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Gateway Distriparks' Q2FY20 results (Outperformer) - Rail performance strong; de-leveraging on track

Q2FY20 result highlights

• Cons. Adj. PAT declined 2.6% yoy to Rs170m: Revenues increased +211% yoy to Rs3.3bn on 100% consolidation of rail. OPM expanded by +370bps yoy to 22% (est 21%) driven by expansion in rail segment and IndAS 116 changes. Hence, EBITDA grew by 274% yoy to Rs715mn (est Rs663mn).
• Rail performance improves: as volumes +7% yoy led by increase in capacity and realisations +3% yoy (price hikes) resulting in Rs2.3bn revenues (+10% yoy). Margins expanded +282bps yoy to 21% (adj. for IndAS 116 +38bps yoy to 18.6%) led by higher efficiencies (higher capacity) driving EBITDA at Rs475mn (+27% yoy; IndAS 116 adj. +13% yoy to Rs420m). PAT increased 38% yoy to Rs272mn on reversal of tax provision.
• CFS performance muted: with IndAS 116 adj EBITDA at Rs197mn (stable over the past 5 quarters). On a yoy basis, revenues fell 5% to Rs1bn (-9.5% volumes on lower Chennai & Vizag volumes, +5% realisations) and margins +765bps to 25.9% on Ind AS 116 benefit (adj. OPM +159bps yoy to 19.9%; improved revenue mix). Lower tax (reversal of DTL due to shift to new tax regime) was offset by higher depreciation, interest & lower other income resulting in Rs84mn loss for the quarter (Rs7mn profit in 2QFY19)

Conf call highlights: (1) Market share in NCR lower by 60bps to 12.4%; Ludhiana at 40% vs 36% earlier (2) GDL expects the first phase of DFC to be operational by Sept-20 and the balance by end of CY21; no clarity as yet on DFCC pricing (3) GDL is planning to develop 3 ICD terminals at a cost of Rs1bn, from which 1 would come in FY20; (4) Virmagaon is ramping up but will take 2 more quarter for it to contribute meaningfully to total volumes; (5) Sale of Chandra CFS for Rs470mn to be used for debt repayment as focus is on deleveraging (consol net debt of Rs7bn); CFS was making marginal loss (6) Debt to be cut by Rs2-3bn by FY21E; (7) GDL is confident on receiving SEIS income for FY19 and FY20 (Rs350-400mn in Rail and Rs200-220mn in CFS), however, it has not applied for the same yet.

Impact on financials: FY20/FY21E EPS cut by 8/9% to Rs8.8/Rs9 (we are cautiously estimating lower SEIS income)

Valuation and view

The operating performance in the quarter has been quite encouraging in 1H20 with scale up in rail volumes and higher profitability. On the other hand, CFS business is seeing stability in performance. We believe the trend will likely continue as rail would see scale up on back of increased rake capacity, lower congestion and market share gains from road once DFC is operational in 2HFY21-22. Concurrently, debt is likely to scale down gradually led by free cash flow, and liquidation of non-core assets as seen in the quarter. Maintain Outperformer based on our SoTP of Rs183.