Pick of the Week - Gateway Distriparks Ltd

GDL is expected to benefit from improving infrastructure and policy initiatives like entry of private players in the rail freight business. It has also moved up the value chain through acquisitions in the cold storage business and become an integrated logistics solution provider.

Company Background

Gateway Distriparks (GDL) is a one of the major private players in handling, transport and storage of containers, warehousing of cargo and various value added services provided in relation to import and export of cargo in containers. GDL is an Indo-Singapore joint venture and has been promoted by Prism International Pte Ltd. Windmill International Pte Ltd and Thakral Corporation.

The company has modern Container Freight Station's (CFS's) at Dronagiri (about 9 kms from the Jawaharlal Nehru Port ), Navi Mumbai and New Manali, Chennai besides an Inland Container Depot (ICD) at Garhi Harsaru (near Delhi ), Haryana and a newly commissioned CFS at Vishakapatam (a joint venture with Suri Group).

In March 2005 the company raised Rs 79.2 crores by way of initial public offer (IPO). GDL offered 1.1 crore shares of Rs 10 each at a premium of Rs 62. In December 2005, GDL raised Rs 384.6 crore by way Global Depository Receipts (GDR) at a price of Rs 230.87 per share.

The company has recently proposed a bonus issue in ratio of 1:4.

Investment Rationale

Container Freight industry to grow at a rapid pace
India container freight business is expected to grow by 4 times in the next 6-8 years to 20,000,000 Twenty Foot Equivalent Units (TEU). To capitalize on the growth opportunity, GDL has enhanced its presence by establishing Container Freight Stations (CFS) and Inland Container Depots (ICD) at strategic locations like Navi Mumbai, Vizag, Chennai, Gurgaon, Faridabad , Haryana, Ludhiana and Kochi . These CFSs and ICDs provide GDL with access to 90% of Container Freight Corridors of India and would enable it to ramp up its revenues going ahead.

Entry into cold storage to derisk business
GDL has acquired 50.1% stake in Snowman Frozen Foods Ltd (SFFL) for Rs 48 crore. The acquisition would enable GDL to forward integrate into the cold storage business and become an integrated logistics player. The acquisition would help GDL to diversify and de-risk its business by providing an additional revenue stream. GDL can also look at exploring business opportunities with other stakeholders like Mitsubishi Logistics Corporation and Nichirei Logistics Group Inc. who hold the balance stake in SFFL.

JV with Concor to transition GDL into an end-to-end rail transportation service provider
The rail freight business was recently opened to the private sector. GDL formed a subsidiary Gateway Rail Freight Pvt Ltd (GRFPL) and acquired an all India operating license from the Indian Railway for an upfront payment of Rs 50 crore. It formed a joint venture with Container Corporation (Concor) to construct and operate a rail linked ICD at Garhi, Harsaru, Gurgaon, which will connect the North Central Region (NCR) with the western ports. GRFPL will hold 51% in the joint venture while remaining 49% will be held by Concor. GDL and Concor will share the rail operations for movement of rakes from the Garhi ICD to ports equally. The joint venture would enable GDL to run rakes from the ICD, which as not allowed under the earlier agreement with Concor. The integrated services from the ICD would enable a strong growth in volumes and help GDL to become an end-to-end container rail transportation service provider. Additionally, GDL will also earn lease rentals from the land leased out to the joint venture.

Better infrastructure and policy initiatives
The Government’s impetus on promoting FDI for construction of small ports at various locations will provide an impetus to Export-Import trade volumes and thus provide a boost to the container freight segment. India’s two major ports JNPT an Chennai, which control 80% of the container freight business are constructing new terminals to decongest the ports. The improved infrastructure and decongestion of the ports would enable GDL to capitalize on the opportunity.

Key Concerns

Low entry barrier
The container freight business is characterized by low barrier to entry. Any player with significant investment capacity can enter the business.

Idle cash balance
The company has Rs 157 crores of fixed deposits. GDL earns an interest of 8.5% on the same. The company has kept this cash balance to finance future acquisitions. GDL’s Return on equity will be impacted till the cash balance is not utilized.

Financials:

GDL is expected to benefit from improving infrastructure and policy initiatives like entry of private players in the rail freight business. It has also moved up the value chain through acquisitions in the cold storage business and become an integrated logistics solution provider. We expect GDL’s consolidated sales to grow from Rs 160.99 crore to Rs 240 crore and net profit to post a 28% growth to Rs 99 crore in Fy08E. For FY09E, we expect the company to report sales of Rs 300 crore and a net profit of Rs 124 crore.

Valuations

GDL with pan-India presence and good connectivity with the major ports is well poised to take advantage of the strong growth in the container freight industry. It would be able to ramp up its volume by entering into newer areas like cold storage and rail transportation services. In addition, the company is actively scouting companies for acquisition, which would trigger further upside in the stock. At the current price of Rs 182 the stock trades at a P/E of 16.3x FY09E EPS of 11.13 (on post bonus dilued equity of Rs 115 crore), which is at 22% discount to the average industry P/E of 20. Given the huge business potential and de-risked business model we rate the stock an OUTPERFORMER with a price target of Rs 220, an upside potential of 20% in the next 6 months.

Technical Outlook

The stock has formed a long-term support at Rs 173,levels. Stock is currently trading above its 200 days moving average . On the weekly charts stock has formed the double bottom formation pattern. The MACD indicators are in the oversold zone and have a bullish crossover. On the weekly charts average volume have increase 6 times compared to the pervious week, which indicate the strong buying was witness at around 179 levels. The RSI indicators have also gained strength and remain in neutral territory. Short Term Averages are on the verge of a positive crossover. Once the stock move above Rs 187 levels, we can see it could further move up to Rs198 levels, closing above this level can further move up the stock to Rs 213 levels very soon. Medium term and long term resistances remain at Rs 193 and Rs 213 levels.