Why Did Radhakishan Damani Buy Gati & Transport Corp Stock And Does It Signal End of Woes For Infra/ Cap Goods Sector?

Radhakishan Damani (or R K Damani as he is popularly known) is a veteran investor whom Rakesh Jhunjhunwala acknowledges as his “Guru”.

If you look at Radhakishan Damani’s portfolio and his brilliant stock picks over the past several decades, you will realize why even Rakesh Jhunjhunwala, the Badshah of Dalal Street, looks at him with so much respect.

Anyway, first let’s note Radhakishan Damani’s latest stock picks. He (acting through his investment companies Brightstar Investments and Derive Investments) bought 40.17 lakh shares (4.6%) of Gati at an average price of about Rs. 43 per share and 25,48,900 shares (3.5%) of Transport Corporation (TCI) at about Rs. 78 per share a few days ago.

Now the question is what Radhakishan Damani saw in Gati and TCI and whether there is a message in this that we should be paying attention to.

First, lets understand the dynamics of the logistics sector and then the scope for Gati & TCI.

The logistics sector presents an incredible arena of opportunity because nearly 90% of the market is still controlled by the unorganized sector. The size of the logistics market is a gargantum $230 billion and it is expected to grow at about 15% CAGR for the next several years. So, there is no dearth of opportunity for companies seeking to bring some cost and time saving innovation to the field.

What makes the logistics sector attractive is the expectation that FDI in e-commerce will be allowed so as to allow big-ticket MNCs to set up JVs so as to tackle supply-chain constraints and logistics. The news is that the top brass in the Government is keen to allow foreign direct investment in retail e-commerce before the end of FY 2014.

TCI is one of the oldest players in the logistics sector. It was set up in 1958 and is a leading multi-modal (road, rail, air, sea) integrated supply-chain and logistics solutions provider. It has about 1,400 branches and a fleet of 7,000 vehicles. It also has a strong distribution network across the length and breadth of the Country.

Financially, TCI has been doing well. Its ROCE is about 16%. Over the past five years, TCI’s topline has been growing at a CAGR of about 11% while the operating profits have grown at a CAGR of about 14%.

At the TTM EPS of Rs. 7.17, TCI is trading at a P/E of 13 times, which is not expensive when you compare it with the P/E of its peers like Gateway Distriparks (9), Container Corporation (15), AllCargo Logistics (7.5), Blue Dart (40) etc.

Gati is also a strong player in the logistics sector. It has been bogged down in the recent past due to losses in the shipping division. However, its founder & CEO, Mahendra Agrawal, expressed confidence that FY 2014 would be a good year with revenue growth of 15% and EBITDA growth of 30%. This was shown by the September quarter when Gati posted a profit of Rs. 4.6 crore as against a YOY loss of Rs. 7.8 crore.

Both companies, TCI and Gati, have strong vertical integration and have been gaining market share because unorganised players find it difficult to operate due to high wage cost and other procedural bottlenecks.

Anyway, the clear-cut message that Radhakishan Damani is sending is that the time is ripe to buy stocks of the beleaguered infra and capital goods sector because the economic cycle is turning. These stocks are literally available at throw-away prices. If Radhakishan Damani is right in his hypothesis about the economic cycle, investors who buy these stocks now will make a lot of money.

Speaking for myself, I have got my eye on two stocks from the capital goods/ infra space that appear to have superb fundamentals. The first is Ratnamani Metals and Tubes, in which Nalanda Capital has a 10.88% stake. Ratnamani Metals is a small cap stock which scores well on all investment parameters. It has a ROCE of 28% and a low debt:equity ratio of 0.18. The best part is that it is trading at a rock bottom P/E of 4.88.

The second is Cummins India, the leading manufacturer of Diesel and Gas Engines for Power generation, Industrial, Automotive and Distribution markets. There is no doubting that Cummins is a powerhouse stock with strong market leadership, superior RoE/ RoCEs, cash generation and generous dividends. However, it has been pummeled by the weakness in the economy and has been reporting weak earnings.

When the economy turns, you can be sure that Ratnamani & Cummins will be among the stocks that will be first off the block. However, this may take time and you must have patience.