Domino’s Expansion Drives Gati Unit Stake Sale: Corporate India

Photographer: Prashanth Vishwanathan/Bloomberg

An employee carries an order to customers at a Domino's Pizza outlet in New Delhi. Close

An employee carries an order to customers at a Domino's Pizza outlet in New Delhi.

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Photographer: Prashanth Vishwanathan/Bloomberg

An employee carries an order to customers at a Domino's Pizza outlet in New Delhi.

The cold-chain unit of Gati Ltd. (GTIC), India’s biggest goods mover by market share, plans to sell a minority stake to fund its expansion as Domino’s Pizza Inc. to Nestle SA drive demand for refrigerated storage.

Gati Kausar Ltd. is in talks to partner with overseas investors as it seeks to raise 1.2 billion rupees ($20 million) to build 10 warehouses across the South Asian country over the next three years, Vice President Manish Agarwal said.

“There isn’t much scope to boost sales and profitability if a company just does trucking,” Agarwal said in an interview in Mumbai. “There’s a lot of synergy when a company has both transportation and warehousing.”

Gati is among companies planning to tap the market in India, where the government estimates about 18 percent of fruits and vegetables valued at 133 billion rupees is wasted annually for want of cold storage. While the U.S. and Thailand use refrigerated trucks to move about 85 percent and 40 percent of the farm produce, the figure for India is negligible, according to a study by KPMG LLP.

Wastage, Inflation

Prime Minister Narendra Modi, whose administration was sworn in last month, is seeking to improve infrastructure and cut food wastage blamed for runaway inflation in the country where the World Bank says about 70 percent of the population lives on less than $2 a day.

Gains in consumer prices that averaged more than 10 percent in 2013 are preventing the nation’s central bank from lowering borrowing costs, while hindering economic revival after growth slipped to near a decade’s low.

KPMG expects the Indian cold-chain industry, valued at $3.1 billion in 2013, will grow 16 percent a year in the five years through March 2017. It estimates transportation will rise 18 percent annually in the same period and the storage industry at 16 percent.

The outlook for the cold-chain industry has fueled a rally in shares of parent Gati, the top gainer on the CNX 500 Index in the past six months. The stock jumped 3.2 percent to 125.45 rupees at the 3:30 p.m. close. It has surged almost fivefold in the past year versus a 32 percent gain in the S&P BSE Sensex. (SENSEX)

Rival Blue Dart Express Ltd., in which DHL Express holds 75 percent stake, rose 51 percent in the same period and closed up 2.4 percent at 3,999.95 rupees. Gati leads the non-courier distribution market in the South Asian country, with a share of 19 percent.

Growth Drivers

Quick-service restaurants and processed foods will be “one of the biggest growth drivers,” Agarwal said. Gati Kausar’s customers include Jubilant FoodWorks Ltd., the local franchisee of Domino’s, Dabur India Ltd., and the local units of Nestle, Unilever Plc and Mondelez International Inc., according to the company’s website.

Among India’s food-services chains, QSRs and cafes exemplify “the most promising and scalable model,” CLSA said in a report in July 2013. Outlets including those of Domino’s, McDonald’s Corp. and Yum! Brands Inc.’s KFC have the potential to more than triple their businesses by 2020, CLSA said.

Jubilant FoodWorks plans to maintain last year’s expansion pace of 150 new restaurants in the year through March 31, Chief Executive Officer Ajay Kaul said in an earnings conference call on May 19. The company declined to comment on its cold storage requirements.

Fleet Expansion

Gati Kausar expects one of its 10 warehouses, with a capacity of 4,500 tons, to start operations this year. The company’s pace of adding refrigerated trucks to its fleet of more than 200 will slow down compared with the previous year’s 65, Agarwal said.

He expects sales to rise as much as 15 percent in the 12 months ending March 31 over a year earlier. That “may not translate into” similar growth in net income due to planned investment in warehousing, he said.

Rival Snowman Logistics Ltd., a unit of Gateway Distriparks Ltd., plans to use most of the proceeds from a planned initial public offering to build six cold-chain warehouses and two ambient warehouses in six cities, according to a draft prospectus filed in August.

Snowman plans to spend 1.42 billion rupees to build the warehouses, according to the filing. Shares will start trading on the exchanges in 2014, Gateway said in its fiscal fourth-quarter earnings statement on May 2.

India’s refrigerated transportation is operated mainly by small, non-integrated firms, which do not use modern technology, while as much as 85 percent of the total storage capacity of 30 million tons is unorganized, according to Prahlad Tanwar, transport and logistics director at KPMG India.

More than 250 transport operators run about 6,000 refrigerated vehicles in India to move commodities, excluding milk, he said.

“There’s going to be consolidation in the industry and it will take a couple of years for the market structure to change,” Gati Kausar’s Agarwal said.

To contact the reporter on this story: Ameya Karve in Mumbai at akarve@bloomberg.net

To contact the editors responsible for this story: Jan Dahinten at jdahinten@bloomberg.net Sam Nagarajan, Ravil Shirodkar

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