector itself and consolidation activity underfoot. While legacy players such as GATI lost out to competition from new-age players in the last decade, not all of these new-age players are in good shape. Consolidation has already started with DelHivery acquiring rival Spoton’s, and very recently, Mahindra Logistics acquiring Rivigo’s express logistics businesses. 

The start-ups have mainly grown on the back of the e-commerce boom with a lion’s share of e-commerce business with competitive pricing. This consolidation presents an opportunity for players like GATI with geographical reach and sticky customer base to come back strongly with augmentation of capabilities and gain market share segments such as e-commerce.

#3 Delivering financial performance

GATI’s financials have been in a mess in the last few years due to business restructuring and divestment of non-core assets. What will be left over is the express logistics business housed under subsidiary GATI-KWE and hence it bears merit to look at the long term financial performance track record of GATI-KWE alone. 

Unsurprisingly, owing to the multitude of factors – change in ownership, restructuring, family disputes, competition from newer players – GATI’s growth has been patchy in the past few years. Margins also took a severe hit, as can be seen from the table below. One positive factor is that cash flows as such have been stable and ROCEs have been reasonable in the past. While GATI appears to have closed FY-22 with a topline improvement, margins remain sub-par.

GATI’s revenue, margin and earnings expansion, therefore, hinge on the turnaround strategy. Logistics is a business of scale, which brings in operating leverage. The infrastructure that GATI is building over the next two years in the form of surface transhipment hubs may take time to achieve optimum utilisation and contribute to operating leverage.  At the same time, it is investing in digitization and customer acquisition as well. 

To put it in better perspective, a highly comparable player in terms of business and revenue size to GATI in express logistics is TCI Express, which has been reporting top-notch performance. Markets have accorded it rich valuations at 53 times earnings, 13 times book value and 6.7 times market cap to sales. 

Its DuPont analysis, along with GATI-KWE is below.

As you can see, GATI-KWE and TCI Express have clocked very divergent growth. The numbers for TCI Express also serve as an indicator as to the extent GATI needs to catch up and how much it can grow. Both TCI Express and GATI-KWE are in express logistics with asset light business models; GATI-KWE will have to significantly improve up on its margins to achieve superior RoE. A small factor that can hasten improvement is the divestment of non-core assets that can further bring down leverage (Assets/Equity) and improve this metric. 

A valuation re-rating for GATI will thus be contingent on margin and RoE improvement, as it builds scale. These are the key metrics to watch out for, to gauge whether the GATI stock can catch market favour.

Below is a comparison of key financial parameters of players in the express logistics and supply chain solutions business.

At this stage, Price to book or Market cap to sales may be better metrics to look at GATI. The PE ratio is misleading due to below-potential earnings on account of business restructuring.

Key Risks

There are two main factors that currently cloud GATI.

One, of course, is execution. While GATI has drawn an ambitious growth plan, it is contingent on simultaneous scaling up of infrastructure and new business acquisitions. From the point of view of an investor, it has to happen with continuous improvement in margins and return ratios to reflect in valuations.  Any delays or challenges in execution may have a significant impact on returns for investors.  

Second is possible corporate action.  Like GATI, parent Allcargo has also undertaken business restructuring in the form of demerger of asset-heavy businesses such as warehousing and CFS to make the core logistics business asset light. The board of Allcargo has recently discussed and agreed to provide in-principle approval to explore appropriate options, including by way of merger / demerger or other suitable structure, for restructuring the businesses of GATI, GATI-Kintetsu Express and the contract logistics business division of Allcargo.

Should Allcargo pursue a  merger of GATI with itself, it will be a negative for GATI’s shareholders. On the other hand, there are other possibilities including merger of subsidiary GATI-KWE into GATI, scrap the holding company structure and demerger/merger of Allcargo’s contract logistics division into GATI. These would be welcomed by GATI’s shareholders.

In a nutshell, GATI has moved in the right direction to gain from the growth in the logistics space and improve earnings and returns. However, it’s too early in the day to be overly positive on the stock. A close watch on key performance metrics is needed to know if the stock can see better valuations.