Gateway Distriparks: are investors extrapolating too much?
Shares of logistics company Gateway Distriparks Ltd have been riding high on optimism that policy actions by the government will translate into an increase in freight activity at ports and railways. The company’s shares have more than doubled in the past year, outperforming the S&P BSE 500 index and their peers.
“Investors are factoring in a 10-15% increase in container freight stations (CFS) and railway freight in fiscal year 2015-16, compared with muted growth in the past few years. Besides, exports may have become more attractive because of the rupee depreciation,” says Niraj Mansingka from Edelweiss Securities Ltd.
Of course, these and other similar growth assumptions are based on a belief that economic growth will rebound. It goes without saying that logistics companies witness disproportionate growth when the economy rebounds; but investors should also keep in mind that the expected rebound is not a given.
Some analysts tracking the company, however, are overly bullish—they expect margins to increase by two percentage points’ year-on-year to 27.5% in the current fiscal year and to around 30% by FY16, aided by momentum in the economy and a surge in freight movement.
As far as the December quarter performance goes, Gateway Distriparks may be able to maintain growth momentum, as growth in traffic at Jawaharlal Nehru Port Trust, the busiest container gateway, near Mumbai, was around 8-9% during the quarter. Gateway Distriparks has also passed on the recent hike in port congestion surcharge and haulage rate without any impact on export-import volumes, according to a Religare Research note dated 8 January.
“However, margins might be under pressure, due to the difference in sales mix, because it is a slightly seasonally weak quarter,” adds Mansingka.
In the three months ended September, consolidated net sales grew by 16.4%, clocking the highest growth in around two years. Both the container freight station business (30% of overall revenue) and the railway freight business (around 60% of revenue) grew by about 20%. Decreasing utilization and double stacking helped in margin expansion of 300 basis points to 29.3% in the September quarter (one basis point is one-hundredth of a percentage point).
For the growth to continue, however, a pick-up in the economy is essential. At the ground level, while the government is following up with policy actions, industrial and manufacturing activity has not yet taken off; therefore, there is risk to earnings and valuations if growth does not take off, according to analysts.
The writer doesn’t own shares in the above-mentioned companies.