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Gati Kintetsu Express Private Limited January 07, 2021 Ratings Facilities/Instruments Amount Rating1 Rating Action (Rs. crore) Long Term Bank Facilities 30.00 CARE A+; Negative Assigned (Single A Plus; Outlook: Negative ) Long Term Bank Facilities 248.63 CARE A+; Negative Reaffirmed (Enhanced from 207.94) (Single A Plus; Outlook: Negative ) Short Term Bank Facilities - - Withdrawn Total Bank Facilities 278.63 (Rs. Two Hundred Seventy-Eight Crore and Sixty-Three Lakhs Only) Commercial Paper 30.00 CARE A1+ Reaffirmed (Carved out of Cash Credit)* (Enhanced from 20.00) (A One Plus ) Total Short Term Instruments 30.00 (Rs. Thirty Crore Only) Details of instruments/facilities in Annexure-1 *carved out of the sanctioned working capital limits of the company (Proposed) Detailed Rationale & Key Rating Drivers The reaffirmation of rating assigned to the bank facilities and instruments derive strength from acquisition by Limited and benefits of operational and financial synergy, strategic and operational support from Kintetsu World Express, established position in express cargo industry with pan- presence and adequate infrastructure, comfortable capital structure with average debt coverage indicators and diversified segments with reputed customer base. The ratings also factor decline in revenue along with losses reported in FY20 (refers to period April 01 to March 31) and H1FY21 (refers to period April 01 to September 30), large share of revenues from Less than Truck Load segment, concentrated revenue profile, dependence on external working capital limits with higher utilization, stiff competition from unorganized player and new startups backed by deep pocketed international PE Investors and economic slowdown due to COVID 19. Rating Sensitivities Positive Factors - Factors that could lead to positive rating action/upgrade:  Ability of the company to benefit operational and financial synergies from Allcargo group thereby having improvement in operations at a sustained level.  Ability of the company to improve the current ratio by 1.5x and TDGCA less than 3x. Negative Factors- Factors that could lead to negative rating action/downgrade:  Any reduction in shareholding of ALL in Gati Limited below the current level of 46.86%.  Any debt-funded unplanned large capex

Outlook: Negative The negative outlook on the ratings reflects the weakening of GKEPL’s credit metrics during FY20 and H1FY21. CARE’s belief that the financial profile may further weaken in near term on account of disruption of supply chain due to outbreak of COVID- 19. The outlook may be revised to stable if the company is able to demonstrate improvement in the credit profile, while maintaining its capital structure.

Detailed description of the key rating drivers Key Rating Strengths Acquisition by Allcargo Logistics Limited and benefits of operational and financial synergy Gati Limited was initially promoted by Mr. Mahendra Agarwal. However, Allcargo Logistics Limited (ALL) (CARE AA; Negative/ CARE A1+) has completed acquisition of 46.86% stake in Gati Limited (holding company of GKEPL) during April 2020, Hence ALL becomes the promoter of Gati Limited and its group/subsidiary companies. Post completion of acquisition, Mr. Adarsh Sudhakar Hegde has been appointed as the Managing Director of GKEPL during October 2020. He has more than two and half decades of experience in the logistic sector. Under his leadership, ALL has established six CFS & ICD facilities across India. He is also part of the leadership team at ECU Worldwide. Group has appointed Alvarez and Marshall to turnaround the operations of the company and implemented a transformation program- “Avvashya”.

1Complete definition of the ratings assigned are available at www.careratings.com and other CARE publications 1 CARE Ratings Limited

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a. Operational Synergy: GKEPL can now leverage Allcargo network to offer its customers the opportunity to explore Allcargo’s services including Container Freight Stations and Inland Container Depots, Project Logistics, and Contract Logistics to tap into the strengths of Allcargo’s global network that operates through more than 300 offices in over 160 countries. Further, Gati’s extensive domestic reach into more than 19,800 PIN codes and 735 out of 739 districts along with excellence in express distribution and first and last mile logistics combined with Allcargo’s worldwide presence and expertise in diverse logistics verticals, enables the group to offer truly end-to-end logistics services to customers in India and across the world. b. Financial synergy: GKEPL will achieve financial synergy by having access to the ALL customers resulting in improvement in operating income. Further, optimization of use of technology and resources including manpower and office locations will improve operating margins. Further, there will be ease in access to capital and the cost of funds is expected to come down on account of better credit profile of the promoter (i.e Allcargo Logistics Ltd). Strategic and operational support from Kintetsu World Express (KWE) KWE is one of the global leading logistics company with a strong presence and longstanding relationships in Japan, Pacific and North America regions with a number of leading Japanese and global clients who have their operations in India. GKEPL has been benefitting through the strategic venture with KWE’s process and its expertise in providing service in meeting the business needs of global logistics clients. The association with the KWE group helps GKEPL draw support in terms of marketing and operational assistance as well as a strong brand presence. Established position in express cargo industry with pan-India presence and adequate infrastructure GKEPL operates through 19 express distribution hubs located at Ambala, Delhi, Jaipur, Lucknow, Noida, Delhi NCR, Ahmedabad, Bombay (Inside), Bombay (Outside), , Pune, , , Coimbatore, , Bhubaneswar, Kolkata, Guwahati and Ranchi covering the corners of the country. Further, the company has a network of 70 delivery warehouses having 1 Mn Sft, 600 own and franchise customer care centres reaching 19800 pin codes across the country. It has employed about 4500 professionals across India for operations. The company operates with a fleet of 370 own vehicles and 5,000-plus vehicles, and an assured space across all major airline sectors which help delivery of goods to every corner of the country. Comfortable capital structure with average debt coverage indicators The capital structure of the company marked by debt equity ratio and overall gearing deteriorated from 0.16x and 0.43x as on March 31, 2019, to 0.40x and 0.77x as on March 31, 2020, respectively. Deterioration was primarily on account of adoption of IND AS-116 regarding the lease obligations along with availing loans for the purchase of new vehicles, equipment to augment capacity and development of IT Infrastructure and overhaul to improve the operational efficiency and higher reliance of working capital borrowings. However, the overall gearing remained below unity for the last three years. The other coverage indicators, total debt to GCA deteriorate from 3.38x during FY19 to 11.56x during FY20, primarily on account of increased debt including lease liability coupled by reduced cash accruals due to loss of business due to covid-19 resulting lower absorption of overheads and higher finance cost. Similarly, interest coverage deteriorated from 3.70x during FY19 to 1.73x during FY20. Analysis of Management initiatives and its impact The company has appointed Alvarez and Marshall to turnaround the opeartions of the company and implemented a transformation program- “Avvashya”. More than 200 initiatives are currently under process for improving operational excellence, which includes sales acceleration, customer service, digital transformation, CRM, finance ERP etc. ALL has brought changes in the management team by bringing officials from ALL to carry out the day to day operations. As part of the cost optimization measures, the company has implemented the policy for paycut for the employees at various levels, removal of unneccessary roles or merging of roles wherever required and usage of technologies to conduct training. Further, the Company is optimizing the cost incurred in office space by cosolidating the ALL and Gati’s resources at various locations across India. Diversified segments with reputed customer base The company caters to a diversified clientele which is spread across varied industrial segments such as general manufacturing products, computer, peripherals & electronic components, auto components, pharmaceuticals, apparel and other. Besides segmental diversification, the company also benefits from client portfolio comprising reputed and major players in every segment. The company has long-term relationship with some of its top clients which include TVS Motor Company Limited, 3M India Limited, Samsung India Electronics Private Limited, Maruti Suzuki India Ltd, etc. The company has a diversified customer base with top 10 customers contributing 9.02% during FY20 (as against 11.78% during FY19). Further during H1FY21, the company has signed 809 new business contracts with reputed clientele. Key Rating Weaknesses Decline in revenue with losses reported in FY20 and H1FY20 During FY20, the overall operating income of the company has witnessed a decline of 5.6% to Rs.1160.74 crore (as against Rs.1229.64 crore in FY19) is mainly due to reduced volumes handled in FY20 coupled by reduced realisation, reversal of shipments undelivered resulting in unsatisfied performance obligation of Rs.21.16 crore in FY20 (as against Rs.9.42 crore in FY19) and exit from the railways business in Q1FY20. The PBILDT margin has witnessed a decline of 152 bps from 5.18% at Rs.71.56 crore in FY19 to 4.29% at Rs.49.89 crore in FY20 on account of fixed employee expenses and recognition of allowances/written off of doubtful receivables. The company has reported loss at PAT level for the first time since the first year

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Press Release of operation in 2012. The loss is due to significant reduction in operating profit, depreciation expenditure, impact of IND AS 116 and higher finance cost led by availing term loan for purchase of equipment to augment capacity and development of IT and vehicle loan. Further during H1FY21, the company has reported revenue of Rs.369.89 crore (as against Rs.604.73 crore during H1FY20) with a PAT loss of Rs.19.25 crore (as against Rs.10.22 crore during H1FY20) on account of under absorption of fixed overhead due to slump in demand due to COVID 19 and high interest and depreciation expense. Large share of revenues from Less than Truck Load (LTL) segment GKEPL has an integrated hub-and-spoke operating model that entails consolidation of goods from multiple locations through feeder vehicles to transhipment hubs and then further transported to respective destinations. Full Truck Load generates lesser net revenue than LTL mode due to transportation of goods from a single customer to single destination for certain customers. However, in LTL transportation consolidation of goods from multiple customers are done through transhipment centres and further it is dispatched to multiple location resulting in better margins due to optimization of capacities. Concentrated Revenue Profile The income profile of the company during FY20 is broadly divided into four categories i.e. surface express constituting Less than truck load (LTL) and MVATS-Full Truck Load (90%), Air express (6%) and Supply Chain Management (SCM) (4%). The major operational division of the company continues to be surface express division wherein GKEPL derives most of the revenue contributing 89% of the total operating income. Dependence on external working capital limits with higher utilization Though the operating cycle remained stable at 35 days during FY20, the working capital utilisation of the company has remained high during the trailing 12 months ended October 2020 with maximum utilization of 88% on account of stretched receivables, operational advances extended to vendors (vehicle owners) and credit period of 180 days extended to GATI limited. However, the company has realized payments from Gati Limited and outstanding receivables from has reduced from Rs.72 crore as on September 30, 2019 to Rs.17.87 crore as on November 30, 2020. Stiff competition from unorganized players and new startups backed by deep pocketed international PE Investors The road freight transport industry is deregulated and highly fragmented. The sector, as a whole, is not very organized and the work is competitive, especially in the big cities, where there are a vast number of unorganized small truck owners and service providers providing stiff competition at razor thin margins. Apart from unorganized player, there is a potential threat from technology driven logistics startups backed by deep pocketed International PE Players. Economic slowdown due to COVID 19 Logistics operations are dependent on the overall economic condition of the country. Higher economic activity translates into higher freight movement which drives demand for road freight transport industry. Overall demand for exports increased by single digit during FY20 vis-à-vis a double-digit growth during FY19 on back of slowdown in the global economies as well as the outbreak of the Covid-19. Looking at the overall macroeconomic situation and the emerging stress on various sectors, the logistics industry might see a slowdown in the next few quarters.

Liquidity: Adequate-The temporary mismatch in cash flows on account of Covid-19 impact resulting in operating cash losses of Rs 10.83 core and repayment obligations of Rs 18.57 crore during H1FY21, were funded by realization of debtors, tax refund of Rs 12.27 crore and moratorium for 3 months (March 2020 to April 2020) provided by lender under Covid-19 relief. Post H1FY21, the Company liquidity position is adequately placed with improvement in cash flows due to realization of GATI receivables of almost Rs 23 crore in November 2020, thereby outstanding receivable from GATI reduced from Rs.40.50 crore as on March 31, 2020 to Rs.17.87 crore as on November 30, 2020 and improvement in operating income to pre-covid level to meet repayment obligation of Rs 12.70 crore for H2FY21 coupled with free cash & bank balance of Rs 24.32 crore as on November 30, 2020. This apart, the company has undisbursed sanction limit of Rs.30 crore, which gives cushion for the company to meet the working capital requirements. However, the working capital utilization for the last twelve months ending October 2020 stood high at 88%.

Analytical approach: Standalone; The rating of Gati Kintetsu Express Private Limited is based on standalone financials of the Company. However, operational and financial linkages of the group/parent companies are factored while assessing the rating.

Applicable Criteria Criteria on assigning ‘outlook’ and ‘credit watch’ CARE’s Policy on Default Recognition Criteria for Short Term Instruments Rating Methodology- Service Sector Companies Liquidity Analysis of Non-Financial Sector Entities Financial ratios – Non-Financial Sector Rating Methodology: Factoring Linkages in Ratings

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About the Company Gati Kintetsu Express Private Limited (GKEPL) is a joint venture (JV) company between Gati Limited, one of India’s largest Express Distribution and Supply Chain (EDSC) solution provider and Kintetsu World Express Inc (KWE) – One of Japan’s leading logistics provider having shareholding of 70:30, respectively. Earlier, the EDSC division was operated by Gati Limited which has been transferred to GKEPL since March 31, 2012. Gati Limited was established in 1989 by Mr Mahendra Agrawal and over the period of time emerged as one of India’s largest road transport company. Gati has established connectivity across air, road, ocean and rail providing various logistics services to the customers in the industry with presence in 735 districts in India covering 19,800 pin codes. Gati at group level offers wide range of services viz. Express Distribution, Supply chain management solution, e-commerce logistics, managed value added transportation services (MVATS), freight forwarding and cold chain logistics. Gati, at group level, has a network of over 600 offices including 18 large hubs, operates a fleet of 5,000 vehicles on road across India. In 2020, Allcargo Logistics Limited (CARE AA; Negative; CARE A1+ reaffirmed on October 7 2020) has acquired stake of 46.86% and becomes the promoter of the Gati Limited (CARE BB+ Stable; CARE A4+). Allcargo Logistics Limited operates in multiple business segments - Multimodal Transport Operations (MTO), Container Freight Stations (CFS)/Inland Container Depot (ICD), Project & Engineering solutions, Contract Logistics, and Logistics Parks. ALL is amongst the leading players in the global LCL consolidation market with a strong network across 160 plus countries and 300 plus offices covering over 4,000 port pairs across the world. Brief Financials (Rs. crore) FY19 (A) FY20(A) Total operating income 1229.64 1160.74 PBILDT 71.56 49.90 PAT 27.01 -7.78 Overall gearing (times) 0.43 0.77 Interest coverage (times) 3.70 1.73 A: Audited Status of non-cooperation with previous CRA: Not Applicable

Any other information: Not Applicable

Rating History for last three years: Please refer Annexure-2

Covenants of rated instrument / facility: Detailed explanation of covenants of the rated instruments/facilities is given in Annexure-3 Complexity level of various instruments rated for this company: Annexure 4 Annexure-1: Details of Instruments/Facilities Name of the Date of Coupon Maturity Size of the Rating assigned Instrument Issuance Rate Date Issue along with Rating (Rs. crore) Outlook Fund-based - LT-Cash Credit - - - 220.00 CARE A+; Negative

Non-fund-based - ST-Bank - - - 0.00 Withdrawn Guarantees Fund-based - ST-Term loan - - - 0.00 Withdrawn

Fund-based - LT-Bills discounting/ - - - 30.00 CARE A+; Negative Bills purchasing Fund-based - LT-Term Loan - - June 2024 28.63 CARE A+; Negative

Commercial Paper-Commercial Not Applicable - - 30.00 CARE A1+ Paper (Carved out) (Proposed)

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Annexure-2: Rating History of last three years Sr. Name of the Current Ratings Rating history No. Instrument/Bank Type Amount Rating Date(s) & Date(s) & Date(s) & Date(s) & Facilities Outstanding Rating(s) Rating(s) Rating(s) Rating(s) (Rs. crore) assigned assigned assigned assigned in 2020- in 2019- in 2018- in 2017- 2021 2020 2019 2018 1. Fund-based - LT- LT 28.63 CARE A+; 1)CARE 1)CARE 1)CARE 1)CARE Term Loan Negative A+; A+; Stable A+; Stable A+; Stable Negative (06-Dec- (03-Oct- (04-Aug- (29-Jul-20) 19) 18) 17)

2. Commercial Paper- ST 30.00 CARE A1+ 1)CARE 1)CARE 1)CARE 1)CARE Commercial Paper A1+ A1+ A1+ A1+ (Carved out) (29-Jul-20) (06-Dec- (03-Oct- (04-Aug- 19) 18) 17)

3. Fund-based - LT- LT 220.00 CARE A+; 1)CARE 1)CARE 1)CARE 1)CARE Cash Credit Negative A+; A+; Stable A+; Stable A+; Stable Negative (06-Dec- (03-Oct- (04-Aug- (29-Jul-20) 19) 18) 17)

4. Non-fund-based - ST - - 1)CARE 1)CARE 1)CARE 1)CARE ST-Bank Guarantees A1+ A1+ A1+ A1+ (29-Jul-20) (06-Dec- (03-Oct- (04-Aug- 19) 18) 17)

5. Fund-based - ST- ST - - 1)CARE 1)CARE 1)CARE - Term loan A1+ A1+ A1+ (29-Jul-20) (06-Dec- (03-Oct- 19) 18)

6. Fund-based - LT-Bills LT 30.00 CARE A+; - - - - discounting/ Bills Negative purchasing

Annexure-3: Detailed explanation of covenants of the rated instrument / facilities-Not Applicable Annexure 4: Complexity level of various instruments rated for this company Sr. No. Name of the Instrument Complexity Level 1. Commercial Paper-Commercial Paper (Carved out) Simple 2. Fund-based - LT-Bills discounting/ Bills purchasing Simple 3. Fund-based - LT-Cash Credit Simple 4. Fund-based - LT-Term Loan Simple 5. Fund-based - ST-Term loan Simple 6. Non-fund-based - ST-Bank Guarantees Simple

Note on complexity levels of the rated instrument: CARE has classified instruments rated by it on the basis of complexity. Investors/market intermediaries/regulators or others are welcome to write to [email protected] for any clarifications.

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Contact Us Media Contact Mradul Mishra Contact no.: +91-22-6837 4424 Email ID: [email protected]

Analyst Contact Mr. Prasanna Krishnan Contact no.: +91-40-6793 7421 Email ID: [email protected]

Business Development Contact Ramesh Bob Contact no. : +91-40-6793 7400 Email ID: [email protected]

About CARE Ratings: CARE Ratings commenced operations in April 1993 and over two decades, it has established itself as one of the leading credit rating agencies in India. CARE is registered with the Securities and Exchange Board of India (SEBI) and also recognized as an External Credit Assessment Institution (ECAI) by the Reserve Bank of India (RBI). CARE Ratings is proud of its rightful place in the Indian capital market built around investor confidence. CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise capital for their various requirements and assists the investors to form an informed investment decision based on the credit risk and their own risk-return expectations. Our rating and grading service offerings leverage our domain and analytical expertise backed by the methodologies congruent with the international best practices.

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