Investment with a two-three year perspective can be considered in the stock of Gateway Distriparks (GDL), a leading provider of logistics solutions. Expansion in container handling capacities, setting up inland container depots at strategic locations and foray into container rail operations are likely to help GDL capture a significant share of the growing logistics market.
At the current market price of Rs 115, the stock trades at a reasonable valuation of about 12 times its likely FY-09 per share earnings. This appears attractive, given the strong earnings prospects of the company over the long term. Investors may, however, buy the stock in lots considering the broad market volatility.
Growth in volumes
The container volumes of the company appear set to increase given GDL's presence in key Indian ports such as JNPT (Mumbai), Chennai, and Visakhapatnam. Jawaharlal Nehru Port Trust (JNPT) in Mumbai, which has traditionally been GDL's forte, may see a further rise in volumes with the acquisition of operational stake in Punjab Conware facility (January 2007). GDL has paid a one-time upfront fee of Rs 35 crore and will pay an annual fee of Rs 1 crore for the next 15 years to Punjab Conware to operate the latter's facility. As a result, effective earnings contribution from this facility may begin only by FY09.
Nonetheless, increase in container handling capacities and addition of new inland container depots and container freight stations (ICDs/CFSs) at Kochi, Ludhiana (40 acres) and Faridabad (66 acres) may drive GDL's overall growth in container traffic (from FY09).
GDL's backward integration into rail container business may also offer a significant earnings upside over the long term. It has, through its subsidiary Gateway Rail Freight Pvt Ltd (GRFPL), formed a joint venture with Container Corporation (51:49) to construct and operate the rail-linked inland container depot (ICD) at Garhi, Gurgaon. This will help GDL consolidate its double-stack container business on the high-traffic exim route between National Capital Region (NCR) and western ports such as JNPT, Mundra and Pipavav.
Improving hinterland connectivity and the proposed addition of 30 trains in the next two-three years are likely to help GRFPL gain a significant share of the rail container business. However, given Concor's extensive network and competitive pricing strategy, GRFPL may have to settle for lower margins in the near-term. GRFPL already owns six trains and expects to get delivery of six more before March 2008. While funding of capex so far has been through a mixture of debt and internal accruals of GDL, GRFPL may raise about Rs 250-300 crore through private equity for future expansions.
Fall in margins
For the quarter ended September 2007, GDL reported a 68 per cent rise in revenues. Commencement of operations at the Punjab Conware CFS and deployment of two rakes by GRFPL inflated costs and triggered an 18-percentage point dip in operating margins to about 39.9 per cent. Earnings, as a result, declined by 10 per cent to Rs 18.8 crore. This pressure on margins may remain over the near term, given the increasing competition and pricing pressure for freight operators in JNPT and higher gestation period for rail container business. Earnings growth, as a result, may remain sedate in this period.
However, changing revenue-mix and increasing contributions from CFSs across other ports may help abate margin pressure in the long-term.
On a segmental basis, while the revenues from container freight business grew by about 25 per cent, container rail logistics grew by about 116 per cent. The company's cold chain initiative, through its 51 per cent subsidiary, Snowman Foods, put up a 10 per cent increase in revenues. Nonetheless, the business is yet to turn around (the management expects it this fiscal).
Increasing competition, delay in expansion plans and cost overruns pose downside risks to our recommendation.
At the current market price of Rs 115, the stock trades at a reasonable valuation of about 12 times its likely FY-09 per share earnings. This appears attractive, given the strong earnings prospects of the company over the long term. Investors may, however, buy the stock in lots considering the broad market volatility.
Growth in volumes
The container volumes of the company appear set to increase given GDL's presence in key Indian ports such as JNPT (Mumbai), Chennai, and Visakhapatnam. Jawaharlal Nehru Port Trust (JNPT) in Mumbai, which has traditionally been GDL's forte, may see a further rise in volumes with the acquisition of operational stake in Punjab Conware facility (January 2007). GDL has paid a one-time upfront fee of Rs 35 crore and will pay an annual fee of Rs 1 crore for the next 15 years to Punjab Conware to operate the latter's facility. As a result, effective earnings contribution from this facility may begin only by FY09.
Nonetheless, increase in container handling capacities and addition of new inland container depots and container freight stations (ICDs/CFSs) at Kochi, Ludhiana (40 acres) and Faridabad (66 acres) may drive GDL's overall growth in container traffic (from FY09).
GDL's backward integration into rail container business may also offer a significant earnings upside over the long term. It has, through its subsidiary Gateway Rail Freight Pvt Ltd (GRFPL), formed a joint venture with Container Corporation (51:49) to construct and operate the rail-linked inland container depot (ICD) at Garhi, Gurgaon. This will help GDL consolidate its double-stack container business on the high-traffic exim route between National Capital Region (NCR) and western ports such as JNPT, Mundra and Pipavav.
Improving hinterland connectivity and the proposed addition of 30 trains in the next two-three years are likely to help GRFPL gain a significant share of the rail container business. However, given Concor's extensive network and competitive pricing strategy, GRFPL may have to settle for lower margins in the near-term. GRFPL already owns six trains and expects to get delivery of six more before March 2008. While funding of capex so far has been through a mixture of debt and internal accruals of GDL, GRFPL may raise about Rs 250-300 crore through private equity for future expansions.
Fall in margins
For the quarter ended September 2007, GDL reported a 68 per cent rise in revenues. Commencement of operations at the Punjab Conware CFS and deployment of two rakes by GRFPL inflated costs and triggered an 18-percentage point dip in operating margins to about 39.9 per cent. Earnings, as a result, declined by 10 per cent to Rs 18.8 crore. This pressure on margins may remain over the near term, given the increasing competition and pricing pressure for freight operators in JNPT and higher gestation period for rail container business. Earnings growth, as a result, may remain sedate in this period.
However, changing revenue-mix and increasing contributions from CFSs across other ports may help abate margin pressure in the long-term.
On a segmental basis, while the revenues from container freight business grew by about 25 per cent, container rail logistics grew by about 116 per cent. The company's cold chain initiative, through its 51 per cent subsidiary, Snowman Foods, put up a 10 per cent increase in revenues. Nonetheless, the business is yet to turn around (the management expects it this fiscal).
Increasing competition, delay in expansion plans and cost overruns pose downside risks to our recommendation.
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