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Gateway Distriparks: Teething troubles
Jul 21, 2006

Performance Summary
Logistics service provider, Gateway Distriparks Ltd. (GDL) announced mixed results for the first quarter ended June 2006. While the topline declined by 2% YoY, bottomline witnessed a 17% YoY growth, primarily driven by higher other income and lower interest outgo. Operating margins contracted by 4.2% during the quarter.

Consolidated results
(Rs m) 1QFY06 1QFY07 Change
Net sales 353 345 -2.3%
Expenditure 139 150 8.4%
Operating Profit (EBDITA) 215 195 -9.1%
EBITDA margin (%) 60.7% 56.5%  
Other income 6 65 1027.6%
Interest 7 4 -39.9%
Depreciation 23 30 31.6%
Profit before tax 190 226 18.7%
Tax 21 28 30.6%
Net profit 169 198 17.2%
Net profit margin (%) 47.7% 57.3%  
No. of shares (m) 75.0 92.2  
Diluted earnings per share* (Rs)   8.3  
Price to earnings ratio (x)   19.0  
*Trailing 12 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 (92% in FY06) from its JNPT facility, where it enjoys leadership position in the CFS business with a market share of around 20%. In FY06, GDL recorded a throughput (number of containers handled) of 210,976 TEUs (twenty equivalent foot units), compared to 92,885 TEUs in FY03 (CAGR of 31.5%). 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). During the period between FY03 and FY06, the company has grown its revenues and profits at compounded rates of 45% and 69% respectively.

What has driven performance in 1QFY07?
Topline growth subdued: During the quarter, GDL achieved a throughput of 57,440 TEUs, compared to 54,003 TEUs in 1QFY06. This, however, did not translate into higher revenues as the average realization per TEU fell from Rs 6,525 in 1QFY06 to Rs 6,100 in 1QFY07 (decline of 7% YoY). As can be seen in the adjacent table, the decline in realizations primarily came from the JNPT-CFS, which handled 78% of the total throughput achieved by GDL during the quarter. We believe that the pressure on realisations is transient in nature and the future prospects of the company look promising. With the commissioning of the third container terminal at JNPT, the container handling capacity of the port will increase from 2.4 m TEUs (FY06 capacity) to around 3.8 m TEUs (once it becomes fully operational in next few months). Given the fact that around 30% of total container traffic handled at JNPT avails of CFS services, business prospects for CFS players at JNPT look bright. Just to put things in perspective, the growth in container traffic on account of new terminal will translate into an average throughput of 32,000 TEUs for each of the CFS players located near JNPT. We believe that GDL, with a capacity to handle around 240,000 TEUs (handled 173,412 in FY06) at its JNPT facility, is well positioned to capitalize on this opportunity. The contribution of the railway business to the topline during the quarter was insignificant at Rs 2 m, as it moved a meager 500 TEUs.

Throughput (TEUs) Realizations (Rs/TEU)
Facility 1QFY06 1QFY07 % change 1QFY06 1QFY07 % change
JNPT 45,804 44,699 -2.4% 7,009 6,714 -4.2%
Chennai 5,622 6,926 23.2% 2,197 3,507 59.6%
Gurgaon 2,577 3,151 22.3% 5,041 5,719 13.4%
Vizag - 2,664 - 3,179
Total TEUs/Average realisations 54,003 57,440 6.4% 6,525 6,100 -6.5%

Margins under pressure: Operating margins witnessed an erosion of 4.2% (YoY) during 1QFY07. This was primarily due to increase in transportation cost (cost of moving containers from port to CFS), which as a percentage of sales increased by 470 basis points to 14.1% in 1QFY07. However, staff cost and labour charges, as can be seen in the adjacent graph declined as a percentage of sales. Going forward, we do not expect much erosion in the CFS margins, in wake of the ensuing strong demand at JNPT. It should, however, be noted that margins in rail transportation business is lower when compared to CFS business. Hence, once GDL starts its own container trains, overall margins are likely to come down from the current levels. However, we expect revenues from rail operations to be earnings accretive.

(as a % of net sales) 1QFY06 1QFY07
Staff cost 6.1% 4.4%
Transportation cost 9.5% 14.1%
Labour charges 3.3% 3.5%
Sub contract charges 4.7% 5.1%
Other expenses 16.0% 16.1%
Total 39.5% 43.3%

Higher other income boost bottomline: Despite a fall in operating profits, the company registered a 17% YoY growth in net profits, on account of higher other income. Other income increased from Rs 6 m in 1QFY06 to Rs 65 m, as the company earned interest/dividend on unutilized GDR proceeds that was raised in December 2005. In the wake of the adequate funds available with the company to fund its capex plans, it pre-paid a high interest-bearing loan availed from IDFC. This resulted in decline in interest expense. Depreciation increased by 32% YoY in view of the capex undertaken by the company.

What to expect?
At Rs 157, GDL is trading at a price to earnings multiple of 11.6 times our estimated FY08 earnings. We had recommended a ‘HOLD’ on the stock recently and, at the current levels, maintain our view. We believe that JNPT and Gurgaon facility will be the major growth driver for the company going forward. In wake of the tight demand-supply situation at JNPT, we do not foresee any significant pressure on realisations. The company’s entry into container train business also augurs well, as it will result in improved profitability for its existing facilities (ICD and CFS) as it intends to move containers from west coast ports of JNPT and Mundra to its rail-linked ICD in Gurgaon. GDL recently acquired 57.5 acres of land in Faridabad (for a consideration of Rs 400 m), to develop its second ICD facility (expected to be operational in FY08). Since a significant portion of container traffic handled at JNPT culminates/originates in the national capital region (NCR), we believe this is a step in the right direction. Overall, we are positive about the company from a long-term perspective.

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