Gateway Distriparks' Q3FY20 results (Outperformer) - Steady quarter, De-leveraging on track

Q3FY20 result highlights

• Cons. Adj. PAT declined 65% yoy to Rs56m: Revenues +190% yoy to Rs3bn on full consolidation of rail. OPM +141bps yoy to 20.2% (est 21%) driven by expansion in rail OPM and IndAS 116 changes. Hence, EBITDA grew by 212% yoy to Rs605mn (est Rs672mn). However, higher interest charges (debt related to rail stake acquisition) and loss in Snowman (Rs34mn; Rs14mn loss GDPL share) impacted profits.
• Rail performance improves: as volumes +8% yoy led by increase in capacity and realisations +1% yoy (price hikes). Hence, revenues grew 9% yoy to Rs2.1bn. Margins expanded +279bps yoy to 21%, adj. for IndAS 116 margins stable at 18.1% (-20bps yoy) as higher discounts and adverse volume mix from Ludhiana were offset by increased double stacking. Hence, EBITDA +26% yoy to Rs443mn (IndAS adj. +8% yoy to Rs380m). PAT +19% yoy to Rs193mn on reversal of tax provision.
• CFS performance muted: The lower port volumes, particularly at JNPT led by weak macro trade impacted CFS business with 14.6% yoy volume decline and negative op. leverage impacting margins (-336bps yoy to 15.5%) and EBITDA (-29% yoy to Rs138mn; Ind-AS adj; Rs200m reported).

Conf call highlights: (1) Deleveraging on track with debt reduced by Rs500mn from Chandra CFS sale and would be further cut by Rs2bn by FY20 end from completion of Snowman stake sale (Rs2.96bn; Rs2.5bn adj for tax); Net debt to be at ~Rs4bn by FY20 vs Rs7.6bn in FY19 (2) Mkt share in NCR increased by  1-2%; Ludhiana at 41% vs 36% earlier (3) Mgmt  expects the first phase of DFC connecting Gujarat ports to be operational by Sept-20, which will improve turnaround times and drive efficiencies over the medium term (4) Post the debt reduction, focus to set up 2 satellite terminals to improve reach and market share (5) GDPL is confident on receiving SEIS income for FY19 and FY20, although payout could be differed till clarity emerges for the eligibility of rail.

Impact on financials: FY21E EPS cut by 5% to Rs9.7; FY20 EPS at Rs7.8

Valuation and view

The rail performance has been stable despite weak macro trade and volumes as GDPL has gained mkt share and higher double stack aided margins. However, CFS performance was impacted by the weak port volumes and integrated services would aid stability going forward. On the other hand, de-leveraging is on track with sale of non-core assets that would reduce interest costs. Over the medium term, we believe rail would see scale up once DFC is operational in 2HFY21-22. The stock trades at 6x FY21 EV/EBITDA and 14x FY21E earnings. Maintain Outperformer based on our SoTP of Rs194.