Published on 17/03/2017 3:00:49 PM | Source: Sharekhan
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* Freight outlook for FY2018 to improve owing to railway action plan:
The Union Railway Ministry unveiled key freight-related initiatives on March 2, which highlights its action plan to bring back traffic lost in recent years to the road sector. The Railways is targeting 8.5% YoY growth in its freight revenue for FY2018, primarily through an increase in cargo volume (expects 6% YoY rise in volume to 1165mt). The Railway’s key initiatives to improve cargo volume will be long-term contracts (not less than three years), whereby customers may get discounts in the range of 1.5-35% based on incremental growth in volume (customers are required to offer at least 1mt of traffic per annum). The noteworthy factor for 6.5% targeted growth in FY2018 factors in 9.9% YoY growth in container services. Additionally, the government has identified 35 clusters (accounting for 50% of total freight movement in the country) for building multimodal logistics parks, with the National Highways Authority of India (NHAI) as the nodal agency (state governments to provide land while private players are expected to develop and operate the multi-modal logistics parks).
* Short-term volume to see uptick while EXIM imbalance to affect near term margins:
The cargo handled at major ports have grown by 6.5% YoY during April-February 2017 vs a 4.3% YoY growth in FY2016. The signs of improvement in cargo volume at major ports, especially at Chennai, Vizag, Kochi and Mumbai will benefit GDL, as was the case in Q3FY2017. Further, container rail volume has grown by 1.9% YoY during April-February 2017 as against a 5.4% YoY decline in FY2016. However, in the short term, exports have started showing growth (up 1.1% YoY during April-January 2017). The rising imbalance due to the fall in imports (down 5.7% YoY) can increase empty running costs for logistics companies, in turn affecting the Operating Profit Margin (OPM) of companies like GDL.
* Maintain Hold with unchanged price target of Rs290:
The outlook for improvement in freight volume in FY2018 looks promising although the current imbalance in EXIM trade and higher competitive intensity are likely to affect the company’s financials in the near term. Improvement in the global trade environment and revival in OPM in the two businesses (Rail and Cold Chain) will be the key monitorables going forward. Although GDL’s structural growth story over the long term remains intact (owing to a range of services, leadership in CFS and Rail businesses and a healthy balance sheet), the near-term uncertainties are likely to weigh on its valuation. Consequently, we maintain a ‘Hold’ rating with an unchanged price target (PT) of Rs290.
The risk to our call is an earlier-than-expected revival in the demand environment and an improvement in the OPM.
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