Value unlocking key trigger for Gateway

Logistics player Gateway Distriparks’ scrip has underperformed the broader markets over the past year with its share price falling 22 per cent as against the positive returns of the Sensex at 12 per cent.

The company, which gets its largest chunk of revenues from its container freight station (CFS) business (the others being cold chain and rail), has been hit by the global slowdown in trade and container volumes.

The stock saw some action recently after it announced plans to list its cold chain subsidiary, Snowman in a bid to raise money to fund the subsidiary’s expansion plans.

While the company has gained market share in some cities where it operates its CFS, the overall business has not been as robust. However, going ahead, analysts at SMC believe the company will continue its strategy of expanding its CFS network and with the general improvement of its business climate (over the longer-run), is expected to do well in the CFS segment.

While trade data for August shows that container volumes were down three per cent year-on-year, they are up 2.3 per cent on a sequential basis, the upward monthly trend visible since May. Religare analysts, however, say any major volume growth in the rest of FY14 would be driven by an improvement in the macroeconomic situation and stability of the rupee.

Most analysts, however, have a buy recommendation due to upsides from value unlocking through listing of subsidiaries (cold chain and rail) and improving prospects on the back of demand revival. Says Jignesh Makwana of Quantum Securities, “The upsides in the stock will largely accrue from value unlocking with the listing of the cold chain subsidiary Snowman in the near future as well as that of the rail business in the medium term. The revival of the economy will also boost the fortunes of the CFS and rail businesses”.

Analysts peg the valuations of the two unlisted subsidiaries at Rs 1,100-1,200 crore, which is the current market cap (Rs 1,155 crore) of Gateway Distriparks (consolidated debt stood at Rs 252 crore at end-March 2013).

Sum-of-the-parts apart, even on a PE basis valuations are attractive as the stock (Rs 103) trading at a price to earnings (P/E) multiple of 8.6 times its FY14 estimates which is at a discount to its average P/E of 11.8 times over the past five years. Analysts have a one-year  target price in the Rs 140-160 range.

Cold chain promise
The company is betting big on its cold chain business which currently accounts for 15 per cent of its revenues. “With almost 45 per cent of the capex during the last six quarters directed at Snowman, total pallets rose to 53,000 in June quarter of FY14,” says a Karvy Stock Broking report.

The year ago number was 18,000 pallets. The company plans to increase its capacity to 90,000 pallets by FY15. Of the Rs 210 crore capex in FY14, Rs 150 crore is being used to fund Snowman’s operations. Pallets are refrigerated units/containers.

Going ahead, the prospects of the cold chain business seems bright if the recent deals which value the Snowman subsidiary at Rs 435 crore are anything to go by. While the division contributes 15 per cent of revenues, it accounts for nearly 38 per cent of the company’s current market cap. The company, which has filed the draft prospectus to list this subsidiary, intends to raise about Rs 150 crore, about 90 per cent of which will be used to create temperature controlled warehouses.

CFS: Muted show
Meanwhile, volumes in the CFS business for the June quarter were down six-nine per cent both on a sequential as well on a year-on-year basis with realisations too falling 2.3 per cent on a sequential basis. While the trade slowdown and growing competition has been a dampener for the company, there could be some improvement in the CFS business with the launch of the Kochi terminal and second CFS terminal at Chennai.  Though the CFS business generates about 31 per cent of the company’s revenues, the rebound of the business is critical for the company as the segment contributes nearly half of its operating profits.

Ebidta margins at 42%, too, are the highest of the three businesses. A recovery in global economies like US, China, etc also raises the prospects of the business which could benefit from a likely increase in India's foreign trade.