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Gati 2QFY14 Conference Call Update

February 7, 2014, Friday, 18:55 GMT | 13:55 EST | 23:25 IST | 01:55 SGT
Contributed by Nirmal Bang


We hosted the conference call (con-call) of Gati today to discuss its 2QFY14 financial performance. Following are the key takeaways:
 
- The management attributed Gati’s good quarterly performance to strong synergy from its joint venture Gati-KWE, which posted revenue of Rs2,610mn, up 16% YoY, , with an operating margin of 10.8% and EBITDA of Rs290mn, up 26% YoY. The JV has signed up IBM for consulting (Project Udaan), which is expected to cut costs by 1.0%-1.5% and the impact is likely to be visible from 3QFY14. It expects JV synergy to grow over 20% by improving profitability via cost efficiency.
 
- Gati has delivery capability currently of 15,000 packages per day, compared to10,000 packages per day a year ago. The incremental capacity is because of the company’s rising focus on Tier I and Tier II cities and on packages weighing less than 500gms (growth of 280%). The company plans to expand its capacity to 25,000 packages per day by the year-end. Gati’s model being asset-light, this expansion will not entail high fixed costs, with Rs70mn-Rs80mn envisaged as the capex that is likely to be incurred.
 
- Gati’s management sees significant opportunity in the e-commerce segment, with cash on delivery (CoD) being the key driver. This business grew 128%/40% YoY/QoQ, respectively, in 2QFY14. The company expects to achieve revenue of Rs650mn in FY14E. The segment’s RTO (return to origin) currently stands at 13%, below the industry benchmark of 20%. The company is aiming at reducing RTO to single-digit. Gati’s network connectivity is multi-modal, with 80% of the deliveries done via road and rail transport and 20% by air. The company’s focus is on the more profitable air delivery segment, which witnessed higher growth of late. The company was able to reduce its transaction time from T plus six-seven days last year to T plus three days currently. The customer interface part of the business like providing delivery boy, last mile delivery etc is done by Gati, while back-end services like sourcing article from the vendor, etc is done by Gati-KWE. The entire e-commerce revenue is booked by Gati and a part of back-end work - which is executed by Gati-KWE on an arm‘s length basis - is treated as costs in Gati’s books and as income on Gati-KWE’s books.
 
- Gati’s cold chain segment posted revenue of Rs116mn, up 6%, with EBITDA at Rs10mn, down 39%, following lower off-take of some products. The company plans to set up 10 cold-chain warehouses at an estimated capex of Rs1,200mn-Rs1,300mn likely over the next two-three years.
 
- Gati has brought down its debt level from Rs4,920mn in 1QFY14 to Rs4,880mn in 2QFY14. The company wants to maintain its debt below Rs5bn. The management has given FY14 turnover guidance of Rs15bn, with EBITDA at Rs1,250mn and PBT at Rs500mn.
 
- Gati Ship’s business continues to incur losses. It may be recalled that Gati had transferred its entire shipping assets into a 100% subsidiary called Gati Ship and subsequently sold a 40% stake in it and also disposed off three loss-making ships. Now Gati Ship has only two vessels. The plan is to dilute stake further and remain a minority holder or exit the business completely. Total capital employed in the shipping business was Rs2bn, but the current value on the books stands at Rs0.5bn, with the value partially impaired in June 2013. Once this business is sold completely, the debt will reduce (debt of Rs660mn in books of Gati Ship). However, the asset sales will not have any positive impact on cash flow and in fact Gati may need to infuse some funds because the value of assets is less than its debt.
 
- Gati has FCCB (foreign currency convertible bonds) amounting to Rs1,370mn, which will mature in December 2016. The conversion price of FCCB is Rs38.5, at the rupee- US dollar rate of Rs52.23/US$. If the FCCBs are converted into equity, it will result in addition of 30mn shares (~35% equity dilution). However, as per the management, FCCB holders are not keen to convert their holdings into equity shares. Gati has land parcels (at Delhi, Gurgaon, Jaipur, Palwal, etc having book value of Rs500mn) worth Rs1,200mn-Rs1,500mn. The company plans to sell its land assets and repay its FCCB holders.