Press Release 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CARE A+; Negative Reaffirmed (Enhanced from 207.94) (Single A Plus; Outlook: Negative ) Short Term Bank Facilities - - Withdrawn Total Bank Facilities 278.63 (Rs.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 Allcargo Logistics Limited and benefits of operational and financial synergy, strategic and operational support from Kintetsu World Express, established position in express cargo industry with pan-India 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 Press Release 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, Asia 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), Indore, Pune, Bangalore, Hyderabad, Coimbatore, Chennai, 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