Upgrade to BUY on Gateway Distriparks - Strengthening the balance sheet - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

We upgrade Gateway Distriparks (GDL) to BUY (from ADD earlier) as the company has completed its fundraise, the proceeds of which will be used to deleverage the balance sheet. We expect the gearing ratio to reduce to ~0.5x in FY21E (from 0.7x) as GDL repays Rs 1.15bn of high-cost NCDs. The company is also in the process of simplifying its group structure with plans to merge the Rail business and the CFS operations under a single umbrella, which will drive operational synergies. The much-awaited Dedicated Freight Corridor (DFC) stretch between Haryana (Rewari) to Gujarat (Palanpur) of 650kms is expected to be commissioned by CY20 as trial runs have commenced. This will lead to a 10% increase in productivity of the operators at a time when EXIM traffic volumes are improving from trough levels (+40% QoQ).

Balance sheet deleveraging: GDL has successfully raised Rs 1.15bn via a rights issue, the fund proceeds of which will be used towards deleveraging. GDL will repay high-cost debentures of Rs 1.15bn on 25th Sep 2020 (out of current outstanding of Rs 4.15bn), which will save interest costs by over Rs 100mn p.a.

Simplification of group structure: The company is restructuring operations by planning to merge the Rail/CFS segments, which will drive group synergies. Further, Gateway is selling down stakes across its non-core activities (Snowman) and smaller CFS' (Chandra).

DFC - connectivity to Gujarat ports in CY20: The DFC connectivity with the Gujarat Ports of Mundra and Pipavav is expected to be commissioned shortly (end of CY20). DFCCIL has successfully conducted the engine train trial run between the 342.5km long New Palanpur to Durai stretch. With this link, the Rewari (Haryana) to Palanpur (Gujarat) route of ~650kms is almost completed. This is expected to increase the productivity of the operators by 10%.

Pick-up in EXIM traffic: Port traffic is now improving from trough levels of 1QFY21. Container TEU loading at major ports has risen from 542k TEUs in Apr-20 to 763k units in Aug-20; +40% from trough levels.

Upgrade to BUY: We expect volume recovery over FY22/23E and are factoring in growth of 16/18% in rail segment, aided by a pick-up in economic activities as well as commissioning of the DFC. We are raising EPS estimates by 21/7% over FY22/23E to factor in savings from lower interest cost payout. We set a revised Sep-22 target price of Rs 125. We value the Rail business at 8.5x EV/EBITDA (8x earlier) to factor in the improving demand outlook.

Key risks: Slower-than-expected recovery, delays in commissioning of DFC, and a substantial increase in capex requirement/inefficient capital allocation.

Shares of GATEWAY DISTRIPARKS LTD. was last trading in BSE at Rs.88.9 as compared to the previous close of Rs. 89.45. The total number of shares traded during the day was 5586 in over 231 trades.

The stock hit an intraday high of Rs. 91.1 and intraday low of 87.5. The net turnover during the day was Rs. 496639.

Source : Equity Bulls

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