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Rail continues to drive earnings up

Gateway Distriparks’ (GDL) Q1FY22 result witnessed higher than expected topline and EBITDA. Rail segment volumes surprised with 24% growth over Q1FY20. Increase in rail share for EXIM transportation continues to help players like GDL. Large part of the deleveraging benefits is behind us with Net Debt at 13% of market cap; net debt increased QoQ.

Management reiterated its plans to spend ~Rs1.2bn of capex for satellite terminals around NCR to help increase GDL market share. Advent of DFC (Rewari – Palanpur to Mundra and Pipavav ports) is commissioning progressively and is set to allow increased volume and operational tailwinds. We downgrade to ADD from Buy with SoTP-based revised target price of Rs332/share (earlier Rs 232/share).

* Rail volumes are up 24% from Q1FY20 -- positive surprise. This leads to upgrade in FY22/23E rail volumes. EBITDA/teu has declined from Rs9,926/teu to Rs 9,211/teu QoQ. With higher volumes and better spot margins, we have upgraded FY22/23E rail EBITDA/teus. FY23E EBITDA/teu is now Rs8300/te, against Rs8000/teu earlier.

* CFS volumes surprised with a 3% QoQ increase. CFS utilisation across seven locations has been ramping up fact reaching 58% in Q1FY22 (FY21 average at 49%). The bulge in EBITDA/teu has been normalising fast, leading to a disappointment in Q1FY22. CFS EBITDA was lower than expected at Rs217mn.

* Snowman; primed for a turnaround. Topline grew at 5% YoY. While warehousing segment reported nearly flat revenue YoY, EBITDA was up (high double-digit increase). Transportation EBITDA continues to drag. Management highlighted pharma and e-commerce revenues are growing at 20-25%. Ice cream revenues are also growing at 15% CAGR. This is also reflecting in product mix with ecommerce contributing ~5% of topline from near 0% YoY. Pharma share in the topline has also also continues to increase. Greenfield 8,000 pallets capacity addition and brownfield 26,000 pallets capacity addition is ongoing. Base capacity is 107,450 pallets across 35 locations.

* Downgrade to ADD from Buy. GDL remains a direct play on: i) rail freight progressively gaining share over road, accentuated by DFC, ii) cold chain logistics opportunity in India augmented by increased focus on pharma vertical, given its 40% controlling stake in Snowman Logistics. Net debt has reversed up in the quarter, up by Rs270mn QoQ to Rs4.5bn (reported). Net debt at ~ 13% of market cap, majority of the deleveraging benefit is behind us. Also, there is not much debt repayment scheduled for in FY22E. Even with higher EBITDA assumptions for Rail and CFS as well as higher attributed multiple for the rail business, our target price justifies an ADD, leading to the downgrade in recommendation.

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