07 Nov 2016 14:56 IST

Gateway Distriparks: Congestion to ease

While the company is under pressure now, long-term prospects appear bright

The enthusiasm around the implementation of Good and Services Tax (GST) notwithstanding, logistics firms are under pressure. A case in point is Gateway Distriparks (Gateway), which operates container freight stations (CFS) near ports offering transportation, storage and warehousing services.

Gateway’s revenue growth and margin have been under pressure due to weak export-import (exim) volumes. The company’s annual profit dipped 43 per cent Y-o-Y in 2015-16 from the average growth of 10 per cent in the prior three-year period.

This was due to volume contraction that impacted revenue and fall in operating margin to below 24 per cent, compared with the average of 26 per cent in earlier years.

The current price of ₹231 discounts Gateway’s trailing 12-month earnings per share by nearly 24 times. This is marginally higher than the average earnings multiple of 22 times it had traded in the last three years. It is, however, cheaper than the 34 times commanded by State-owned Container Corporation, a larger peer.

In the long term, logistics providers will benefit from port and rail infrastructure developments. Gateway’s balance sheet continues to be strong, with debt at 0.2 times equity. The company is also a regular dividend payer, and its dividend yield is about 2.8 per cent (based on ₹7 per share paid in 2015-16).

Currently, there are uncertainties over when its subsidiary (Gateway Rail Freight) would be listed. Any positive developments in this regard could also be a trigger for the stock.

Investors can, therefore, continue to hold Gateway’s shares, given the company’s revenue growth prospects and reasonable valuation.

Revenue growth

Gateway operates in three inter-linked segments — freight, rail and cold storage. It owns six container freight stations in the port cities of Navi Mumbai, Chennai, Visakhapatanam and Kochi.

Its mainstay is rail transport segment, accounting for about half its revenue. A drop in international trade volume hurt revenue growth in this segment. Rail freight volume dipped about 17 per cent in 2015-16 compared with a year ago. The downtrend seems to be easing a tad — in the first quarter of 2016-17, volumes were down 5 per cent Y-o-Y.

The long-term growth prospects in this segment however, appear bright. One, capacity additions in ports such as Jawaharlal Nehru Port Terminal, and Navi Mumbai will aid freight volume growth.

Two, the company will benefit from the completion of Dedicated Freight Corridors. Three, data from ICRA shows that freight volume growth in ports is picking up. The company is on an expansion path and adding capacity. Its new terminal in Viramgam, Gujarat is expected to be operational before the third quarter of 2016-17.

The CFS in Krishnapatnam, Andhra Pradesh is developed as an integrated logistics hub and will be operational by the fourth quarter of 2016-17. These additions should aid revenue growth. Gateway’s listed associate company, Snowman Logistics, operates cold storage warehouses and is expanding capacity.

Margin pressure

Revenue growth may, however, not translate to earnings growth due to pressures on margins. Gateway’s operating margin is on a downtrend and may not improve in a hurry due to a few reasons.

One, Direct Port Delivery — where the port delivers imported cargo to the customer directly, rather than being held in a CFS — could dampen pricing power. Two, as Gateway’s new facilities ramp up, lower utilisation may impact margin. Also, the expected operational benefits from double stacking cargo (instead of single stacking) may take a few years to realise.

That said, removal of port congestion surcharge levy (10 per cent of the basic freight rate) in April 2016 is a positive.

Gateway’s consolidated revenue in 2015-16 was ₹1,046 crore (revenue growth is not comparable year-on-year due to Snowman changing from a subsidiary to an associate company after September 2014).

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