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On a steady path; maintain BUY

We recently interacted with the management of Gateway Distriparks (GDL) to take business update, post re-listing on 22 March 2022. GDL’s rail business continue to perform well with a) strong volume growth (significantly better than for market leader), and b) strong profitability, aided by concessions from Indian Railways (IR) as well as improved efficiency, especially post partial commissioning of Dedicated Freight Corridor (DFC). CFS business continue to generate steady profits and cash flow, though will see substantial reduction in volume in FY23 as it did not renew lease for its 2 nd CFS at JNPT in Jan’22 (Punjab Conware) given low profitability. Slight pressure on margins in CFS/Rail business cannot be ruled out in short term on account of recent cost inflation (especially fuel cost on first/last mile), though the company is confident about pass through of such costs. Our estimates broadly remain unchanged and we continue to maintain our positive on the company on account of a) tailwinds on EXIM momentum, b) benefits of DFC yet to be captured fully in financials (volume/margins). We maintain BUY on GDL with Mar’23TP of INR90 (unchanged). Key risks: a) lower-than-expected cargo growth/profitability and b) adverse outcome in pending litigations

GDL continues to gain market share in EXIM Rail segment: As shown in Exhibit 3, GDL has outperformance Indian Railways and Container Corporation for more than 6 quarters (on YoY/2yr CAGR basis) on the back of market share gains in NCR region (from <13% to 14-15% now), while it maintains market leadership position in Ludhiana (market share stable at around 35%). Ludhiana terminal could see modest market share loss/pricing pressure in short term, according to the company, on account of capacity addition by a competitor.

Indian Rail volume remains steady: Indian Rail (IR) volumes, according to the company, have been reasonably steady in March month. While exports have remained robust, imports have been slightly under pressure due to skipped calls by shipping companies and macro environment. IR had given 5% rebate on laden containers and 25% on empty containers/rakes in Apr’20 and had extended by 1 year upto Apr’22. The industry await clarity on renewal/extension of these concession. GDL has seen improvement in efficiency on account of partial commissioning of DFC (upto Mundra/Pipavav ports) and it expects the same to sustain/improve further.

CFS remain steady: GDL did not renew its lease of Punjab Conware (located near JNPT Mumbai) when it expired in Jan’22. According GDL, it used to handle about 10,000 TEU per month at this facility though high lease charges (INR 200mn p.a.) resulted into losses in past few quarters. GDL also owns 1 CFS facility in the same region and some of the profitable volumes at Punjab Conware (30-40%) have already been absorbed in its own facility. GDL believes absolute EBITDA in CFS business is expected to be maintained given a) absence of losses of Punjab Conware, b) improvement in volumes in its own facility (per teu margins will improve from current INR2,300/TEU to INR2,700/TEU)

Cash flow remains strong; debt refinanced: We estimate GDL to generate annual average OCF of INR4bn and FCF of INR3bn during FY22-24, thanks to robust profitability in rail business and steady cash flows in CFS segment (FCF yield>10%). While the company continue to evaluate new locations, we build annual capex of INR1bn (including maintenance capex of INR50-60mn in CFS segment), mainly towards satellite terminals in Northern region. GDL recently refinanced its INR2.85bn debentures with relatively lower cost bank/NDFC borrowing, thanks to its improved credit profile due to improvement balance sheet strength (robust profitability).

Maintain EPS estimates and TP: We broadly maintain estimates and continue to value a) Rail business at 10x FY24 EV/EBITDA and b) CFS business at 5x FY24EV/EBITDA to arrive at Mar’23TP of INR90 (INR 90 earlier, adjusted for corporate restructuring). We maintain BUY. Key risks: a) lower-than-expected cargo growth/profitability and b) adverse outcome in pending litigations

Restructuring rationale: With effect from 28th December 2021, Gateway East India Private Limited and Gateway Distriparks Ltd have been merged with Gateway Rail Freight Limited (GRFL). GRFL issued 4 shares (of INR10 face value) in exchange of every 1share of GDL (of INR10 face value). Subsequently, on 11th February 2022, Gateway Rail Freight Limited changed its name to Gateway Distriparks Limited. According to the company, it creates a) greater operational synergies and efficiencies at multiple levels of business operations and shall provide significant impetus to their growth (i.e. cross selling, common customers like shipping lines), b) Improves earnings, cash flow and debt servicing abilities of the amalgamated Gateway Rail Freight Limited (GFRL), c) Centralized and more efficient management of funds establishing stronger resource base for future growth, which are presently divided amongst multiple corporate entities, d) Consolidates and improves the internal systems, procedures and controls bringing greater management efficiency, and e) result into simplicity in working, reduce various statutory & regulatory compliances and related costs, which presently have to be duplicated in different entities

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