Raking in profits - Gateway Distriparks : Buy

The company's container freight stations and container rail businesses are expected to drive growth.



Better-than-expected first quarter performance, improving profitability of its container rail business and ongoing capacity expansion of its CFSs (container freight stations) strengthen the prospects for Gateway Distriparks, a leading logistics service provider. Investors with a long-term perspective can consider buying the stock.

At the current market price of Rs 136, the stock trades at about 12 times its likely FY-12 per share earnings. This seems reasonable, given the improving outlook and financials of the company's CFS and container rail businesses. In the June-2011 quarter, GDL reported a consolidated revenue growth of about 44 per cent to Rs 188 crore, driven by a robust all-round performance across its business segments. The CFS business remained the key driver, registering a revenue growth of 74 per cent (44 per cent of total revenues). Its rail freight business (through Gateway Rail Freight) reported 26 per cent growth in revenues, while the cold-chain logistics business (through Snowman Logistics) registered 32 per cent growth in topline. Increase in dwell time, higher tariff, and shift in focus towards exim volumes in the rail business helped the company more than double its operating profits. Operating profit margins, therefore, expanded by about 10.8 percentage points to 35.3 per cent. These put together helped GDL grow its profits by over 138 per cent to Rs 34 crore in the quarter.

Growth drivers

GDL's CFS and container rail businesses are expected to drive the company's growth from hereon. In the CFS segment, the company operates two large stations at JNPT and one each at Chennai and Visakapatnam. Encouraged by the healthy growth seen in container volumes across major Indian ports, GDL is now looking to expand the capacities at its existing facilities as well as add new ones. It plans to double the capacity of its Chennai CFS (operating at near full capacity) and add a new CFS at Kochi.

The Kochi facility, expected to become fully operational by early 2012, is a joint venture (60:40) with Chakiat Agencies, which operates shipping lines (50,000 TEUs expected capacity). Located opposite the International Container Transhipment Terminal, the new CFS can be expected to attract significant volumes. The CFS could also benefit from captive volumes from its joint venture partner.

Attracting volumes

With 21 rakes and two operational ICDs (inland container depots), Gateway Rail Freight, GDL's wholly-owned subsidiary, presents a promising growth picture. For one, the subsidiary after reaching breakeven at the net profit level in the third quarter last year has managed to sustain the trend since. For the third quarter in a row, it reported incremental profits. Second, the company has now shifted its focus from the domestic to the high-margin exim segment (20:80 mix).

With a presence in JNPT, Mundra and Pipavav ports, GRFL is strongly positioned to service the exim route. The company now plans to set up a new terminal at Asauti, Faridabad (120,000 TEUs capacity, expected to become operational by end of 2011). This would help the company attract more international volumes, what with Mundra and Pipavav ports expected to see a healthy growth in traffic.

GDL's presence in cold-chain logistics, through its majority joint venture with Mitsubishi also presents a healthy growth picture. Though its contribution to the total revenue pie is less (below 10 per cent), the business holds the potential to become a significant contributor in a couple of years.

Here again, the company is expanding capacities. On the whole, it expects to spend a total of about Rs 100 crore this year in all its three business segments. Funding the expansion shouldn't pose any problem as the company ended FY11 with cash and equivalents of about Rs 100 crore. Besides, its CFS business, which generates healthy cash and cold chain business do not have any borrowings. To that extent, the company's balance sheet has room for leverage, if required.

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