Logistics Industry; In A Consolidation Phase?

GeoPost, one of the leaders in the express logistics industry, is slated to buy 40% stake from Reliance Capital in DTDC, India's second largest courier and cargo mover. A French company and the second largest revenue generator in Europe, GeoPost has valued the 40% stake in DTDC at Rs 475 crore.

DTDC has 20 years’ experience in this field and is one of the fastest growing companies in the logistics field. As of now, DTDC has a presence in 12 countries like US, UK, Canada and India.

Back in 2006, Reliance Capital had picked 44% stake in DTDC worth Rs 60 crore. It proved to be a good value creator, with the investment growing multi-fold in a period of just 6 years. We feel that these acquisitions are indicative of a consolidation taking place in the industry, and one can expect many smaller players being merged with larger ones.

This is certainly not the first large scale acquisition of its kind. In 2004, worldwide logistics leader DHL, a part of Deutsche Post, had bought 88% stake in Blue Dart in two parts. While 68% stake was bought from promoters, another 20% was acquired through an open offer. At that point, DHL had valued the 88% stake at Rs 732 crore.This guided us to take a closer look at how the major logistics players have performed in the past. To this end, we tried to find out the CAGR growth in market capitalisation of a few listed companies. (See Table: Growth In Market Capitalisation)

Moving to Blue Dart, another larger player in express service. This company has also seen good growth since 2004. Blue Dart operates in more than 220 countries and covers more than 33,734 locations with a global brand name. Blue Dart, has witnessed an 8-year CAGR of 24% to touch Rs 4,781 crore and the stock has traded at a P/E of 39% as of March 2012. Blue Dart is also a debt-free company. In FY12, it posted a bottomline of Rs 122 crore and hence, the P/E stands at 39x.This brings us to Gati, a company which has been operating in the logistics industry since 1989. It has seen a CAGR of 20%, with its market cap increasing from Rs 70 crore in 2004 to Rs 318 crore. If we take look at the performance, it has witnessed the slowest CAGR. No wonder then, that it is trading at the cheapest valuations of 4.4x. Gati also had a total debt of Rs 156 crore on its balance sheet as of June 2012. On the valuations front, it reported a PAT of Rs 72 crore as on March 2012, resulting in a P/E of just 4.4x.

With the consolidation happening in the industry, we anticipate that Gati may be the next candidate in those being acquired. We feel that despite the debt on its account and relatively slower growth, the recent consolidation will help rerate the stock in the near future.