Gateway Distriparks (Gateway), in the last 12 months, focused on debt reduction, which has reflected in the positive stock returns in this period.
Gateway Distriparks (Gateway), in the last 12 months, focused on debt reduction, which has reflected in the positive stock returns in this period. We have reflected the impact of higher interest and depreciation cost given tight liquidity conditions and some accounting standard changes in FY20E-21E EPS. Additionally, we have realigned the rail volumes’ uptick to reflect a delay in DFC commissioning for Gujarat ports to late FY21E v/s earlier in the year. Retain buy.
Gateway acquired 99.93% stake in Gateway Rail post negotiations with Blackstone in March 2019 for Rs 8.5 bn and Rs 5.5 bn NCDs were raised between 11.25%-11.5% coupon for financing the same. Company’s D:E at 0.6x and less than 50% facility utilisation till the dedicated freight corridor (DFC) is commissioned makes it highly vulnerable to rate changes. Every 10% change in interest cost is 17% on FY21E profits. Hence, debt reduction focus is very important for financials and also valuation re-rating from current levels. Rail business, understandably is a significant factor, with every 5% change in volumes impacting FY21E profits by 15%. Delayed DFC commissioning has been built in our estimates and led to the downtick in FY20E-21E profits. However, receipt of `2.959 bn from sale in Snowman Logistics stake to the Adani Group and benefits of debt repayment from the same is yet to be factored in. The deal is expected to be completed by March 2020.
Over the last 4 years, investors have lost confidence in the Gateway management as business profitability, especially in railways, saw a sharp decline. Company’s volume trends underperformed the industry leader, Container Corp by a fair bit. We believe management bandwidth being involved in the Blackstone deal did have a vital role to play. The last 12 months saw rail business volumes growing faster and an improvement in margins. This business momentum continuing is an important re-rating trigger for the company in the next 2 years as lost confidence is gradually built-up.
Our SOTP based TP of `250 (v/s `310 earlier), implies consolidated PE of 18x FY22E.