Gati is turning over a new leaf. Buy for target price of Rs 234 (58% upside): Nuvama

Turning over a new leaf

Incorporated in 1989, Gati (GTIC) has emerged as one of India’s leading multi-modal express logistics players. It operates in two segments — express logistics and fuel stations, which contribute 85% and 15% to total revenue, respectively. We initiate coverage with a ‘BUY’ rating and a DCF-based fair value of INR234, implying an upside of 58% from its CMP (EV/EBITDA of 20.2x/14.7x on FY25E/FY26E earnings), backed by:

i) A volume CAGR of 13.5% in the surface express logistics over FY23–26E, led by a greater focus on the core business, improvement in service levels, and addition of load handling capacity.

ii) A 449bp expansion in EBITDA margin over FY23–26E to 8.6% on operating leverage benefits, improving efficiency and cost optimisation.

iii) A 195.1% CAGR in free cash flow over FY23–26E to INR134cr on improving profitability, stable working capital, and asset light expansion.

iv) Multi-fold jump in RoCE/RoE to 23.4%/11.9% on profitability and efficient capital management.

v) Greater preference for national players and a faster-than-industry growth expected for express players.

Transformation to Gati 2.0, an overhaul of operations and management

Declining service quality, scattered business operations, and heightened competition, led to performance declining over FY16–20, with EBITDA margin contracting to 2.1% from 7.8%. Allcargo Logistics (AGLL) acquired a majority stake in FY21 and: i) revamped GTIC’s management bringing in experienced professionals; ii) divested stake in non-core operations (international cargo, logistics parks, and cold chain) and identified non-core assets to sell (fuel station, non-core land and buildings), thus freeing up capital; iii) switched to an asset-light model, iv) utilised the freed up capital to pare off debt; and v) cleaned its Balance Sheet (rectified legacy contracts and cleared contingencies). Owing to these efforts, volumes saw a sharp uptick after the lifting of COVID-related restrictions, registering a 20.4% CAGR over FY21–23. While costs surged on higher provisions (bad debts and contractual deductions) and turn aroundrelated expenses (consultancy charges and employee cost), margin recovered to 4.1% in FY23 from 2.1% in FY20 on higher volume and efficiency. Asset turnover improved to 3.9x in FY23 from 2.2x in FY20.

Efficiency, service, and capacity enhancement to drive 13.6%/13.8% volume/revenue CAGR over FY23–26E

We expect revenue CAGR of 13.8% over FY23–26E to INR2,542cr, with a growth of 15.6%/20.6%/20.2% in surface express/air express/supply chain management and a 0.9% annual fall in the fuel station segment. The shift in focus to the core express business has led to improved service quality, improved load handling capacity, and lower turnaround time at its hubs. The full impact of these measures, expected to be visible from FY25E, will drive customer additions and enhance wallet share from existing customers. Over FY23–26E, we expect surface/air express volumes to grow at 13.5%/18.2% CAGR to 1.64mt/0.02mt. We expect a muted realisation on strong competition.

Expect 449bp expansion in EBITDA margin over FY23–26E, PAT to turn positive

We expect EBITDA to grow to INR218cr in FY26E from INR70cr in FY23 (45.9% CAGR), led by: i) operational efficiency (the newly commissioned hubs are fully automated with cross bays and higher capacity, improving turnaround and efficiency); ii) volume growth (more than 80% of indirect operating costs is fixed in nature, which will see improved absorption on higher volume); and iii) cost optimisation (we expect non-core one-off expenses such as consultancy charges and bad debts to decline with a cleanup of the Balance Sheet). We expect EBITDA margin to expand 449bp over FY23–26E to 8.6% and EBITDA/kg to clock 28.5% CAGR to INR1.3. With an asset light capacity expansion, we expect depreciation to stay rangebound. We expect lower interest cost as GTIC continues to deleverage. We expect PAT of INR98cr in FY26E as against of INR13cr in FY23.

Asset light growth and profitability to drive 195.1% CAGR in FCF over FY23-26E, GTIC to turn net cash positive

Working capital stands ~37 days. Its receivables average ~55 days and pertains to corporate accounts. MSME and retail clients operate on a cash and carry basis. We expect the working capital cycle to settle ~29 days in FY26E on a higher share of non-corporate revenue. With better working capital and EBITDA growth, we expect 24.2% CAGR in OCF to INR146cr in FY26E. We estimate a cumulative OCF of INR285cr over FY23–26E, of which ~80% will trickle down to FCF due to an asset-light capacity expansion. We expect FCF to grow to INR134cr in FY26E from INR5cr in FY23. As FCF will aid further deleveraging, we expect GTIC to turn net cash positive at INR316cr, with a net D/E ratio of -0.39x as of March 2026. With deleveraging, improving asset turnover, and higher profitability, we expect RoCE/RoE to expand to 23.4%/11.9% in FY26E from 2%/-2% in FY23.

Initiate coverage with a ‘BUY’ rating and potential upside of 58%

We are optimistic on GTIC’s long-term growth story due to capacity expansion, improving efficiency and service levels, strong growth in profitability, a strengthening Balance Sheet, and favourable industry dynamics. We expect valuations to catch up with peers as its margin and market share improves. Muted realisation on higher competition and slowerthan-expected volume growth due to a weak macro environment are the key risks to our assumptions. We have not included any synergy benefits between GTIC and AGLL’s contract logistics business in our estimates. We arrive at a DCF-based fair value of INR234, implying an EV/EBITDA and P/E multiple of 14.7x and 31.1x on FY26E earnings, respectively. Recommend ‘BUY’.