We recently met with the management of Gateway Distriparks Limited (GDL) and Gateway Rail Freight Ltd (GRFL) and following are our key takeaways.
GRFL, subsidiary of GDL, is operating the rail business of the company. Although the slowdown has impacted the volumes to some extent there is lot of interest by newer domestic players for end-to-end solutions to save on costs.
With faster than expected recovery in the economy we feel that rail business of GDL would record robust growth going forward and in fact it is expected to turn around report profit at net level in FY10E.
GRFL has equity of Rs2 billion. Of this 95% is owned by GDL and balance 5% is owned by promoters, directors and top management. It has approx Rs1.15 billion as interest free advance form GDL. In addition to this it has debt of Rs1.96 billion.
Currently GRFL is operating with 15 owned rakes and 2 leased rakes. The company is having 2 rakes on an average on lease and the management is looking to lease more rakes for the domestic business.
Basically some of the private rake operators on the EXIM route have excess rakes which are leased to players like GDL with strong focus on domestic business.
It is operating in a unique model in terms of running mix cargo trains on Delhi - Mumbai route consisting of both EXIM and domestic cargo.
This primarily helps to reduce the empties by balancing the import and exports containers. This results into higher fill factors which would ultimately lead to higher profitability going forward.
It has already spent approx Rs5.7 billion on creating the assets for the rail and road business. Further it is likely to spend approx. Rs2.5 billion by March 2010E to further ramp up its assets base in terms of containers, rakes and terminals.
However it is important to note that the company seeking to raise Rs3 billion through equity issue in the current year and capex would be dependant on the ability of the company to raise funds.
With current buoyant markets we feel that fund raising could be done in GRFL and this would lead to value unlocking for the shareholders of GDL.
Valuation and recommendation
At Rs.100, the stock trades at 1.6x book value, 11.2x earnings and 7.4x cash earnings based on FY10E.
We continue to remain positive on the long term growth prospects of the company due to increasing containerization, export import trade and company’s presence at all the major ports, rail linked ICD, running of private container trains and expansion in booming cold chain business would keep its position stronger in the future as well.
The stock of GDL has run up sharply by 54% since our last recommendation at Rs65 in one month timeframe. Due to recent sharp run up in its stock price we recommend investors to look for buying opportunities at lower levels.
Due to 10% upside potential we recommend ACCUMULATE on GDL with revised price target of Rs110.