Gateway Distriparks: Buy

Investment with a two- three-year perspective can be considered in the stock of Gateway Distriparks (GDL), a leading provider of logistic solutions. At the current market price of Rs 134, the stock trades at about 15 times its likely FY-09 per share earnings. GDL's pan-India presence backed by an expansion in capacities; foray into container rail operations and presence in cold chain logistics suggest good prospects over the long term.

Strategic initiatives

A ramp up in container handling facilities and robust growth in foreign trade are likely to lead to strong volume growth in port traffic. Anticipating this, GDL has acquired the Punjab Conware facility in January 2007, consolidating its presence with a second freight station in the Jawaharlal Nehru Port Trust (JNPT) in Mumbai, which accounts for more than half of the container traffic in India.

Over the past year, there have been concerns on increasing competition and pricing pressure for freight operators in JNPT because of excess capacity. However, GDL's presence in other locations such as Chennai and Kochi is a long term positive. While the increase in port traffic at Chennai augurs well for GDL's freight station (CFS) at this port, Kochi could make a significant contribution if the proposal to set up an International Container Transhipment Terminal takes off.

GDL's long-term growth prospects may also gain strength from its initiatives to tap the container rail segment. The company has, through its subsidiary, Gateway Rail Freight Pvt. Ltd., signed a concession agreement with the Indian Railways to operate container trains on the network. This apart, it has also formed a joint venture with Container Corporation (51:49) to construct and operate the rail-linked inland container depot (ICD) at Garhi, Gurgaon. This could help GDL consolidate the double-stack container business on the route between National Capital Region (NCR) and western ports (such as JNPT, Mundra and Pipavav).

The improving hinterland connectivity for GDL holds promise but Concor, an established player, will pose formidable competition. While the initial revenues for GDL may originate mainly from low-margin domestic traffic, the commissioning of two more rail-linked ICDs could help the company capture high-margin EXIM traffic. Effective contributions from the rail container operations are likely to flow in only from late FY-09 or FY-10.

Cold chain business

Given the boom in food and grocery retail, GDL's cold chain initiative through its 51 per cent subsidiary, Snowman Foods, appears promising. While large retailers are likely to handle their own logistics, smaller players in the food retail segment could rely on established cold-chain service providers such as GDL. Revenues from this subsidiary have been growing and the management expects a turnaround in this business this fiscal.

For the quarter ended June 2007, GDL's consolidated revenues recorded a 40 per cent growth, helped by a 25 per cent rise in throughput. Rise in transportation cost due to the acquisition of Snowman and the operation of its own container train led to a contraction in margins by about 10 percentage points to 45.6 per cent. However, with a changing revenue mix, the pressure on margins may abate over two-three years.

Concerns

Given that GDL's Mumbai facility contributes to about 80 per cent of its overall revenues, any slowdown in traffic or any regulatory changes pertaining to the JNPT port could affect GDL's earnings. However, with the scaling up of other facilities, its dependence on this CFS would reduce. Increasing competition, delay in expansion plans and cost-overruns are downside risks to our recommendation.