GATI 17 TH November 2015

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1 GATI 17 TH November 2015 Price Chart Key Parameters Key Parameters Bse Code BSE Code NSE Code Nse Code KWALITY GATI Reuters Code GATI.NS CMP (as Reuters on 17/11/2015) Code KDAI.NS Stock Beta CMP (as on 21/07/2015) Week H/L / Market Stock Cap (Cr) Beta Equity Capital (Rs cr) Face Value 52week (Rs) H/L 81/ Average Mkt Volume Cap (Rs.Cr) Shareholding Equity Pattern Capital (%) (Rs.Cr) Promoters Others Fave Value(Rs.) Grand Average Total Volume Shareholding Research Analyst: Pattern(%) Promoters Varun Gopal I G Non-Institutions Equity Research Analyst Public ATS and Wealth others Managers varungopal@adityatrading.com Grand Total 100 Phone: Background Gati Limited (Gati) is engaged in express distribution and supply chain solutions. The Company's operating segments include Express Distribution and Supply Chain, which covers integrated cargo services, such as road, rail and air transportation; Shipping, which covers sea transportation, and Fuel Stations, which covers Fuel Stations dealing in petrol, diesel and lubricants. Gati's supply chain solution offers an integrated supply chain service to businesses across industry verticals. It offers warehousing, international freight forwarding, express distribution services, supply chain solutions, cold chain transportation solutions, custom clearance and e-commerce solutions. Gati offers technology-enabled services on the foundation of Web-based Gati Enterprise Management Services (GEMS). Gati serves in healthcare, engineering, automotive and consumer durable industry.. Source: Reuters Investment Rationale Integrated services Strong network coverage and geographical reach Long term relationships with clients Ready to tap in E-Com boom GST and Make in India Risks and Concerns Competition from unorganized sector Dependence on end user industry Cost fluctuations Conclusion & Recommendation Gati being a dominant player in domestic and international transportation and logistics industry with wide market reach in both India and abroad. With the given growth opportunities we expect company to outperform the industry in the both medium term and long term future. At the current market price of Rs the stock is trading at ~16x FY17E EPS. Investors could buy the stock at CMP and add on dips to around Rs.120 to Rs.125 levels (~14x FY17E EPS) for our sequential targets of Rs.170 and Rs.193 (~20x to ~22x FY17E EPS). Financial Summary Particulars (Rs. in Crs) 2013/ /03# FY15 FY16E FY17E Net Sales Operating Profit PAT EPS (Rs.) PE (x)

2 Business Profile Gati-KWE Express Distribution Gati-Kintetsu Express Private Limited (Gati-KWE) is a joint venture company between Gati and Kintetsu World Express - Japan s leading logistics provider. An intrinsic network that spans the length and breadth of India. Gati-KWE has a reach of more than 99% of districts in India. A large fleet of more than 5000 vehicles and an assured space across 32 airline sectors ensures that the shipments are delivered in the right time at the right place. GATI-KWE Supply Chain Solutions Gati-Kintetsu Express Private Limited (GATI-KWE) is a joint venture company between Gati and Kintetsu World Express. GATI-KWE s Supply Chain solution offers an integrated supply Chain service to businesses across industry verticals. Be it flexible point-to-point distribution solutions or complex end-to-end integrated logistics solutions or supply chain management GATI-KWE does it all with great effectiveness and reliability. It partner with clients to identify cost benefit opportunities that drive value into their business. it achieve this by addressing critical operational constraints, freeing up working capital, improving the flow of information and reforming business processes in order to deliver sustainable competitive advantage. Gati E-Connect Gati E-connect, the e-commerce Logistic Solutions vertical of Gati. Gati E-connect have an extensive reach of more than 99% of districts in India. Unique to its service offering Gati E-connect has the Cash on Delivery and Prepaid facility to more than 5120 direct pin codes and reach to 15,400 remote pin codes enabling the business to reach the remotest corner of the country. It enables Business to Business (B2B), Business to Customer (B2C) or Customer to Customer (C2C) requirements. Gati International Services Gati International, the global wing of Gati Ltd. It provides of freight forwarding and Logistics services, specialized in air freight, ocean freight shipments and associated Supply Chain Management Solutions. Being experts at India centric operations we have an expansive reach of 667 out of 671 districts and have a network of 61 warehouses pan India. It enable seamless multi-modal logistics solution, Gati International has offices in Singapore, Hong Kong, China, Nepal, Thailand and an agency network that spans across 100 countries. Gati Kausar Cold Chain Solutions Gati Kausar is a subsidiary and cold-chain arm of Gati Limited. Gati Kausar is the longest established cold chain company in India, with 30 years of expertise in the cold-chain distribution business. Gati Kausar offers customized solutions for temperature sensitive shipments through its cutting edge technology and a vast fleet of over 200 refrigerated vehicles equipped with advanced climate-control systems. Gati Kausar provides customized temperature sensitive services for Consumer foods, Pharmaceuticals, Retail and Agri - food sectors. Gati Kausar's innovative cold-chain transportation solution, strengthened by cutting edge equipment, technology and expertise, ensures that perishable products are delivered in a fresh, healthy and potent state to retailers and end consumers.

3 Gati Trading Solutions GIETL, a subsidiary of Gati Limited, offers clients a unique business partnership in domestic distribution management with logistics efficiency as focus. Some of the services GIETL provides are imports/exports of products as importer/exporter of record (IOR/EOR), billing & distribution to end customers and high sea sales management. It also provides distinctive supply chain solutions to consumer goods companies. Gati operates a fleet of more than 5000 vehicles on road, and over 3100 business partners across India. A market leader in India, Gati has a strong market presence in the Asia Pacific region and SAARC countries. Today, Gati has offices in China, Singapore, Hong Kong, Thailand, and Nepal and has plans to foray into other markets. Revenue CAGR of 15% in last 15 years. 16 express distribution centres 64 warehouses Network of 540+ Offices, 5 e-fulfillment Centers, 3 million + sq ft warehousing space Fleet Strength of Express Fleets, 220 Reefer Trucks, 1400 Last mile e-com delivery fleet strength17 operational units

4 Revenue Breakup Mode of transportation Breakup 7.70% 2.70% 8% 3% 20.50% 69.31% Express Others E-Commerce Cold Chain 10% 79% Surface Rail Air Others Revenue from industry Breakup Geographical Breakup Pharma 37% 5% 8% 13% 15% 11% 11% IT Hardware Auro Ancillary Engineering Textiles FMCG Others 35% 85% 26% 31% South West East North

5 Investment Rationales Integrated services Gati provides a broad range of logistics services to customers seeking to use a variety of transportation options to optimize their supply-chain needs. The increasing scale and complexity of the customers operations has driven demand for logistics providers that can offer a full spectrum of logistics services across multiple geographies. Gati is among the very few transport and logistics companies which offer Road, Rail, Air, Cold chain, Express and Third party logistics services all over India, which provides competitive advantage over its peers. Its ability to fulfill their requirements by being an end-to-end logistics partner allows its customers to reduce the number of service providers they engage. It allows Gati to capture the demand for the integrated services requirements in the market. Strong network coverage and geographical reach Gati have 16 express distribution centers, 64 warehouses, network of more than 540 Offices, 5 e-fulfillment Centers, 3million plus sq ft warehousing space, Fleet Strength of 5000 plus Express Fleets, 220 Reefer Trucks, 1400 Last mile e-com delivery fleet strength and 17 operational units with access to 99 percent districts in India. With the increase in requirements for integrated logistics mainly in Tier 2 and Tier 3 cities. This provides company an opportunity to capitalize on the growth opportunities spread across various geographies and various channels. Long term relationships with clients Gati have more than 3100 institutional clients from various industries namely Automobiles, Pharmaceuticals, E-Commerce, Consumer durables, Textiles, Food and Beverages, etc, which includes brands such a s Havells, Schneider electrical, D Link, Cipla, Dr. Reddy s, Cadila, Ashok Leyland, TATA, Eicher, Ford, Adidas, Reebok, Gini and Jony, Pantaloons, Amway and many more. The increase in demand for the products of the companies in different industries further adds to the growth prospects of the company. It a have long term partnership with many of the major players in different industry will ensure consistent revenue for the company. Information Technology capabilities Gati through its proprietary enterprise resource planning software, GEMS (Gati Enterprise Management Systems ensures sharing of operations data between our operations, our customers and our service providers in order to facilitate warehouse management, route optimization, freight consolidation, back office functions and other services. Which will allow the company to reduce the cost expenses in its operations by planning of services and delivery in a cost effective manner by reducing the unwanted activities, which will eventually help the company to increase its margins and satisfy the customer needs? Ready to tap in E-Com boom The growth of e-commerce logistics is directly linked to the fortunes of the online retail industry. It is estimated that online retail will be an $18-billion industry in India in 2018 and e-commerce logistics will be a $2-billion industry in This number will only grow when online retail becomes, a $220 billion market in Online shopping of physical goods will increase from $2 billion in 2013 to $8.5 billion 2016, while online shoppers will double to 40 million in 2016 from 20 million in 2013.Growth for online retail will be increasingly driven by the smaller urban centres like which are each receiving over 2,600 deliveries a month. Tier-II and III cities and towns are expected to contribute to more than 350 million e-tailing shipments in E-tailers realize that reaching out to the next 10,000 plus pin codes would be difficult as most of these would be at tier 3 and tier 4 locations. Catering to these locations in-house would require significant loss funding. Third party

6 service providers are in a unique position to consolidate volumes, scale up and be more productive than in- house logistics arms. With many small scale and startup ecommerce players coming to market without in-house logistics facility further add opportunities to the company. Gati being a major player in this segment will be able to generate considerable amount of revenue from this segment. GST and Make in India Government has proposed to implement Goods and Service Tax (GST), which will integrate the multi layered indirect tax system into a single unified one. It would reduce the transportation cycle times, enhance supply chain decisions, lead to consolidation warehouse etc. which would help the logistics industry to reach its potential in terms of service and growth. Make in India campaign will make India into a manufacturing hub with various multi nationals setting up business units and making investments in India. The manufacturing sector in India contributes over 15 per cent of the GDP. The Government of India, under the Make in India initiative, is trying to give boost to the contribution made by the manufacturing sector and aims to take it up to 25 per cent of the GDP. With the increase in manufacturing the opportunities for transportation and logistics will increase substantially and it will act as a trigger for Gati for its growth into next level. Growth expected in international trade With the forecasted growth in India, the international trade is expected to grow at a faster pace and companies having all round transport and logistics network will have a competitive advantage and it will further fuel the growth of the companies in this industry. The steps taken by the government in recent times have shown positive results as India's gross domestic product (GDP) at factor cost at constant ( ) prices is Rs trillion (US$ trillion), as against Rs trillion (US$ trillion) in , registering a growth rate of 7.5per cent and higher growth forecasted, it will further increase the international trade. Gati being a major player in this segment is expected to benefit from this in a substantial manner. Consistent growth and sound financials The revenue of the company has grown at a CAGR of 15.24% in the last 10 years and the profit of the company has grown at a CAGR of 34.36% in the last 5 years. ROIC of the company stands at 6.80% in FY15, compared with 3.92% in FY14. The debt of the company is very low as the reserves of the company stands at Rs crores. Industry Overview India s logistics sector is poised for accelerated growth, led by GDP revival, ramp up in transport infrastructure, e-commerce penetration, impending GST implementation, and other initiatives like Make in India. This offers opportunities across the spectrum for companies in transportation, storage, distribution, and allied services. Empirical evidence suggests the Indian logistics industry grows at times the GDP growth. Moreover, infrastructural bottlenecks that have stifled sector s growth and promoted inefficiency are being addressed by the government. Building of dedicated rail freight corridors will promote efficient haulage of containerised cargo by rail. One key advantage of the dedicated freight corridor is that freight trains could be run on time tables similar to passenger trains, and the frequency can be theoretically increased to one train in 10 minutes. This will reduce time for goods transportation between Mumbai and Delhi to 18 hours from 60 hours now. Also, setting up of various industrial corridors along the dedicated freight route will metamorphose the warehousing business from small warehouses spread across the country to large, global-size warehouses concentrated in a few hubs. The proposed new goods and services

7 tax (GST) regime and e-commerce will alter the landscape in warehousing, supply chain management and third party logistics business. GST implementation will be a game-changing event for businesses and particularly for organised logistics players. The Indian logistics industry spends around 14% of the GDP on different types of cost incurred in logistics operation. The amount of cost incurred is very high in comparison to the logistics cost incurred by different nations. The logistics firms are moving from a traditional setup to the integration of IT and technology to their operations to reduce the costs incurred as well as to meet the service demands. The industry as a whole has moved from being just service provider to the positon where they provide end to end supply chain solutions to their customers. With the implementation of GST, the logistics companies, which are currently forced to set up many small warehouses across multiple cities can set up just a few, big warehouses region wise and can follow the hub-and-spoke model for freight movement from the warehouses to the different manufacturing plants, wholesale outlets, retail outlets and the various POS. This growth is also backed by the boom in the e- commerce sector and expansionary policies of the FMCG firms. This has increased the service geography of the logistics firms but they also have to meet the demands of quick delivery and tight service level agreements. The logistics requirement for e-commerce will grow as exponentially as e-commerce.indian logistics sector is estimated to have grown at a healthy 15% in the last five years. However, growth in sub-sectors varies, with the lowest being in basic trucking operations and highest in supply chain and e-tailing logistics. Some studies estimate the share of India s logistics spend in GDP at 13% (versus 7-8% in developed countries), implying overall size of $ bn (direct costs +wastages from inefficiencies). A comparison with other countries shows inefficiencies are high in the Indian logistics sector. This growth is also backed by the boom in the e-commerce sector and expansionary policies of the FMCG firms. This has increased the service geography of the logistics firms but they also have to meet the demands of quick delivery and tight service level agreements. Infrastructural bottlenecks across modes (rail, road, waterways) have stifled the sector s growth. Capacity constraints and inefficiencies can be noted from the high transit time in rail as key train routes operate at >110% utilisation, thus leading to an average speed of 25 km per hour. The road sector is fraught with inadequate and low-quality highway availability, thereby limiting the trucks size and impacting economies of operation. Despite being an economical mode of transport, railways has lost market share in freight movement to roads in the last few decades due to capacity constraints. Compared to other countries, India s rail share in goods transport is 31%, which has come down from 60% in 1980s and 48% in 1990s. Another key constraint is administrative delays. Despite being a relatively low-cost country, logistics cost in India is higher due to administrative delays led by paper work leading to huge inventory investments and wastage and a complex tax structure. Also, low penetration of new technology in the supply chain process is resulting in damage of goods. India has the least warehouse capacity with modern facilities, and given the fragmented industry state (large share with unorganised players), investment in IT infrastructure is almost absent at required scale. Logistics encompasses a wide array of services like transportation (air, surface, internal waterways, sea), storage (warehousing, logistics parks, container depots, cold chains) distribution (courier service, e-tail deliveries),and integrated/allied services (freight forwarding, 3PL) and investment in logistics boosts growth in its upstream and downstream economic activities, says the report. Key takeaways Indian logistics market is expected to grow at a CAGR of 12.17% by 2020 driven by the growth in the manufacturing, retail, FMCG and e-commerce sectors. India spends around 14.4% of its GDP on logistics and transportation as compared to less than 8% spent by the other developing countries. 3PL logistics market in India is expected to be worth US$ billion by Estimates that the warehouse market in India is expected to grow at a CAGR of 10% whereas freight forwarding market is expected to grow at a CAGR of 12% till 2020.

8 Risks and Concerns Competition from unorganized sector There are large number unorganized players in various transportation and logistics market in India and abroad. Gati is exposed to high completion from these players both in domestic and international markets. Dependence on end user industry Gati s majority revenue comes from delivering services to the various end user industries. So the Gati s performance over dependant on end user industries demands. Cost fluctuations Cost of labour and transportation contributes a significant share in the cost of Gati. The cost fluctuations can make a major impact on the, revenue and operational margins. Financials Quarterly financial review 16.4 per cent drop in consolidated net profit at Rs 5.79 crore for the quarter ended September 30 compared with Rs 6.93 crore in a year ago quarter. The total income from operations of the company during the September quarter also declined to Rs 405 crore, over Rs 412 crore in the year-ago period. Employee cost increased by 15.8% at Rs crore on YoY basis. Q1FY16 2ndQtr nd Qtr VAR % 2ndQtr stQtr VAR % Gross Sales Net Sales Other Operating Income Other Income Total Income Total Expenditure PBIDT

9 Interest PBDT Depreciation PBT Tax Reported Profit After Tax Minority Interest After NP NP afr Minority Interest & P/L Asso.Co Adjusted Profit After Extra-ordinary item PBIDTM(%) PBDTM(%) PATM(%) Profit and Loss Account as per rough estimates 2013/ /03# FY15 FY16E FY17E Gross Sales Net Sales Other Operating Income Other Income Total Income Total Expenditure PBIDT Interest PBDT Depreciation PBT Tax Reported Profit After Tax Minority Interest After NP Net Profit after Minority Interest & P/L Asso.Co Balance Sheet as per rough estimates SOURCES OF FUNDS: 2013/ /03# FY15 FY16E FY17E

10 Share Capital Reserves & Surplus Minority Interest Loan Funds Deferred Tax Liability Other Liabilities Total Liabilities APPLICATION OF FUNDS: Fixed Assets Intangible Assets Loans Investments Current Assets, Loans & Advances Inventories Sundry Debtors Cash & Bank Balance Other Current Assets Loans & Advances Current Liabilities & Provisions Current Liabilities Provisions Net Current Assets Other Assets Total Assets Conclusion and Recommendation We are positive on Gati over the long term and hence recommend a BUY at CMP of Rs and further add on declines between Rs.125 to Rs.120 for a target of Rs.170 to Rs.193 with stop loss maintained at Rs.115 Price Chart Disclaimer: This report is only for the information of our customers. Recommendations, opinions or suggestions are given with the understanding that readers acting on this information assume all risks involved. The information provided herein is not to be constructed as an offer to buy or sell securities of any kind. ATS and/or its group companies do not as assume any responsibility or liability resulting from the use of such information.