The Hindu Business Line : Gateway Distriparks: Hold

SHAREHOLDERS of Gateway Distriparks can retain their exposure, as the company's growth prospects over a two/three-year period appear promising. Stocks in the logistics space are likely to figure prominently in investor preferences, as this sector is set for robust growth. In the cargo-handling segment, Gateway Distriparks is a major player with an expanding footprint across India. The stock is likely to be one of the preferred plays in the logistics space along with Container Corporation of India.

The stock price has more than trebled since the initial public offering at Rs 72 earlier this year. The gains are likely to be more moderate. We retain a bullish view on the prospects for the company. Our outlook on the stock is based on the sharp spurt over the past year and the likelihood of double-digit growth rates from FY-07 onwards; the latter is likely to be driven by the higher base effect and the limited scope for a hike in tariff rates over the next few years.

The principal risks to our recommendation are any changes in laws pertaining to contract labour that leads to higher costs and an expansion in the equity base that could dilute per share earnings.

Gateway Distriparks offers support services for exporters and importers; its services are linked mainly to cargo moved in containers. With containerisation at low levels and likely to show a steady rise over the next decade as port facilities across the country improve, the prospect for robust growth for Gateway Distriparks appears likely.

The company's efforts at expanding its geographic footprint and capacities are likely to complement this macro-level opportunity. Until recently, the company relied heavily on its cargo handling facility in Mumbai for revenue and earnings growth. Even now, this facility accounts for about 90 per cent of revenues. This picture is likely to change over the next couple of years.

The company has expanded its Haryana facility and added a railway siding that is likely to enhance its cargo handling capacity. It is still in the process of fine-tuning its operations in Chennai and Visakhapatnam; the company has acquired controlling stakes in two ailing outfits in these two locations, which, by next year, are likely to make a more meaningful contribution to revenues.

Gateway Distriparks may have to settle for lower margins at its new locations, as it has to battle it out with established players.

The cargo handling facilities in Chennai and Visakapatnam, however, give it a presence at major ports across the country; the one near Delhi is likely to be an excellent hub, as export-import activity has become a thriving business with several companies setting up or expanding manufacturing facilities.

The company has entered into an arrangement with Container Corporation of India, which could also have a beneficial effect on the cargo levels, especially at the Delhi facility. This could provide the company with a share of containerised cargo that is channelled through the Mundhra and Pipapav ports in Gujarat. Though cargo-handling facilities are set to expand, growth rates in revenues and earnings are likely to taper to modest levels. This year, Gateway Distriparks' earnings card reflects the benefits of two tariff hikes in FY-05 and commissioning of newer capacities in Mumbai.

As it has effected a substantial hike in tariffs, the company may be able to, at best, pass on input cost hikes; competitive pressures are likely to restrict its ability to effect more pronounced hikes.

The company has also indicated that it will consider expanding through the acquisitions route. Any moves in this regard will be a long-term positive, though it could turn a drag on resources and returns in the near term.

There are indications of the company expanding the range of its activities in the logistics business by setting up cold-storage networks and getting into supply-chain management. These new areas hold promise though payoffs may come only over the long term.

Gateway Distriparks also appears set to join companies raising funds in the overseas markets. This could help it lower its debt burden and also create a kitty to bankroll its plans for a presence in other key centres such as Kochi, Bangalore and Tuticorin.

If it opts for a large offering — shareholder approval is being sought to mobilise up to $ 120 million — the scope for dilution in per share earnings may be significant; this can raise concerns about the sustainability of profitability parameters.

The bigger risk in the process will emerge if foreign institutional investors — they now hold a 20 per cent stake — get a negative perception of the overseas offering and develop a sense of aversion to the stock due to over-exposure. Over the next six months, there is likely to be clarity on these aspects of its business plans when we can review our stance.

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