Gateway Distriparks: Rail margins led to beat on Ebitda

By: |
June 9, 2020 2:40 AM

FY21e EPS down 15% due to Covid-19; ‘Buy’ retained as DFC will boost market share.

Management highlighted that Dedicated Freight Corridor (DFC) phase-wise commissioning should begin by 1HFY22e and will be a game changer.

Gateway Distriparks (Gateway) reported better Ebitda in Q4FY20 as rail margins surprised positively. Warehousing was considered an essential service and was not materially impacted by the lockdown. The company has repaid Rs 1 bn+ debt, ending the year at 0.5x net d:e. Management highlighted that Dedicated Freight Corridor (DFC) phase-wise commissioning should begin by 1HFY22e and will be a game changer. Maintain Buy.

Lowered FY21E volumes to reflect COVID-19 impact: Q1FY21e port volumes will be lower y-o-y and in turn will impact Gateway’s volumes. Management mentioned that revenues may not be down as much as volumes, as income should come from logistics services on piled up goods in Q4FY20. We have lowered our FY21e volumes by 6% and factored in 30% y-o-y volume decline in Q1FY21e. While we have lowered our FY21e EPS by 15%, FY22e impact is negligible as lower volume assumptions have been offset by the lower interest costs.

Working capital containment, a positive surprise: Debtor days are down 51% y-o-y and contributed in generating FCF to repay debt. Management’s aim is to reduce debt from Rs 7 bn to lower than Rs 4 bn. We have assumed some working capital deterioration in FY21e driven by COVD-19 impact and have flat debt levels end FY21e. Utilisation of internal accruals to further pay debt should lead to a valuation re-rating.

Business improvement visible: Over the last 4 years investors had lost confidence in Gateway management as business profitability esp. in railways saw a sharp decline. The company’s volume trends underperformed the industry leader Container Corp (ConCor). We believe management bandwidth being involved in the Blackstone deal played a role. The last 12 months have seen rail volumes growing faster and margin improvement. This business momentum continuing could be a re-rating trigger as lost confidence is gradually built up.

Maintain Buy: Our positive stance is driven by confidence in management’s ability to grab share in the expanding market pie from DFC commissioning like it did when private sector operators were allowed to compete with ConCor post 2008. Our SOTP-based PT of Rs 165 implies consolidated PE of 25x FY22e. Downside risk: (i) indefinite delay in DFC (ii) market share loss.

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