December 22, 2011

GATEWAY DISTRIPARKS LTD. (GDL)

Initiating Coverage - ACCUMULATE

Analyst Rajiv Bharati rajiv.bharati@destimoney.com

Gateway Distriparks ACCUMULATE with an upside target of 10%

ACCUMULATE
TARGET : `136 CMP : `124

Key Data Ticker (Bloomberg) NSE Code BSE Code Sector Industry Face Value (`) Book Value per share (`) Dividend Yield (%) 52 Week Range (`) Market Cap. (` mn.) GDPL GDL 532622 Logistics Logistics 10 64 4.8% 101-153 13,436

( In ` mn ) Net Sales EBITDA EBITDA Margin EPS (`) EV/Sales EV/EBITDA P/E (x) (` 124.05) Price Performance Absolute Relative

FY10 5,166 1260 24% 7.3 2.5 10.4 17.0 CY08 -45% 6%

FY11 5,991 1609 27% 8.9 2.2 8.1 13.9 CY09 65% -11%

FY12E 7,819 2431 31% 12.4 1.7 5.4 10.0 CY10 -14% -32%

FY13E 8,479 2520 30% 13.3 1.5 5.2 9.3 CY11 15% 38%

Shareholding Pattern as on 30 Sep 2011

MF/UTI/FIs /Insurance Co. 14% Individuals 8% Bodies Corporate 8% Promoters 40% Others 2%
Source: Company, Bloomberg, Destimoney Research

Relative Stock Performance (Dec'10=100)

160 130 100 70 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 GDL NIFTY

FIIs 28%

Volume growth to be driven by new capacities, pricing to come under pressure

Gateway Distriparks Limited (GDL) is the largest private sector player in India providing port related logistics support services. The company provides services for handling and clearance of sea borne export-import trade in containerized form through transit facilities located near ports or in the interiors of the country. CFS (Container Freight Stations) business is the main cash generating segment for GDL. It contributed 40% of revenue in FY11 and has operating margin of ~50%. We expect this segment to remain under pressure as the recent growth has primarily been price led. Lower throughput in port volumes due to prevailing macroeconomic situation might have negative impact in the medium term. Volume growth in the Rail Segment is expected to surge with incremental diversion of rakes on domestic circuit to EXIM circuit, coupled with operationalization of Asaoti ICD (Inland Container Depots). The segment has turned in black recently which got further bolstered by reduction in interest burden after the inflow of capital from Blackstone group. GDL with its Snowman vertical caters to the burgeoning demand in the Cold Storage Logistics space. The company is planning to expand its capacity by 2.6x from the present 18,000 pallets. Currently, contributing 8% to topline, we expect this segment to generate stable cash flows in future. Logistics sector being closely linked to GDP growth; governments and RBIs focus on curbing inflation at the cost of industrial growth coupled with deteriorating global economic condition could start reflecting in international trade with India in the medium term. We remain cautious on sudden fall in demand for finished product which could impact the containerized cargo volumes in India. Therefore, we initiate coverage on GATEWAY DISTRIPARKS with a ACCUMULATE rating and a target price of `136 per share.

GDL operates in three fast growing segments

GDLs business verticals

CFS1
Extended arm to ports helping decongestion of ports, faster paper work and other value added services (kitting, stuffing, de-stuffing etc). 4 CFSs with total Capacity of 600,000 TEUs. Two at JNPT (366,000 TEUs) CFS Chennai (85,000 TEUs) CFS Vizag (149,000 TEUs) Another one coming up in Cochin with 50,000 TEU capacity
Source: Company

Rail & ICD

Currently the company has 21 operational rakes. 3 ICD (Inland Container Depots) currently operational Garhi (Gurgaon) 100,000 TEUs Sanewal (Ludhiana) 180,000 TEUs Kalamboli (Mumbai) Another one coming up in Asaoti (Faridabad) with 120,000 TEUs

Cold Chain Logistics

Temperature controlled logistics solution connecting over 100 cities and distributing to more than 4400 outlets. Current capacity of 18,000 pallets, to be expanded to 47,000 by the end of FY13.

4
1refer

Annexure I

which they have acquired over the years

1994

Incorporated in 1994, the company is a JV between India based Newsprint Trading & Sales Corp (NTSC30%), Singapore based Thackeral Grp, Windmill Corp, Parameshwara Holdings Phase 1 (1998), began operation with 48,000 TEUs annual capacity Phase 2 (2001), expanded capacity to 120,000 TEUs Phase 3 (2003), expanded it further to 180,000 TEUs Acquired ICD at Garhi Harsaru in Gurgaon for `177.5 mn Acquired 60% stake in Gateway East India Ltd. Acquired 100% stake in Indev Warehouse and Container Services Pvt Ltd, A CFS at Chennai, for `270 mn Signed an agreement with Concor to jointly work on development of EXIM trade Acquired 100% stake in Gateway Rail Freight Pvt Ltd (GRFL). Acquired 60% stake in Gateway Distriparks (Kerala) Pvt Ltd. Chakiat Agencies holds the balance 40% . Entered cold chain logistics business by acquiring 50.1% in Snowman Frozen Foods Ltd. GRFL signed a 20 yrs agreement with Indian Railways to operate train on Indian Railway Network. Entered into 15 yrs operate and management agreement with Punjab Conware for its CFS as Nhava Sheva.

19982003

2004

20052006

2007

2009

Blackstone Group acquired 37.5% stake in GRFL for `3bn.

Source: Company

partnering with incumbent players to expand the umbrella of offering

CFS Dronagiri (Navi Mumbai)

Gateway Distriparks Ltd.

Punjab Conware CFS (Navi Mumbai)

Gateway East India Pvt Ltd CFS Vizag, 100% Subsidiary

Gateway Distripark (South) Pvt Ltd CFS Chennai, 100% Subsidiary

Gateway Distriparks (Kerala) Limited CFS Cochi, 60% Subsidiary

Gateway Rail Freight Ltd 97% Subsidiary

Snowman Logistics Limited 52% Subsidiary

Container Gateway Limited 51% Subsidiary

Source: Company

GDLs growth is closely linked to

Revenue Breakup FY11 = `5,991 mn

Revenue Breakup FY13 = `8,479 mn

Rail 52% CFS 40%

Rail 53%

Snowman 8% Quarterly revenue breakup

CFS 36%

Snowman 11%

100% 75% 50% 25% 0% Jun-08 Jun-09 Jun-10 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Jun-11 Dec-08 Dec-09 Dec-10 Sep-11

Source: Company, Destimoney Research

CFS

Rail

Snowmann

EXIM trade in India...

EXIM trade in India in $bn

450 300 150 0 -150 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 H1FY12

EXIM Balance($bn)
Source: Bloomberg

Imports($bn)

Exports ($bn)

Cumulative trade (exports + imports) in H1FY12 is already at 62.3% of cumulative trade in FY11 Trade data reflects exports breaching $300 bn mark in FY12.

which in turn is coupled to economic growth

Indian Logistics Industry Revenue($ mn)

120

Indian logistics market 2009 - Activity wise breakup

75

Transportation 62%

Freight Forwarding 8%

Warehousing 26%

Value Added Logistics Services 4%

2009
Source: Frost & Sullivan

2014

Indian Logistics Industry revenue is expected to grow at 9.9% CAGR between 2009-2014. Industry with widespread consumer base but limited production base like oil & gas, pharma, minerals, food processing and FMCG are driving up the demand for multimodal transportation services. Integrated logistics park demand from Pharma, FMCG, food processing and agricultural sector have made warehousing a significant part of the logistics industry in India.

Though clearance to the plan of debottlenecking of JNPT port bodes well for the EXIM trade in long run

Incremental container traffic movement towards neighboring ports owing to capacity constraint at JNPT (in 000 TEUs)
145 118 209 110 73 2009-2010 Chennai JNPT 307 159 304

10 year plan for ports by Shipping Ministry (Container Volume in 000 TEUs)
28,000 21,000 14,000 7,000 0 2005-06 2007-08 2009-10 2015-16 2004-05 2006-07 2008-09 2010-11

2010-2011 Mundra Pipavav

Source: Media Sources, Indian Ports Association

Lower absorption of incremental container traffic at JNPT has resulted in shipping lines shifting to other neighboring ports In light of the changing dynamics, JNPT has given final approval to PSA-ABG Shipyard JVs bid to build 4th terminal at JNPT. This will expand the current capacity of JNPT to 11 mn TEUs by 2016 thereby catapulting the volumes at the busiest Indian port and paving way for future expansion.
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2019-20

we expect lower GDP growth to impact EXIM volumes and container trafficcoupled with looming pricing pressure in CFS segment

revenue growth is attributed to improvement in realization

4000 3000 2000 1000 0 FY09 FY10 FY11 FY12E FY13E
CFS Revenue-in Rs. mn (LHS)
Source: company, Destimoney Research

muted volume growth is attributed to congestion on JNPT and Chennai facilities

12% 6% 0% -6% -12% FY09 FY10 FY11 FY12E FY13E 64% 48% 32% 16% 0%

12000 9000 6000 3000 0

Average Rev/TEU-in Rs. (RHS)

Throughput growth rate (LHS)

Operating Margin (RHS)

In H1FY12, CFS business has seen sharp jump in revenues attributed primarily to improvement in realization post the tariff revision in Q1FY12 by GDL. Though volume growth is expected to remain muted in H2FY12 as well, we expect commencement of operation at Cochin port to provide the much needed respite. Lower GDP growth is expected to cast its shadow on EXIM volumes in coming quarters, we expect the utilization to deteriorate a little resulting to a dip in operating margins.
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In the Rail Segment, growth in the recent past is mainly volume led and is now hinged to success of Asaoti terminal which might take 12-15 months to stabilize

better utilization on EXIM route will compensate for drop in per average revenue per TEU on rail vertical for GDL
30000 22500 15000 7500 0 FY09 FY10 FY11 FY12E FY13E 4800 3600 2400

Volume led growth based on shifting traffic from Domestic to EXIM route
24%

40%

50%

49%

33%

43%

36%

30%

25%

60%

1200 Sep-09 09 0

50%

51%

67%

57%

64%

70%

75%

76%

Dec-09 09

Mar-10 10

Jun-10 10

Sep-10 10

Dec-10 10

Mar-11 11

Jun-11 11

Rail Revenue-in Rs. mn (RHS)

Source: company, Destimoney Research

Average Rev/TEU-in Rs. (LHS)

EXIM-Volume Share%

Domestic-Volume Share%

Rail segment has become profitable recently also helped by the lowering of interest cost burden after the induction of Blackstone Group as equity partner with 37.5% stake. Higher TEUs per rake and more trips per month will lead to better utilization of rake on EXIM route thereby compensating for per TEU drop in revenue as compared to domestic circuit. Though the new ICD terminal at Asaoti with 120,000 TEU capacity will help improve the volumes, stabilization of the same will take time resulting in pressure on volume growth in the medium term. Empty running while travelling towards port on account of massive export-import gap in India remains a cause of concern.
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Sep-11 11

While the Snowman segment is growing smartly

steady growth
1,000 750 500 250 0 FY09 FY10 FY11 FY12E FY13E 32% 24% 16% 8% 0%

Snowman Revenue-in Rs. mn (LHS)

Source: company, Destimoney Research

Operating Margins

GDL is planning to increase its capacity from present 18,000 pallets to 47,000 pallets by the end of FY13. As per industry data, by 2014 Cold storage market in India is expected to grow to `9 bn, while the reefer transportation is expected to grow to `16 bn.

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We expect the margin profile to remain stable despite tapering in topline growth

Consolidated revenue growth is expected to taper

80% 60% 40% 20% 0% FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Revenue Growth%
Source: Company, Destimoney Research

Operating margin%

We expect the growth to taper in FY13 due to higher base of FY12 and delay in stabilization of new facilities. We expect the margins to remain stable or a tad lower than H1FY12 depending on the delay in deployment of new capacities and movement in port volumes.

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therefore, we initiate coverage with ACCUMULATE rating and a target price of `136 per share

Logistics sector being closely linked to GDP growth; governments and RBIs focus on curbing inflation at the cost of industrial growth (refer Annexure II) coupled with deteriorating global economic condition could start reflecting in international trade with India in the medium term. We remain cautious on sudden fall in demand for finished product which could impact the containerized cargo volumes in India. The stock is trading at 10.0 and 9.3 times its FY12E and FY13E earnings. We initiate coverage on GATEWAY DISTRIPARKS with a ACCUMULATE rating and a target price of `136 per share.

Relative Stock Performance (Dec'10=100)

160 130 100 70 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 GDL
FY10 EPS (`) CEPS (`) P/E (x) P/B (x) ROE ROCE EV/EBIDTA (x) 7.3 11.6 17.0 2.0 12% 8% 10.4 FY11 8.9 13.8 13.9 2.0 14% 9% 8.1

NIFTY
FY12E 12.4 17.6 10.0 1.8 18% 15% 5.4 FY13E 13.3 19.0 9.3 1.6 17% 14% 5.2

Source: Company, Bloomberg, Destimoney Research

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Financial Summary

Income Statement
( In ` mn ) Net Sales Operating expense EBIDTA Depreciation EBIT Interest EBT Other Income PBT Tax PAT Margins Sales Growth % Operating Margin % Net Margin % 14% 24% 16% 16% 27% 17% 31% 31% 17% 8% 30% 17% FY10 5,166 3,906 1,260 455 805 206 599 125 724 (79) 803 FY11 5,991 4,382 1,609 502 1,106 194 912 129 1,041 44 997 FY12E 7,819 5,388 2,431 572 1,859 173 1,686 149 1,834 495 1,339 FY13E 8,479 5,958 2,520 620 1,900 127 1,773 212 1,985 547 1,438
( In ` mn ) Liabilities Equity Share Capital Reserves & Surplus Loans Deferred Tax Liability Current Liabilities (CL) Provisions Minority Interest Total Assets Gross Block + CWIP

Balance Sheet
FY10 FY11 FY12E FY13E

1,079 5,563 2,099 187 1,019 659 625 11,232

1,080 5,799 1,154 140 672 817 3,568 13,230

1,080 6,540 1,154 140 860 1,066 3,568 14,408

1,080 7,301 1,154 140 933 1,156 3,568 15,331

10,553

12,036 2,210 9,825 130 9 3,266 13,230

12,714 2,782 9,932 130 9 4,337 14,408

13,787 3,403 10,384 130 9 4,808 15,331

Accumulated Depreciation 1,851 Fixed Assets Investments Misc Current Assets (CA) Total 8,702 150 5 2,374 11,232

Source: Company, Destimoney Research

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Key Risks and Challenges

Logistics industry is closely linked to economic growth, slowdown in economic activities and drop in EXIM trade will impact the growth of GDL. Congestion at ports can impact the utilization of storage space (CFS/ICD) and rakes thereby reducing the return on assets of the deployed asset resulting in lower growth and profitability. Transportation charges amounted for 48% of the revenue in FY11. Rise in fuel prices will directly impact the profitability of the company. Unfavorable revision in haulage charge can lead to deterioration of viability of transportation by rail even further. Protectionist trade policy by government (e.g. ban on transport of some key commodities on private rakes) can throw the operations of private players off-road.

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ANNEXURES

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Annexure I: Typical port logistics

The subsystems of a typical container terminal

Definitions as per Ministry of Commerce CFS (Container Freight Stations) / ICD (Inland Container Depots): A common user facility with public authority status equipped with fixed installations and offering services for handling and temporary storage of import/export laden and empty containers carried under customs control and with Customs and other agencies competent to clear goods for home use, warehousing, temporary admissions, re-export, temporary storage for onward transit and outright export. Transshipment of cargo can also take place from such stations.

Diameter of the subsystem indicates its capacity

Source: Henesey (2004)

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Annexure II: Moderation in IIP

IIP trend (2004-05base)

16.5 11.0 6.3 5.5 0.0 (5.5) Sep-10 Feb-10 Dec-09 Nov-09 Nov-10 Dec-10 Feb-11 Aug-10 Oct-10 May-10 May-11 Oct-09 Jan-11 Jun-10 Apr-10 Mar-10 Mar-11 Apr-11 Jun-11 Jan-10 Jul-10 Jul-11 -5.1 Aug-11 Sep-11 2.4 9.5 14.9 13.7 13.1 13.3 8.5 9.9 7.4 4.5 6.1

11.3 8.2 7.5 6.7 6.4 9.4 5.3 5.9 8.8 3.3 4.1

Source: CSO

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