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Gateway Distriparks: Investment mode - Views on News from Equitymaster
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Gateway Distriparks: Investment mode
Feb 1, 2007

Performance Summary
Logistics service provider, Gateway Distriparks (GDL) announced mixed results for the third quarter ended December 2006. While the topline has grown by 19% YoY, bottomline has bore the brunt of contraction in operating margins and, in the consequence, falling by 6% YoY. Pressure on operating margins has been due to substantially higher (as percentage of sales) transportation costs.

Performance Snapshot - Consolidated Numbers
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net Sales 346 414 19.4% 1,058 1,141 7.8%
Expenditure 138 236 70.1% 403 549 36.1%
Operating Profit (EBDITA) 208 178 -14.4% 655 592 -9.7%
EBITDA margin (%) 60.0% 43.0%   61.9% 51.9%  
Other income 27 57 113.0% 48 181 278.0%
Interest 6 2 -60.2% 20 10 -49.4%
Depreciation 27 36 34.5% 78 93 19.9%
Profit before tax 202 196 -2.8% 606 670 10.6%
Tax 23 31 34.9% 62 97 56.4%
Profit after Tax 178 165 -7.7% 544 573 5.4%
Minority interest - 2 - - 2 -
Net profit 178 167 -6.4% 544 576 5.8%
Net profit margin (%) 51.5% 40.4%   51.4% 50.5%  
No. of Shares (m) 92.3 92.3   92.3 92.3  
Diluted earnings per share (Rs)*         8.2  
Price to earnings ratio (x)*         23.3  
*Trailing twelve months

What is the company’s business?
Incorporated in 1994, GDL is the largest private sector player providing port-related logistics services in India. The company has been promoted jointly by Singapore based Windmill Group, Parameswara Holdings and Thakral Corporation along with the Indian partner - Prism International Pvt. Ltd. GDL currently owns and operates container freight stations (CFSs) at JNPT, Vizag and Chennai and an inland container depot (ICD) at Gurgaon. The company derives bulk of its revenues from its JNPT facility (79% in 3QFY07), where it enjoys leadership position in the CFS business with a market share of around 20%. In May 2006, the company entered the rail container business in partnership with Container Corporation of India (Concor), wherein the latter will run container trains for GDL (since it does not have its own wagons).

What has driven performance in 3QFY07?
Higher volumes, realisations aid topline: During the quarter, GDL achieved a throughput of 57,464 TEUs (twenty foot equivalent units), compared to 55,295 TEUs in 3QFY06, an increase of 4% YoY. As can be seen in the table below, the growth in volumes mainly came from the Gurgaon and Chennai facilities. On the other hand, realisation per TEU for the quarter increased by 9% YoY, aided primarily by the JNPT facility, which accounted for 68% of the total throughput handled by the company during 3QFY07. As a result, the topline for the quarter grew by 19% YoY. In 3QFY07, GDL had acquired a 50% stake in Snowman Frozen Foods Ltd for a consideration of Rs 481 m. The latter is engaged in the business of cold chain logistics (for perishable cargo) on a nation-wide basis. The contribution of Snowman to GDL’s consolidated topline stood at Rs 25 m in 3QFY07.

  Throughput (TEUs) Realizations (Rs/TEU)
Facility 3QFY06 3QFY07 % change 3QFY06 3QFY07 % change
JNPT 6,613 7,868 19.0% 45,419 39,203 -13.7%
Chennai 4,823 3,496 -27.5% 6,680 10,212 52.9%
Gurgaon 4,892 7,146 46.1% 2,743 5,816 112.0%
Vizag 2,914 2,723 -6.6% 453 2,233 392.9%
Total 6,281 6,818 8.5% 55,295 57,464 3.9%

Transportation costs dent margins: Though there was an increase in overall realisations, EBDITA per TEU fell by a sharp 16% YoY during 3QFY07. As a result, operating margins contracted by 17% YoY to 43%. Decline in operating margins was mainly on account of a sharp increase in transportation cost and other expenditure, which as a percentage of sales increased to 21.1% and 18.8% respectively. The increase in transportation cost (incurred on transportation of containers from ports to CFS) was a result of ban on overloading of trucks by the Supreme Court. As a result, trucks, which were hitherto carrying two TEUs were allowed to carry only one TEU. Due to competition, GDL has not been able to pass on the entire increase in transportation cost to its customers, which is seen in the negative impact it has had on the profitability during 3QFY07. Also, the acquisition of Snowman involved a one-time expense of Rs 21 m in the form of merchant banking and legal expenses. Adjusting for this, the operating margins for the quarter would have been higher at 48%.

% of sales 3QFY06 3QFY07 9mFY06 9mFY07
Staff cost 5.5% 5.3% 5.0% 4.7%
Transportation 9.5% 21.1% 9.3% 17.9%
Labour charges 3.7% 5.3% 3.4% 3.9%
Sub-contract charges 5.1% 4.6% 4.9% 4.8%
Auction expenses 0.5% 2.0% 1.7% 1.1%
Other expenditure 15.7% 18.8% 13.7% 15.8%
  EBDITA/TEU
Facility 3QFY06 3QFY07 Change
JNPT 4,191 4,100 -2.2%
Chennai 2,130 1,568 -26.4%
Gurgaon 1,867 1,283 -31.3%
Vizag (1,810) (1,115) -38.4%
Realisations 3,777 3,162 -16.3%

Margin contraction dents bottomline: Lower operating margins were the main perpetrators of the dent on GDL’s bottomline during 3QFY07. However, on the back of higher other income, the full impact of this compression in operating margins was not felt on the bottomline, which declined by 6% YoY (14% YoY decline in operating profits). Depreciation costs witnessed an increase of 35% YoY on account of goodwill amortization and higher capital expenditure.

What to expect?
At Rs 190, GDL is trading at a multiple of 23.3 its trailing 12-month earnings. During 3QFY07, GDL acquired a 50% stake in Snowman Frozen Ltd with a view to enter the cold chain logistics business. Snowman has a nation-wide presence and currently operates 15 cold stores facilities. Though the company is loss making at the operating level, GDL plans to turn it around and expects the cold chain business to contribute positively to the EBDITA from FY08 onwards.

The company has also won an operations and management (O&M), contract for the Conware CFS from the Punjab Government. Conware is one of leading CFS players at JNPT and currently handles 50,000 TEUs per year. Under the agreement, GDL will be required to pay a one-time upfront fee of Rs 350 m and annual fee of Rs 100 m (with an escalation clause). During FY06, Conware achieved a throughput of 55,662 TEUs and an EBDITA of Rs 138 mn. The one-time fees paid will be amortized over a period of 15 years. This O&M contract will provide GDL with operating leverage to rapidly increase its market share and customer base going forward. Besides, we are also positive on the Gurgaon ICD, which is expected to witness strong growth in volumes on the back of a shift in traffic from road to rail. We maintain our ‘Hold’ recommendation on the stock.

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