Gateway Distriparks' Q3FY18 results (Neutral) - Rail business disappoints

Q3FY18 result highlights

• PAT fell 4% yoy to Rs189m: on sustained weakness in CFS business (albeit stable qoq) and lower other income (across segments on lower yields). Snowman saw a turnaround on improved utilisations & rentals of its warehouses, with scale down of transportation business.
• Higher empty runs & discounts impact rail: Volumes +8% yoy on pick up in trade, albeit lower on qoq basis due to slower evacuation by railways. Realizations fell 4% yoy on higher discounts, resulting in revenues of Rs1.9bn (+3% yoy). EBITDA +3% yoy to Rs349mn as higher empty running (imbalance) offset haulage savings on Viramgam terminal (double stack benefits on JNPT volumes). PAT +79% yoy at Rs176m on lower tax rate.
• CFS PAT stable qoq (-37% yoy to Rs101m): Revenues fell 3% yoy to Rs970m on lower realizations (-2% yoy; lower dwell times on DPD impact) and lower volumes (-1% yoy, weakness in Vizag & Kochi). While, OPM fell 190bps yoy to 23.3%, margins have stabilised qoq as DPD volumes are stagnating. Hence, EBITDA fell 10% yoy to Rs226m. Higher interest expenses, lower other inc and higher tax rate further impacted PAT.

Conf call highlights: (1) Rail impacted due to slowdown of rakes on Mundra/Pipavav rail routes on repair work. Impact to last for next few quarters (2) Leased 3 additional rakes to offset impact of route disruption resulting in higher fixed costs (3) Discounts +Rs300/TEU qoq due to high competitive intensity (4) Empty running charges +Rs150/TEU yoy on higher imbalance (5) Rs45mn haulage cost savings on Viramgam double stacking since commissioning in 2Q18 (6) FY19 capex of Rs1bn in Rail (land purchase at Viramgam), Rs1bn in Snowman (capacity addition)

Key positives: turnaround in Snowman, stability in CFS (qoq basis)

Key negatives: weak rail performance

Impact on financials: Downgrade FY18/19 EPS by 7%/8% to Rs6.3/7.4

Valuation and view

GDL’s rail business has been under pressure for the last few quarters on evacuation issues, higher empty running, discounts, etc. GDL is partially offsetting the same by double stack benefits at Viramgam (2-4% saving in haulage costs) and price hikes. On the other hand, CFS business is facing structural challenges as growing emphasis on DPD is driving down margins led by lower dwell times. Given the weak earnings trajectory will remain muted (7% consol earnings CAGR over FY17-20) and the hangover on the stock related to the Blackstone buyout in rail, we maintain our Neutral rating.