For the day we may expect higher opening on the back of strong global cues that may retest either 5140 or 5185 level.
However, due to overretracement in the short term, we may expect initial pullback for the same. Traders should be
cautious at higher levels but at the same time they should be aggressive buyers on declines with an upside target
5300/5350 (17900/18000). For the day we may expect support between 5095/5075 (17050)
GATI LTD
PRICE: RS.58 RECOMMENDATION: BUY
TARGET PRICE: RS.70 CONS. FY11E P/E: 16.5X
q Pick up in economy - positive for high margin SCM business of GATI
q GATI enjoys high operating leverage in the Express distribution business
q Issue of warrants to promoter at Rs.81 (40% premium to current market
price)
q Maintain FY10E EPS of Rs.1.9
q Introduce FY11 earning estimates with EPS of Rs.3.5
q Due to 21% upside potential we upgrade GATI to BUY with increased
price target of Rs.70 (Rs.62 earlier)
We recently spoke with the management of GATI and following are our key
takeaways:
Issue of warrants to promoter @ Rs.81 (40% premium to current
market price)
n The board of directors of GATI have approved issue of 4.8 mn warrants to promoter
group entity i.e. Mahendra Investment Advisors Pvt. Ltd. The warrants
would carry an option of conversion into equal number of equity shares with
face value to Rs.2 and premium of Rs.79 per share within a period of 18
months from the date of allotment of warrant.
n The issue of warrants would entail cash inflow of 25% of the value for the
company. This is positive as the money would be used for the capex plan of the
company which would ultimately result in increased revenues and profitability
for GATI going forward.
n Also the conversion price is Rs.81 per share which is at a premium of 40% to
the current market price of Rs.58. This is positive as it shows the optimism of
the management in the various businesses of GATI.
Further issue of 5.36 mn warrants to promoter @Rs.58
The board of directors of GATI have also approved issue of 5.36 mn warrants to its
promoter i.e. Mahendra Kumar Agarwal. The warrants would carry an option of
conversion into equal number of equity shares with face value to Rs.2 and premium
of Rs.56 per share within a period of 18 months from the date of allotment of
warrant. The issue of warrants would entail cash inflow of 25% of the value for the
company.
Growth in Coast-to-coast shipping business
n With a fleet strength of six vessels and tonnage of 43581 DWT, GATI operates
in the niche coast to coast shipping business. It operates on the Chennai - Port
Blair - Yangon - Chennai route and direct container service from Penang, Malaysia
and Thailand. Since this is niche segment it is operating at optimal capacities.
n Going forward the management is looking to acquiring vessels to expand its
tonnage and the fleet gets younger. The modern, expanded and betterequipped
vessels will result in reliable services to its customers. The fleet will operate
and serve the routes - Bay of Bengal, Andaman Seas and Malacca Straits
