Post on 17-Feb-2016
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Due Diligence for GATI Ltd
Neha Butala (C008) Vaibhav Khurana (C031)
Ruchita Sen (C049) Sanchit Jhunjhunwala (D022)
Ishaan Arora (H004) Hanisha Sharma (H054)
Financial Consulting Project
About the Company - Gati Ltd.
Incorporated in April 25th, 1989
Movement of cargo via road, rail, air & sea
1996 – strategic alliance with Indian Airlines
1997 – third party logistics (3PL)
1999 – entered international market; tie ups with Bhutan & Maldives postal department
2004 – worldwide saver
2007 – acquired 73.27% stake in Kausar India Ltd – transportation of of perishable goods in refrigerated trucks
2008 – strategic alliance with General Logistics System in Europe.
2008 – acquired 97.24% shares of Zen Cargo Movers Pvt Ltd (clearing house) Source: Annual Reports
About the Company - Gati Ltd.
Source: Annual Reports
TCI Freight
• Leading surface transport entity
• Multimodal
TCI XPS
• Door-to-door express delivery solution
• 13000 locations in India
• 200 countries
TCI Supply Chain Solutions
• Inbound & Outbound logistics
• 1100 owned trucks
• 38 refrigerated trucks
TCI Global
• End-to-end logistics solutions across boundaries
TCI Seaways
• Well equipped ships & caters to coastal cargo requirements
About the Company – TCIL Ltd.
Source: Annual Reports TCIL
17/11/2014
03/12/2014
19/12/2014
04/01/2015
20/01/2015
05/02/2015
21/02/2015
09/03/2015
25/03/2015
10/04/2015
26/04/2015
12/05/2015
28/05/2015
13/06/2015
29/06/2015
15/07/2015
31/07/2015
16/08/2015
01/09/2015
17/09/2015
03/10/2015
19/10/2015
04/11/20150
50100150200250300350
Gati Ltd. TCI Ltd.
Stock Price Comparison
60.99
38.11
GATI Shareholding Pat -tern
OthersFIIsIndian Insti-tutionsPromoters
24.68
5.672.78
66.87
TCIL Shareholding Pattern
OthersDIIsFIIsPromoters
Comparative Analysis for Shareholding Pattern
50
26
17
4
1 2
TCIL
TCI FreightTCI XPSTCI Supply chainTCI SeawaysTCI GlobalOthers
73
32
22
Gati
EDSCKausar Cold chainShippingOther
Segmental Revenue Breakdown
TCIL has a diversified portfolio as compared to Gati.
Source: Annual Reports, Moneycontrol
Parameters Gati Ltd. TCILDebt-Equity Ratio 0.39 0.61Long Term Debt-Equity Ratio 0.3 0.11Current Ratio 1.36 1.11Fixed Assets Turnover Ratio 4.32 3.26Debtors Turnover 8.82 5.94Interest Cover Ratio 3.06 4.07PBIDTM (%) 11.88 8.36PBITM (%) 9.6 6.11PBDTM (%) 8.74 6.86CPM (%) 8.28 5.71APATM (%) 6.01 3.46ROCE (%) 4.76 16.57RONW (%) 4.27 15.05Price Earning (P/E) 79.14 26.7Price to Book Value ( P/BV) 3.08 3.47Price/Cash EPS (P/CEPS) 55.67 15.98EV/EBIDTA 43.37 12.3Market Cap/Sales 4.26 0.9
•TCIL is a bigger company with market cap and sales Double that of Gati .• TCIL is more levered although its interest coverage is more than Gati.•So its excess debt is not affecting it interestPayment due to higher EBITDA.•Gati has higher fixed asset turnover ratiowhich shows that it has been able to use assets more efficiently.•By Dupont analysis TCIL is able to show higher returns as compared to GATI as its RONW and ROCE are higher.
Current Market Price 143.35 296.2Market Cap 1253.99 2253.30Net Sales 1648 2196.75Total Debt 472.7 852.22Cash in Hand 59.9 270.98
Financial Comparison of Gati and TCIL Ltd.Gati was carved out of parent company TCIL in 1989.Gati commands a leadership position with 28% market share in the ground express segment. Besides ground express, the company has a significant presence in provision of cold-chain warehousing and transportation solution (Gati-Kausar) and shipping facilities within the country’s territorial water (Gati Ship).
Source: CapitalLine
Financial Due Diligence
Operating Strategies
PRINCIPLE STRENGTHS•Integrated service offering: A large spectrum of services is available for the customers. With growing complex needs, clients are looking towards companies with broad service offerings.•Strong network coverage and wide geographical reach: Gati operates through 550 operating units in six countries. This aids their e-commerce business and express delivery offerings. •Information Technology capabilities: It has developed proprietary enterprise resource planning software, GEMS (Gati Enterprise Management Systems). It ensures sharing of operations data between operations, customers and service providers in order to facilitate warehouse management, route optimization, freight consolidation, back office functions and other services.•Long term relationship with clients: It has built a leading and trusted brand that stands for quality service and reliability.
Gati’s business strategy is to achieve and maintain leadership positions in its current areas of operations and areas they plan to expand into.
Accounting PoliciesGati changed its accounting policy during the financial year 2013-14, to be in line with the provisions of the Companies Act, 2013.
•Financial year changed from “July – June” to “April – March”•Recognition of income is done on an accrual basis, fixed assets are stated at historical costs, depreciation is provided on straight line method over the useful life of assets.•Investments are stated at cost or at the fair values.•Petroleum products are valued at lower of cost or net realisable value.
Financial Due DiligenceQuality of Earnings
PRINCIPLE FINDINGS
•Revenues from other is on a decline - Positive for the company. Gati Ltd. has negligible amount of exceptional items added to the profit over the years
•A sharp increase in the trade receivables not reflected in the sales turnover – possibly due to longer credit given to customers, economic downturn, intense competition in the industry. Affecting the earnings quality in a negative way.
•Inventories check - Gati Ltd. has negligible amount of inventories on ending of each year. Positive for the company.
•Net profit margin - has declined by huge percentage over the years. Not good for the company, a huge negative on the earnings quality.
Years 2015 2014 2013 2012
Revenues from non-core operations
11.324 8.763 8.122 96.576
Total Revenues 454.574 262.584 169.414 801.258
% of other income 2.49% 3.34% 4.79% 12.05%
Exceptional Items -2.959 0 0 0.34
Trade Receivables 62.629 37.912 28.105 25.729
Inventories 0.906 1.568 1.214-
Net Profit Margin5.38% 8.15% 15.71% 10.32%
Earnings quality of Gati Ltd. is a mixed bag with increasing trade receivables and decreasing profit margins causing concerns.
Customers & SuppliersIt caters to large corporate across various industry sectors.
Auto Sector
Ford
Honda
Suzuki
Tata Motors
Electronics
Samsung
Canon
Sony
Toshiba
Pharmaceuticals
Cipla
Sun Pharma
Novartis
In all, Gati serves over 9,000 customers across the supply chain services.
Gati has also expanded its
base to providing e-Commerce
logistics, and catering to leading e-commerce players in
India
E-Commerce
Supply Chain Cold Chain Solutions
FMCGs
Dabur
Nestle
Amul
HUL
Dominoes Pizza
GatiKausar, the subsidiary providing cold chain solutions has a strong customer base.
Financial Due Diligence
Source: Annual Reports
Status of Corporate Governance
•Strong adherence to Clause 49 of the Listing Agreements entered into with the stock exchanges
•None of the Directors on the Board are Members of more than ten Committees or Chairman of more than five Committees across all the public companies in which they are Directors
•Independent Directors, however, are on boards of several companies which could harm their unbiased and non-conflicting contribution to the company, and also might not be able to contribute in full capacity.
•Attendance of the directors not mentioned on the report which could have helped in gauging their interest indirectly.
Financial Due Diligence
Source: Annual Reports
Taxes – Direct and Indirect Provision for tax is made for both current and
deferred taxes
Provision for current income tax is made on the current tax rates based on the working results of the year
The company provides for deferred tax based on the tax effect of timing differences resulting from the recognition of items in the accounts and in estimating its current tax provision
The effect on deferred taxes of a change in tax rate is recognised in the year in which the change is effected
TAX EXPENSE Twelve Months Ended 31st March 2015
Nine months ended 31st March 2014
Current Tax - - - -
Deferred Tax 17.97 1.27
Taxes for earlier years
0.14 -
Reversal of Excess Deferred Tax Liability
- (78.20
Financial Due Diligence
Source: Annual Reports
Financial Due DiligenceNet Assets Position –FA, CA and InvestmentsSubstantial reduction in all inventories suggest Gati’s move to an inventory-light company.
Key Points•Change in Tangible Assets: The Tangible Assets this year have decreased from Rs 3,778.97 Crores to Rs 2,916.40 with the sale of Assets and adjustments in Depreciation•Sale of Assets: The primary sale is the entire divestment of ships gaining about Rs 1300 Crore in return •Moving towards conservative approach: It has reduced its Long Term Loans and Advances reducing Capital Advances by 72%, advances and rental deposits from Rs 662 Crores to 206 Crores•Reduction in Inventory: Gati has taken considerable effort to reduce the inventories from Rs 119 Crores to Rs 34 Crores in the last fiscal year
Source: Annual Reports
Financial Due DiligenceShareholding Pattern
Key Points•Individual Promoters have increased their shareholding by 3% to 9% in the last fiscal year•FIIs have invested heavily in the sector, increasing their shareholding percentage from a mere 0.28% to a strong 9.33%. •Goldman Sachs India Fund Ltd. Bought 2.17% stake in the company in June 2014 highlighting strong valuations for the company
An increase in shareholding of promoters suggests the promoters’ confidence in the company.
Legal and RegulatoryKey Points
•GST roll out would prove to be a big opportunity for the logistics industry.•They have Courier Legal Liability, Commercial General Liability and Directors and Officers Liability policy to mitigate the risk involved in business operations. •Many customers of the company would be revamping their supply chains, realigning the locations of warehouses thus generating tremendous business opportunities for logistics firms specializing in supply chain reengineering Source: Annual Reports
Financial Due Diligence D/E ratio is at 0.39 in March 2015 up from 0.28 from the last year owing to increase in long term borrowing
and liabilities. The long term borrowing has increased by Rs 40 Crores to Rs 2,709.38 Crores. This is because of increase in Term Loans from banks by Rs 164 Crores, unsecured loans in form of Fixed Deposits have also increased by Rs 149 Crores.
Secured Debentures of Rs 240 Crores have been initiated in the last fiscal year. These undertakings have increased the D/E ratio for the short term.
The long term trend of the capital structure shows Gati aiming to decrease its debt levels. The Long term Debt/Equity Ratio was 1.37 in the year 2010, and consistent efforts were made by Gati to decrease it to 0.30 over the last five years.
Relating to interest payments the interest coverage ratio has increased from 1.41 in 2010 to 3.06 this year, showing healthy growth and stability in the company.
Capital Structure – Long & Short Term
Source: Annual Reports
Mr. Chugh was the Chairman of the ITC Group from November 1991 to December 1995. On his retirement he was honored with the title of Chairman Emeritus – ITC. Mr. Chugh was also appointed as a Director on the Central Board of Reserve Bank of India
Mahendra Agarwal is the Founder & CEO of Gati Ltd. – leader and pioneer in Express Distribution and Supply Chain Solutions. Under his visionary leadership, Gati has evolved into a major ILSP (Integrated Logistics Service Provider).
Mr.Yoshinobu Mitsuhashi graduated from Keio University, Faculty of Law, and Department of Political Science.He joined Kintetsu World Express Inc., in 1979 and after serving in various positions, became the Managing Director of Kintetsu Integrated Air Services Sdn Bhd.
Mr. Sanjeev Kumar Jain is a seasoned and result oriented professional with an experience of over 25 years in key financial positions. Mr. Jain has varied industry expertise with business verticals like telecom, logistics and fertilizers.
CFO
CEO
Bablu Tewari is Chief Supply Chain Operations Officer, Gati Ltd. In this role, he provides leadership and oversight that drives Gati's Operations Team towards greatest value for both internal and external stakeholders. He is instrumental in devising the operational strategy and plan for Gati Ltd. and leads Gati's operations team in meticulously implementing it.
Board Of Directors
Management
Financial Due Diligence
Source: Annual Reports
Share price Performance
Gati has outperformed with respect to NSE, BSE Sensex and its competitor Blue Dart Express in the past 3 Years.
The overall growth in the same time period has been phenomenal with an increase of 364.88% as opposed to returns of BSE Sensex of 46.03% and NSE a 46.03%.
It has bettered the returns as against BlueDart Express with relative returns of 27.18% in these years.
Financial Due Diligence
Source: Moneycontrol
Net sales have been projected on the basis of 3 year moving average y-o-y growth rate
. Depreciation has been projected using last 5 years' moving
average of depreciation
Return on Market has been assumed on average of 15%, which gives an Equity Risk
Premium of 7.34%
Terminal growth rate has been conservatively assumed to be 6%, as that of Indian Economy for the
long run
Beta Value has been sourced from reuters as the 3 year Beta
WACC Calculations
Risk Free Rate (Rf) 7.66%Market Premium (Rm) 15%Beta 1.13CMP(17/11/2015) 141.6No. of shares 8.75Market cap 1239Debt Value 237.88
Cost of equity 15.95%Cost of Debt 5.00%Tax rate 20%
WACC 14.03%
NPV 2247.944 debt 237.88 Equity Value 2010.064 no. Of shares 8.75 fair price 229.7216
Valuation of GATI Ltd.DCF Assumptions
Sensitivity Analysis
229.72161 12% 13% 14% 15% 16%
5% 279.2029 237.7031 205.4565 179.6894 158.6364
5.50% 300.2917 253.2746 217.3509 189.0199 166.114
6% 324.8954 271.0707 230.7321 199.387 174.3393
6.50% 353.9724 291.6046 245.8975 210.9738 183.4305
7% 388.8648 315.5608 263.2293 224.0089 193.5318
Valuation of GATI Ltd.
HUL GatiEPS 19.83 3.43Number of shares outstanding (in Cr) 216.35 8.75CMP 797.1 140.35Earnings 4290.221 30.0125
zero acquisition premium exchange ratio 0.176076
When the deal is neither accretive nor dilutive 0.17297
Synergy 25%Combined price to earning ratio with Synergy 32.16139Combined price to earning ratio without Synergy 40.20169Minimum acceptable exchange ratio for the target 0.176076Maximum price that can be paid by buyer 0.176112
Key Points
zero acquisition premium exchange ratio of 0.176
For any exchange ratio of less than 0.1729, the deal would be accretive for the buyer.
Assumed combination of cost and revenue synergies is around 20%
For any exchange ratio greater than 0.1729, the deal would be dilutive for the buyer.
P/E ratio with synergy comes out to be 32.16
P/E without synergy comes out to be 40.21
Deal Structure
Thank you