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Execution underlines strengthened guidance

We visited the Farukh Nagar sorting centre of Gati in Haryana. It’s 113,000 sqft facility is located inside Allcargo Logistics Park. Farukh Nagar has helped Gati consolidate three different erstwhile NCR hubs across 84,000 sqft allowing the benefits of consolidation, cross docking (having 89 bays), dock lever, improved planning for IT integration and better connectivity. According to the management, current infrastructure is adequate to meet Gati’s NCR infrastructure needs for the next 10 years. Gati CEO Pirojshaw Sarkari reiterated the exit revenue run-rate of Rs30bn in three years and the exit FY23E gross margin/EBITDA run-rate of 29/9% and FY24E exit gross margin / EBITDA run-rate of 32 /12-15%, respectively. There will not be any meaningful increase in lease expenses despite Seven new sorting centres coming up as Gati will be giving up old sorting centres. We maintain our BUY rating on the stock.

* Commissioning of Farukh Nagar sorting centre has helped improve service parameters for Gati. Management expects the same to be visible in western zone once Mumbai sorting centre commissions by end June, early July, '22; and in South zone with the commissioning of Bangalore sorting centre by Dec, '22. There is a turnaround of ~200 trucks (average tonnage of 12te with minimum being 3te and maximum being 16.5te) handled by the facility. The rent is paid to Allcargo, and the facility is BTS in keeping with Gati's needs and incorporating the best practices to maximise throughput.

* Management focus remains on enhancing MSME mix. However, the path to gaining traction from the existing 3,000+ MSME customer set (many inactive) is through sales relationship and management doesn’t feel particularly threatened from the incremental competitive intensity either from new entrants or incumbents. It is also clear, given the nature of MSME operations, there’s very little difference that technology can bring for the incumbents, which can make a difference for key enterprise accounts (KEA) e.g. creating an API for uploading multiple orders or integration for consolidated e-way bills. MSME calls for cluster marketing, differential engagement and entrenched relations.

* Management reshuffling is largely complete; technology (backend) will be upended. Senior resource positioning is largely complete and, to our comfort, the four experienced Gati-ites have been placed in charge of the four zones. While lateral hires have been placed to improve processes (i.e. reducing TAT through route optimisation), core business of service delivery is still in the hands of the experienced personnel. While the technology front-end digitisation is largely complete, management expects GEMS (Gati enterprise management system) backend to shift from legacy oracle platform to microsystems.

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