Allcargo Logistics, one of India’s largest shipping and port logistics companies, is in talks with Indian express logistics firm Gati, as reported by Bloomberg. Allcargo operates over 300 offices across 160 countries and provides services in a multitude of port-related operations including multimodal logistics, container freight stations, warehousing and contract logistics.
After the news broke out, Gati’s market value rose by 3.6 percent, but Allcargo’s valuation dropped by 2 percent. To understand the drop in Allcargo’s stock price, Gati’s current standing in the market needs to be scrutinized.
Though the company has had great success over the last decade, operating a combined warehouse volume of 3 million square feet and owning over 5,000 trucks, Gati is struggling to weather the storm of an unending transporter strike across India and the newly implemented goods and services tax (GST).
Implemented in 2017, the GST was instituted to replace several differing tax brackets that existed across Indian states, making it a uniform and singular tax bracket for the whole nation. Though the motive behind the tax system was good, the implementation was not, with the Indian government going back and forth on the tax percentage brackets and making it increasingly hard for businesses to adapt.
All these factors combined to affect Gati’s earnings, as it witnessed a drop in net profit for the second quarter of 2019 to $670,000 from $2.52 million, even when its total revenue grew to $64.22 million from $60.12 million.
Goldman Sachs now owns a 6 percent stake in Gati, which again was a result of a legal altercation between the two companies. A problem arose in 2016 when Gati had issues in settling outstanding payment on $22 million of foreign currency convertible bonds (FCCB) it issued to Goldman Sachs in 2011. The settlement was made in terms of equity shares of Gati.
That said, Allcargo’s interest in beleaguered Gati is understandable because Allcargo is looking to expand its services into warehousing, which Gati already has a sizable stake in the Indian market. Allcargo is building warehouses across four cities in India and is bolstering existing warehouses near ports to expand its footprint in the booming Indian ecommerce scene.
The equity valuation of Gati is estimated to be $183 million. If Allcargo manages to acquire Gati, it would potentially be an exit for companies like Goldman Sachs and Japanese shareholder Kintetsu Group. For now, Gati’s founder Mahendra Agarwal owns 14.4 percent of the company, and the overseas investors jointly control 17.1 percent.
The ecommerce boom and a rapidly growing economy have made India a favored destination for foreign logistics and investment firms. Gati predicts the country’s logistics and warehousing industry to be valued at $217 billion by 2020.