Angel Broking -Buy - Gateway Distriparks- Target -Rs. 123. - 3QFY2011 -Update

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Gateway Distriparks – 3QFY2011 Result Update

Angel Broking maintains a Buy on Gateway Distriparks with a Target Price of Rs. 123.

GDL reported strong revenue growth of 23.0% yoy to `158cr against our

estimates of `142cr on account of better performance across segments. Revenue

growth was driven by healthy volumes across segments, normalcy of operations at

Punjab Conware and breakeven of the rail segment at PAT level. Higher share of

exim revenue in the rail segment improved OPM by 250bp qoq (flat yoy). Fuelled

by higher other income (owing to money received from Blackstone), PAT grew by

36.7% qoq (40.0% yoy) to `28cr v/s our estimates of `21cr. During 3QFY2011,

Gateway Rail Freight (GRFL) begun deploying `300cr infused by Blackstone in

2QFY2011 towards retirement of debt and capex execution. We maintain our Buy

recommendation on GDL.

Strong growth witnessed across segments: GDL reported strong revenue growth

of 23.0% yoy (14.0% qoq) to `158cr for 3QFY2011, led by better capacity

utilisation across segments. Revenue from the CFS segment increased by 24.9%

yoy (23.1% qoq) to `66cr, while that from the rail segment grew by 20.1% yoy

(8.3% qoq). Cold-chain business reported revenue growth of 33.1% yoy (7.3%

qoq) to `11.4cr on account of low base and improving utilisation. Consolidated

OPM improved by 250bp qoq (flat yoy) to 28.1%, owing to healthy realisation in

the CFS segment and a higher share of exim revenue in the rail segment.

Noticeably, the rail segment has turned profitable at the PAT level for the first time

with a profit of `0.28cr v/s loss of `4.5cr in 2QFY2011 and `5.2cr in 3QFY2010.

Other income jumped by 187.5% yoy to `2.3cr. Consequently, PAT grew by

40.0% yoy and 36.7% qoq to `28cr.

Outlook and valuation: We have upgraded our FY2011E and FY2012E estimates

by ~8%. The breakeven of the rail business at the PAT level and the ability to

combat intense completion at JNPT CFS on sustainable basis will act as a positive

catalyst for the stock’s performance. At the CMP, the stock is trading at a PE of

10.7x and P/BV of 1.7x on FY2012 estimates. We maintain Buy on the stock with

a Target Price of `123.

CFS segment witnessed healthy traction

During the quarter, Mumbai CFS revenue grew by 19.7% yoy (up 23.7% qoq) to

`52cr, aided by the Punjab Conware CFS returning to ~80% capacity utilisation

after the complete shut down due to the fire accident in February 2010 and

improving exim volumes at JNPT. For 3QFY2011, consolidated CFS volumes grew

by 12.1% yoy (3.8% qoq) to 86,640 TEUs. Mumbai witnessed healthy CFS volume

growth of 15.4% yoy (9.6% qoq), while other CFSs (Chennai, Kochi, Vizag)

reported moderate volume growth of 4.7% yoy (down 8.3% qoq), owing to

infrastructure bottlenecks resulting in loss of volumes at Chennai CFS. Further, CFS

realisation grew by 11.5% yoy (18.6% qoq) to `7,620/TEU, owing to new customer

additions and better capacity utilisation. Consequently, overall CFS revenue

reported 23.1% yoy and 24.9% qoq growth to `66cr.

Rail business profitable at PAT level

In the rail segment, GDL reported volume growth of 20.2% yoy (9.3% qoq) to

34,494 TEUs, led by addition of new rakes and improving capacity utilisation. For

3QFY2011, the share of exim volumes stood at 65%. Management intends to

increase its exim contribution to 90% in ensuing quarters.

During the quarter, GDL received the much-awaited funds infusion of `300cr from

Blackstone Group in 2QFY2011 and has begun deploying the same towards

retirement of debt. However, the company has slowed down addition of rakes, as

it wants its Faridabad terminal to get operational. This resulted in lower interest

and depreciation cost (down 21% qoq and 8% yoy) for the rail segment.

Consequently, GDL reported `0.28cr of profit in 3QFY2011 against loss of `4.5cr

in 2QFY2011 and `5.2cr in 3QFY2010. Management has guided that the recent

hike of 4–5% in haulage charges is a complete pass-through; however, it has

resulted in loss of 400 containers/month to road transportation

Investment arguments

Pan-India presence to aid GDL capture growing container traffic

Containerisation is popular as it helps to ease congestion at harbours (facilitates

efficient handling of cargo), resulting in quicker turnaround of time for container

vessels. This, in turn, led to an increase in container traffic at major ports at a 4.4%

CAGR vis-à-vis 8.0% CAGR for total cargo over 2001–10.

The CFS at Mumbai, Chennai, Vishakhapatnam and Vallarpadam and the ICD at

Garhi and Ludhiana could act as GDL’s six hubs to cater to the traffic demand in

the western, eastern, southern and northern regions of India. In 1HFY2012, one

more ICD will get operational at Faridabad, which will strengthen GDL’s pan-India

presence and allow it to cater to the fast-growing Indian exim trade. We expect

container traffic to increase from 6.9mn TEUs in FY2010 to 13.9mn in FY2015E,

registering a 15.0% CAGR during the period. Consequently, we expect GDL to

register a 13.2% CAGR in CFS volumes over FY2010–12E.

Rail business gaining momentum

GDL’s rail business is likely to breakeven in FY2012E (v/s management

expectations of FY2011E) on the back of improving capacity utilisation and

availability of rakes. GRFL currently operates 21 rakes, which is likely to increase

by 8–10 rakes in two years, mainly through cash infusion by Blackstone. The rail

business is likely to receive a boost once its Faridabad ICD becomes fully

operational in 1HFY2012E. Increased volumes from the high-margin exim

segment and better utilisation levels are likely to improve operating margins.

We expect GDL to report profit at the PAT level in FY2012E, after having booked a

loss of `12.7cr in FY2010 and 7.3cr in 9MFY2011. We expect rail volumes to

record a 21%CAGR over FY2010–12E, driven by the addition of new rakes and

better capacity utilisation.

Sustaining market share at JNPT CFS to act as a catalyst

GDL reported 13.0% yoy and 1.3% yoy decline at JNPT CFS volumes in FY2010

and 9MFY2011 in spite of the 2.7% yoy and 7.4% yoy growth registered in

container volumes at the JNPT port for same period. This is partly due to closure of

Punjab Conware CFS due to the fire accident in February 2010 and intense

competition and oversupply of CFS at the port. Consequently, GDL witnessed a

100bp erosion in market share to 5.3% at the JNPT CFS in FY2010. We believe

GDL’s ability to combat intense competition at JNPT CFS on sustainable basis will

act as a positive catalyst for the stock’s performance. We expect additional

capacity of 0.8mn TEU to come up at JNPT’s third container terminal only by

2HFY2012E, which will improve capacity utilisation of CFS players.

Outlook and valuation

With exim volumes showing signs of improvement, we expect GDL’s revenue mix

to change in favour of exim in its rail business, which will in turn improve its

margins going forward.

We remain bullish on the long-term prospects of the container sector, which is the

core growth driver for GDL’s business. We believe GDL's presence at strategic

locations and its ongoing expansion plans will make it a key beneficiary of the

growing container traffic in India.

Overall, we expect GDL to register a 17.5% CAGR in earnings over FY2010–12. At

the CMP, the stock is trading at a PE of 10.7x and P/BV of 1.7x on FY2012

estimates. We maintain Buy on the stock with a Target Price of `123.