Deleveraging plans suffers a setback
The acquisition of Snowman Logistics (Snowman) by Adani Logistics may not go through (Exchange release). The sale of ~40% stake in Snowman held by Gateway Distriparks (GDL) was supposed to bring in Rs2.96bn for GDL. It was also a key element in bringing GDL’s net debt down by Rs2.5bn-3bn by Mar’21. GDL’s net debt (as at 30th Sept’19) was Rs7.3bn and, given our reduced FY21E earnings to factor in the Covid-19 impact, ‘net debt to EBITDA’ based on 30th Sep’19 debt of GDL expands to 5.2x. We expect FY21E EBITDA to drop ~55% YoY driven by both contractions in rail and CFS earnings. While we don’t see solvency issues (most of the Blackstone debt was funded by NCDs) yet, cancellation of the Snowman deal will make FY21E a tough year for GDL. Maintain HOLD with a revised target price of Rs86/share (earlier: Rs128).
* Deleveraging to take backseat with stalling of asset sales. GDL raised 7-year bonds to acquire rail business stake from Blackstone and was planning to make early repayment of Rs2.5bn-3bn by Mar’21 on the back of asset sales. With delay in sale of Snowman stake (~40%), deleveraging will clearly take a backseat. The other planned non-core asset sales would also get delayed, i.e. land sales in different terminals including the 22-acre plot at Kochi which GDL owns and had earlier guided to sell out. Previously, sales proceeds from Chandra CFS were used to repay Rs500mn of NCDs.
* We reduce FY21E/FY22E EBITDA by 58/50% to factor-in Covid-19 impact. This factors-in 56/41% EBITDA decline for CFS and 59/53% EBITDA decline for the rail business in FY21E/FY22E. Increasing rail coefficient of ports like JNPT can potentially help pure-play exim players like GDL, as utilisation of Viramgam can ramp up. Yet, with stressed earnings and elevated leverage, FY21E ‘net debt to EBITDA’ may appear elevated at 5.2x.
* Deemed as an essential service, Snowman’s business appeared favourably poised to counter lockdown effects. Management noted that the business has not been adversely affected by the lockdown and demand for storage has increased from segments such as seafood, meat, poultry, QSR products, butter and healthcare products. Export cargo, accounting for approximately 30% of the volumes handled by Snowman, is being stored leading to an increase in warehousing occupancy. Imported products, accounting for approximately 5% of Snowman’s volumes have not been affected as these commodities are essential goods comprising of pharmaceutical products imported regularly to India. Also, a global e-commerce giant has partnered with Snowman for the delivery of FMCG perishables including vegetables, fruits, eggs, frozen food and groceries (announced in Mar’20).
* Expect moderation of GDL’s capex plans. Company’s capex for FY21E/FY22E was previously guided at Rs1.5bn, which can be curtailed.
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