Gateway Distriparks: On the right track

The logistics sector is perceived as an attractive play on planned infrastructure development in the country. Stocks of freight handling, logistics and storage service providers have seen considerable investor interest.

One of the beneficiaries is freight and logistics service provider Gateway Distriparks (GDL). The value unlocking from the listing of its subsidiary Snowman Logistics last September also helped. Besides, expectations that another subsidiary, Gateway Rail Freight, may be listed soon pushed up GDL’s stock price to a high of ₹442 in March 2015.

Though it has corrected since, GDL’s current stock price of ₹333 discounts the company’s 2014-15 consolidated earnings by nearly 20 times. Though cheaper than the 30 times commanded by state-owned Container Corporation, a larger peer, GDL trades higher than its own average earnings multiple of 10 times in the past three years.

The company’s revenue and profit have grown at an average annual rate of 11 per cent in the last three years — good but not spectacular. While some re-rating of logistics stocks may be justified given the ongoing infrastructure developments, which should aid freight volumes, , GDL’s valuation seems to be factoring in all the positives. Shareholders can remain invested as downside risks seem limited, but upside too may be capped due to the high valuation.

GDL operates in three inter-linked segments — freight, rail and cold storage. It owns six container freight stations offering transportation, storage, warehousing and related services in the port cities of Navi Mumbai, Chennai, Visakhapatanam and Kochi. Freight is a high-margin segment with operating margin of about 40 per cent. Cargo volume grew 16 per cent in 2014-15 to 6.4 lakh twenty-foot equivalent (TEU) and should benefit from a few factors in the long term.

One, the 48 lakh TEU capacity additions at the Jawaharlal Nehru Port Terminal (to be completed in 2020) should increase freight activity. Two, the dedicated freight corridor (DFC) expected to be operational by 2019 will also aid volumes. Still, the company faces some concerns. One, rail-linked cargo volume growth may not improve in a hurry due to competition from the road segment. Two, its Chennai subsidiary’s operations were suspended by the Customs department in December 2014 due to unauthorised removal or attempted theft of a container. Volumes may be impacted until the unit becomes operational.

The stock price may, however, get a near-term boost when subsidiary Gateway Rail Freight (GDL holds about 55 per cent stake in it) gets listed.

The subsidiary owns and operates a fleet of 21 trains, over 270 road trailers and three rail-linked inland container depots in North India and Navi Mumbai (installed capacity of 0.5 million TEU).

These depots, with direct connectivity to ports, such as Mundra and Pipavav, currently operate at 50 per cent capacity. A new facility in Ahmedabad is expected to be operational in a year. Additional capacity should boost revenue.

In the recent March quarter, profit in the rail operations segment nearly doubled year-on-year to ₹105 crore.

The management expects that while operating margin (28 per cent in 2014-15) could be maintained, volume growth seen in this segment last year may not be sustained in 2015-16 due to export growth worries; still, overall volumes may be aided by import growth.

GDL also operates cold storage warehouses through its listed associate company Snowman Logistics (40 per cent stake holding), which is expanding capacity aggressively.

Revenue from this segment increased 32 per cent in 2014-15, but margins dipped 160 basis points to 23 per cent, likely due to new capacities not yet fully ramping up. Snowman Logistics is signing up new customers — the recent one being Compass Group — to improve utilisation and stabilise margins.

GDL’s consolidated earnings in 2014-15 grew 38 per cent to ₹187 crore; revenue growth is not comparable year-on-year due to Snowman changing from a subsidiary to an associate company after September 2014. GDL’s balance sheet remains strong with net debt at 0.15 times equity.

COMMENT NOW