Investor's Eye: Update - Gateway Distriparks (Value unlocking through listing of subsidiary), Automobiles (A mixed performance)

Investor's Eye [September 02, 2013]  Sharekhan www.sharekhan.com

Summary of Contents      STOCK UPDATE Gateway Distriparks Recommendation: Buy Price target: Rs149 Current market price: Rs106 Value unlocking through listing of subsidiary Key points GDL plans to raise Rs150 crore through IPO for its subsidiary SLL: Gateway Distriparks Ltd (GDL) is planning to raise Rs150 crore for its subsidiary Snowman Logistics Ltd (SLL) through fresh issue of 4.2 crore shares largely to fund the capital expenditure for setting up new warehouses. Currently, SLL is having a capacity of 53,000 pallets as on August 2013, which is slated to increase to 80,000 pallets by Q1FY2015. SLL has proposed to set up six temperature-controlled warehouses (two in Chennai, one each in Mumbai and Bhubaneshwar, Pune and Visakhapatnam) and two ambient warehouses (one each in Pune and Surat). All the proposed warehouses are expected to be on leased land following the asset-light business model. SLL is looking to garner the first-mover advantage in this segment by rapidly increasing its capacities, venturing into tier-II and tier-III cities and increasing its stronghold in metro cities. Additionally, SLL plans to increase its share from value added services and also increase its client engagement through vendor consolidation. Debt leverage to remain at comfortable levels after equity capital raising: The debt to equity ratio of SLL by the end of FY2013 stood at 0.74x with a debt of Rs95 crore and a net worth of Rs129 crore. We believe the proposed equity raising will help SLL to further raise funds through debt in the future keeping the debt to equity ratio at a comfortable level as its cold chain business is capital intensive and will require continuous infusion of funds for capacity expansion and growth. GDL to maintain management control with over 40% stake: GDL holds 54% stake in SLL, which is slated to decline to 40% after the issue of shares. The management of GDL is of the view that it should have a management control on SLL at all times with a long-term positive view on the cold chain business. SLL's recent transactions at Rs35/share are likely to set benchmark for IPO: During June 2013, GDL and SLL executed a share subscription agreement with Norwest Venture Partners (NVP), pursuant to which NVP invested Rs60 crore (1.7 crore shares at Rs35/share) in SLL by subscribing to SLL's equity shares. Along with it, GDL acquired a 5% shareholding in SLL from International Finance Corporation for a total consideration of Rs18 crore (GDL's acquisition at Rs35/share). Further, GDL entered into a share purchase agreement with Nichirei Logistics Group at a price of Rs35 per equity share on August 29, 2013. On completion of the transfer, Nichirei Logistics Group will no longer hold any shares in the company and GDL's shareholding will increase to approximately 54%.  Valuation at 26x FY2013 EBITDA-premium for growth: The price paid per share for the above transactions at Rs35 per share values SLL at Rs580 crore, which is at a multiple of 26x FY2013 EBITDA. The higher valuation is owing to SLL's robust growth trajectory in the near future. Currently, SLL has a pellet capacity of 53,000, which is slated to increase to 70,000 to 80,000 over the next year, with the ultimate objective of achieving 100,000 pellets capacity.  Volume and realisation to improve return ratios: SLL operates in over 100 cities and serves 4,500 outlets per day. The company has presence in 17 locations with major capacities in Taloja, Pune, Chennai and Delhi. Going ahead, the company is targeting to increase capacities on its existing network at Mumbai, Pune, Chennai and East. The company recently opened 5,500 pallets in Kolkata and is expected to open new stores in Chandigarh and Surat in a few weeks. As far as the competitive intensity is concerned, there is no major pan-India player in the business. However, there are local players with smaller capacities. The company has a return on equity of 10% currently, which is slated to increase to 16% over the next two years. Currently, the warehousing contributes 47% to the revenues having an EBITDA margin of 35% plus while distribution contributes 53% with an 11% EBITDA margin. The company is focusing on increasing its share in the warehousing business leading to better return ratios. The average realisation from the warehousing business is at Rs1,700 per pellet per month and from the transportation business is at Rs28-30 per km. The company was able to increase its realisation by 10% year on year (YoY) in FY2013. Going ahead, the management expects to increase realisation by 8-10% per annum. We believe an increase in the capacities along with a higher realisation will lead to better return ratios. Outlook and valuation: In our sum-of-the-parts (SOTP)-based valuation of Rs149, we had valued SLL at Rs24 per share, which is conservative considering the management's expectation of Rs35 per share for the fresh issue. We continue to have faith in GDL's long-term growth story based on the expansion in each of its three business segments, ie container freight station, rail transportation and cold storage infrastructure. Also, a revival in the export-import trade would augur well for the company. At the current market price, the stock trades at 7.5x and 6.3x its FY2014E and FY2015E earnings. We maintain our Buy recommendation on GDL with the price target of Rs149.   SECTOR UPDATE Automobiles A mixed performance Companies report mixed performance The domestic automotive players reported a mixed performance in August 2013. While Maruti Suzuki (Maruti), Hero MotoCorp and Mahindra & Mahindra (M&M; tractor segment) showed a volume growth on a year-on-year (Y-o-Y) basis, TVS Motor reported flat volumes. Companies such as Tata Motors, Ashok Leyland, M&M (automotive segment) and Bajaj Auto reported a Y-o-Y decline in their volumes. Macro-economic environment remains challenging; commercial vehicles and passenger cars most affected The automotive sector continues to face macro-economic challenges. The gross domestic product (GDP) for Q1FY2014 at 4.4% is at a four-year low. Apart from the lower economic growth, the interest rates have firmed up in the last two months exerting further pressure on the demand. Also, an increase in the fuel prices (particularly diesel) has kept the environment challenging for the automakers. The sales of commercial vehicles and passenger cars have been worst hit as they are relatively more sensitive to the macro-economic head winds, increased fuel prices and high interest rates. Two-wheeler sales have been the least impacted by the slowdown.  Export volumes improve for most companies Contrary to the sluggish volumes in the domestic industry, the export volumes improved for most of the companies during the month. Most of the automotive companies, excluding M&M, reported an export volume growth during the month. H2FY2014 to witness revival on account of festive season and low base While the macro-economic environment remains challenging, automakers have pinned hopes on the festive season to revive sales in the second half. Also, a better crop realisation due to a good monsoon is expected to boost the rural income leading to a recovery in the sales. We expect the sales to recover in H2FY2014 on account of the festive demand and a favourable base created by the low sales in the corresponding period of the last year (October 2012-March2013). 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Regards, The Sharekhan Research Team

 

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