Gateway Distriparks' Q2FY18 results (Neutral) - Rail performance improves on volume uptick

Q2FY18 result highlights

• PAT +11% yoy to Rs183m: led by higher profitability in rail (+79% yoy) on higher volumes due to pick up in exim trade. CFS profitability declined due to lower dwell time (DPD impact). Snowman loss was due to sustained weakness in transportation business.
• Pick up in exim, market share gains drive volume growth: Volumes +12% yoy on pick up in trade and mkt share gains in NCR market. Realizations +1% yoy on lower discounts, driving revenues to Rs2bn (+13% yoy). EBITDA +11% yoy to Rs375mn as empty running charges were offset on haulage savings as Viramgam terminal increased double stack benefits on JNPT volumes. PAT +79% yoy at Rs185m on lower tax rate (MAT).
• CFS profitability remains weak (-29% yoy to Rs105m): Revenues -5% yoy to Rs976m on lower realizations (-6% yoy; lower dwell times) partly offset by higher volumes (+1% yoy; volumes from Krishnapatnam). OPM fell 70bps yoy to 22.4% due to lower dwell times (DPD impact) as also break even at Krishnapatnam CFS. Hence, EBITDA fell 8% yoy to Rs218m. Higher interest expenses, lower other inc and higher tax rate impacted PAT.

Conf call highlights: (1) Price hikes of Rs1000/Rs2000 per TEU for import volumes from Mundra /JNPT in late Oct-17 (2) Increased mkt share by 150bps in NCR mkt led by ramp up of Faridabad terminal; lost mkt share in Ludhiana (unprofitable business) (3) Share of rail volumes from Mundra & Pipavav/JNPT at 80%/20% (4) Viramgaon to help 2% haulage rate savings led by higher double stacking (incl JNPT volumes) and hubbing across the three western ports

Key positives: Strong rail performances

Key negatives: Continued Snowman loss, decline in CFS profitability

Impact on financials: Maintain FY18/ FY19 EPS atRs6.7/8.

Valuation and view

GDL’s rail business has seen volume revival, while margins are improving led by Viramgam benefits (2-4% saving in haulage costs) and price hikes. However, CFS business is facing structural challenges as growing emphasis on DPD is driving down volumes while concurrently putting pressure on margin led by lower dwell times. Further the risk remains on DPD being adopted by other ports and thereby having an impact on other CFS facilities. Given the weak business outlook in CFS (55% of FY18E PAT), we believe earnings trajectory will remain muted (9% consol earnings CAGR over FY17-19). Maintain Neutral with SoTP based target price of Rs244.