Management Speak: Gateway Distriparks (Outperformer) - Muted 3QFY19 volumes

Highlights of our meeting with Gateway Distriparks (GDL) management:

Railway congestion to impact volumes in 3QFY19: Congestion on the Rewari-Palanpur line due to ongoing railway maintenance could lead to weak volume momentum in 3QFY19. Moreover, muted demand in Nov 2018 too could impact volumes during the quarter (Indian Railways data reflects the same). Management expects completion in rail work by 4QFY19, post which, volumes should normalise. Moreover, management is closely monitoring road freight rates which are on a downward trajectory post the decline in crude as also the higher axle load norms. Accordingly, we expect rail volume growth of 5% in FY19E.

Dedicated Freight Coridor (DFC) to drive market share gain in rail by FY21E: The western DFC line, which would connect Mundra and Pipavav ports to NCR, is expected to be partially commissioned in FY21E (Mar 2020). The new rail line would decongest and enable faster movement of trains. Accordingly, we expect rail to gain market share from road over the longer term.

Addition of rolling stock to aid evacuation: GDL added 4 rakes in 1HFY19 and plans to add 4 more in 4QFY19 (total 31 rakes), which would aid faster evacuation on congested routes and drive volume growth. GDL is increasing its rake capacity from 61T to 68T, which will enable higher double stacking and aid in margin expansion. GDL is looking to also add more satellite terminals near its Garhi terminal in FY20E, which too will aid volume growth and market share expansion in NCR.

Margins to remain steady: Margins in GDL’s rail segment improved in 1HFY19 (+100bps to 17.9%), led by lower empty running costs and higher double stacking (ramp up at Viramgaon terminal (Gujarat). The company has also taken price hikes to pass on the 5% rail haulage hike. Accordingly, we expect margins to expand 50bps to 18.1% over FY18-20E.

Blackstone deal delayed to Mar 2019: GDL is in the process of buying a 49% stake in its rail subsidiary from Blackstone at Rs8.1bn. GDL has already paid Rs2.5bn to Blackstone for 18% stake and is in the process of raising debt for the balance Rs5.6bn. However, debt raise is taking time, as management is evaluating multiple favourable and cost-effective options, for which it has scheduled a board meeting in Dec 2018. The company expects to raise debt before Mar 2018 to complete the deal. However, the delay in payment to Blackstone from Sept 2018 to Mar 2019 is likely to drive a 15% cost on the remaining amount of Rs5.6bn.

Valuation and view

Macro headwinds in trade (higher imbalance, discounts, etc) and DPD impact on the company’s CFS business have impacted GDL’s profitability over last two years. However, we believe volumes and thereby earnings have bottomed led by improvement in trade as reflected in higher port volumes. Concurrently, the 49% stake acquisition in rail from Blackstone is value accretive and will not put a strain on the company’s balance sheet. Considering our SOTP of Rs200, we maintain our Outperformer rating on the stock. Key risk would be slowdown in exim trade and lower road freight rates.