Gateway Distriparks - Holding structure simplified; prepared for next phase of growth - ICICI Securities

Gateway Distriparks' (GDL) Board has approved: i) amalgamation of Gateway East India (GEI) with GDL, and ii) amalgamation of GDL (post-merger with GEI) with Gateway Rail (GRFL). For amalgamation of GEI with GDL, no consideration will be given to the shareholders of GEI since it is a wholly-owned subsidiary of GDL. For amalgamation of GDL with GRFL, the shareholders of GDL will receive equity shares of GRFL in the ratio 1:4. GRFL will get listed and GDL will cease to exist. GDL holds 99.85% stake in GRFL. Promoter shareholding remains largely unchanged post the scheme at 32.12%. Amalgamation into GRFL was expected on account of the existing category-I Rail licence being in the name of GRFL. We upgrade GDL to BUY from Hold with a revised target price of Rs134 (earlier Rs88).

- Rationale for amalgamation / merger. The amalgamation, reverse merger and the corresponding listing of GRFL highlights the management's business priority for the Rail intermodal logistics business vis-à-vis CFS business. This will also allow better cashflow management as, while GRFL was becoming an important source of cashflow, NCDs were in the parent entity. This will also allow better access to growth capital by levering up the consolidated balance sheet. CFS cashflows can be better utilised to accelerate capex for satellite rail terminals for the NCR.

- Upgrade to BUY. With no unpleasant surprises from simplification of group structure, the focus shifts to GDL's (in future GRFL's) journey to capture incremental Rail business share. The journey will start with the endeavour to increase the current 13% market share in the NCR by trying to go deep and create satellite terminals. This would entail additional capex and additional debt, hence managing the balance sheet is paramount - FY22E 'Net Debt to EBITDA' (2.2x) appears quite manageable. GDL had ~Rs2.7bn of NCD repayment scheduled for FY21. Post rights issue of Rs1.15bn and repayment of similar amount, GDL has repaid ~Rs2.25bn, leaving a small repayment due for rest of FY21.

- Time to diversify away from container traffic. As Dedicated Freight Corridor (DFC) keeps getting delayed, perhaps it is time to look into other segments of Rail freight as well. With the extent of Indian Railways' capex in augmenting the key freight routes - 18 high-density routes of a combined 36,000km carry 96% of freight , has witnessed maximum investment in quadrupling of lines, electrification in the past five years - it makes sense to diversify away from container transport. As the wait for DFC continues, freight capacity is being unlocked across the network. What is required is corporate involvement in improving accessibility and loading/unloading infra at some of the freight stations connected to this network. With Indian Railways consistently gaining freight market share amid the pandemic, a good opportunity presents itself to GDL.

Shares of GATEWAY DISTRIPARKS LTD. was last trading in BSE at Rs.91.95 as compared to the previous close of Rs. 87.5. The total number of shares traded during the day was 22371 in over 874 trades.

The stock hit an intraday high of Rs. 96.2 and intraday low of 89. The net turnover during the day was Rs. 2072599.

Source : Equity Bulls

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