Logistics sector is in focus given Delhivery's IPO that's hit the markets soon.
Elara Capital's Ankita Shah and Ash Shah, in a report dated May 9, 2022 said, “Based on growth potential, we value financial year 2026 expected profit after tax (PAT) attributable to Gati’s shareholders in line with peers, at price to equity of 30 times discounted back to FY23E at a WACC of 15% (factoring in execution risk) and arrive at a one year forward target price of ₹275. We initiate with Buy.”
As of 9.53 am on May 13, 2022, Gati is trading at ₹138.60 per share on the NSE, up 0.6%.
Shah and Shah of Elara say the reason behind this 76% upside possibility is the fact that Gati has transformed itself with sale of its non-core assets nearing completion and express logistics finally finding its momentum back.
They said, “Initial green shoots visible in initiatives such as infrastructure strengthening, sales acceleration to high-yielding SMEs and B2B/digitization focus," adding, “Organized express logistics industry may grow at a faster rate and incremental synergies with parent, Allcargo Logistics, should aid end-to- end customer service.”
The duo said Gati's revenue is expected to reach ₹1900 crore and EBITDA margin is likely to reach 10.8% by financial year 2024.
However, there some risks involved as well. Elara Capital says Delhivery and Spoton's consolidation could impact Gati's growth. There's intensifying competition in the business as well, the two wrote.
Other key risks raised in the report are; execution risk by the new Gati management, inability to reduce losses in its e-commerce segment and the wider economic slowdown.
The assumptions that Shah and Shah made to reach the ₹275 target price, up 76% from its current price, are also a laundry list in itself.
They said, assumptions include divesting Gati's fuel station business by next year, GatiKWE's revenue compounded growth of 23%, improvement in standalone profitability, capital expenditure of ₹2000-3000 crore and an expectation that financial year 2026's consolidated revenue to reach ₹2800 crore with an EBITDA margin of 12.2% and profit after tax of ₹150 crore.
The duo wrote, “In the long-term, we expect FY26E revenues of ₹2800 crore and return ratios of +20%, comparable with peers such as TCI Express and Blue Dart Express. Based on growth potential, we value FY26E PAT attributable to Gati shareholders in line with peers at P/E of 30x discounted back to FY23E at 15% WACC (factoring in execution risk) to arrive at a one year forward TP of INR 275. Initiate with Buy.”