GATEWATY DISTRIPARKS - SELL

The slowdown in domestic freight movement and the clearly visible signs of a prolonged slump in export and import activity are likely to take a toll on the domestic logistics players, who may now have to grapple with a considerable fall in volumes.

This suggests that investors can exit the stock of Gateway Distriparks (GDL), which trades at a valuation premium. In the business of providing logistics solutions, GDL too may suffer from significant fall in volumes over the next year.

However, the company’s presence (through container freight stations) in ports that enjoy high volumes, strategic location of its inland container depot and presence in container rail logistics business, make for good long-term prospects, once the current phase of slowdown is behind.
Valuations

At current market price of Rs 88, the stock trades at about 13 times its likely FY09 per share earnings, at a premium to the market. This may limit the stock’s participation in any upside over the next year or so. This is because the recent de-rating in the stock has been based on company-specific concerns — expectations of a considerable slowdown in GDL’s CFS business and a longer period to break even for its rail logistics business.

In the last four years, GDL managed a compounded revenue and profit growth of over 46 per cent and 40 per cent, respectively. EBITDA margins in the same period, however, dropped to 43.1 per cent in FY08 from 47.3 per cent four years ago. In the year ended March 2008, while the company managed a 68 per cent growth in revenues, its net profits declined by 5 per cent. The profit growth has trailed revenue growth in the last couple of years due to higher depreciation cost (due to addition of rakes to its container rail division).

That, by nature of the rail logistics business, is capital intensive and will need periodic capital injections to further growth. This also highlights the near-term concerns for the stock, given the ongoing credit crunch and slowdown in economies.
Tepid growth in port volumes

Port volumes, which are a good lead indicator of the volumes handled by logistics players, have, of late, moderated. GDL has a significant presence in JNPT and Chennai.

While JNPT saw 6 per cent growth in TEUs handled in April-November 2008, Chennai posted a 12 per cent growth. This tepid growth in port volumes may soon get reflected in the company’s revenues as well. Given the high competition and excess capacity at JNPT, low growth in port volumes may also mean curtailed realisations. This suggests that the coming few quarters may present more challenges for the company. The sharp slippage in both export and import growth for October also presages a slowdown.

But that said, GDL may emerge as a key beneficiary of any reversal in domestic and global trade trends, by virtue of its presence in key Indian ports such as JNPT (Mumbai), Chennai, and Visakhapatnam, as it certainly has an edge over its peers.

In such as event, the company’s increased container handling capacities and new inland container depots (ICDs) and container freight stations (CFSs) at Kochi, Ludhiana and Faridabad may also contribute.
Container rail – key to long-term growth

But what perhaps holds the key to the company’s long-term growth is its presence in container rail logistics business. Containerisation as an idea is expected to find more takers as port infrastructure and hinterland connectivity are set to improve in the foreseeable future.

While there is no denying that Container Corporation will be the primary gainer from such a trend, GDL may also benefit, given its increasing stronghold in the northern hinterland through its ICD in Garhi.

The company’s presence in Garhi will also help it 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. It currently has 12 rakes and plans to add 22 more over the next few years.

GDL had earlier indicated at tapping private equity money to fund the incremental capex in the rail division.

But given the current funding crisis, it needs to be seen how the company sources funds for its expansion. And since adding wagons holds the key to furthering growth of this division, any delays in such expansion may push its breakeven farther.

Also visit my other blogs namely
http://goodfundadvisor.blogspot.com/
http://goodtravelplanner.blogspot.com/
http://indiahotelstariff.blogspot.com/