Port of call

PENNY WISE

Gateway Distriparks' growth is linked to the development of India's port facilities and the setting up of the dedicated rail freight corridor.

With a rapid growth in containerised traffic and the upcoming capacity addition at various ports, India's largest private sector logistics player will not have a problem of securing business.

But in a business which has many players, low entry barriers and scaling up issues, maintaining margins while at the same time expanding the business can be tough. To counter competition, Gateway Distriparks (GDL), which provides port related logistics support services, is banking on its pan-India facilities, cargo handling capabilities and ability to service key clients.

It has mapped out its future growth path by rail linking its inland container depots (ICDs) at Faridabad and Garhi Harsaru (Haryana), diversifying into cold storage business and expanding current facilities.

However, poor infrastructure and lack of space near India's largest container port "� JNPT"� has meant that the company has to contend with a rate war while at the same time ensure that the quality of service is up to scratch.

While the prospects for the company that gets its revenues from handling and transportation charges, ground rent and auction sales are good in the long term, in the short to medium term, investors can expect slow but steady growth.

Cramped for space
Gateway's container freight station (CFS) at Dronagiri, JNPT which accounts for more than 80 per cent of its capacity and revenues, is packed to capacity. The lack of land near its CFS is forcing it to look at facilities that it can acquire nearby.

GTI, a joint venture between Concor and Maersk has set up a third terminal at JNPT which is expected to be fully operational within the next six months.

This will add 1.3 million twenty-foot equivalent units (TEUs) to JNPT's current capacity of 2.4 million TEUs. It is expected to generate around 36,000 TEUs for GDL and the company needs to expand to accommodate this growth.

Since the company cannot grow horizontally, it is also considering increasing the number of containers from five in a stack to seven. This will however require an investment in a certain number of new equipment to handle the containers. At best, this can be a short-term arrangement. A fourth terminal planned by JNPT will add another 3 million TEUs of capacity.

The first phase, which will add 1.5 million TEUs is slated to be completed by 2011 while the second phase is expected to start operations by 2015. The other option for the company is to divert traffic to its Visakhapatnam, Chennai and the upcoming Kochi facility.

To do that it has to convince its customers to ship to the nearest ports and service providers (shipping lines) to call on the smaller ports.

Shipping companies do not wish to call on ports other than Mumbai and Chennai due to lack of volumes while logistics players say unless shipping lines bring their ships to other ports, container traffic will continue to head towards Mumbai and Chennai ports which account for 70 per cent of India's container traffic.

Partnership push
To cater to the increase in traffic and improve its share of the logistics business, Gateway Distriparks is taking the acquisitions route or entering into alliances with regional players. Recently it entered into a JV with Chakiat Group to develop a CFS at Vallarpadam port, Kochi.

The CFS will have a handling capacity of 15,000 TEUs and would come on stream in the second half of next year. Last year, the company started operations in a greenfield facility at Visakhapatnam in a joint venture with the Suri group.

According to C S Verma, CEO, Gateway Distriparks, the company opted for the joint ventures instead of going it alone to benefit from the synergies and capabilities of its JV partners.

The rail impetus
In January this year, the government granted 14 companies the right to move container trains for domestic and export cargo. This has opened up the rail route for GDL to ship goods from its ICDs to ports in the country.

Since it does not own its own rolling stock, the company has tied up with Concor to move container trains from its facility Garhi ICD to Mundra and JNPT. From two trains in May the company has handled 19 trains in October 2006 with a capacity of 1,200 TEUs. GDL earns handling charges on the containers while Concor gets haulage income.

Though the company has received the license to move its own container trains, it can do so only in FY09 as there is a waiting period for rolling stock.

Since its cheaper to move containers by rail rather than road, once the company starts its own train service, it can not only scale up its capacity but also be able to reduce its dependence on its Dronagiri CFS. The company plans to use the Rs 385 crore GDR proceeds to fund the capex on its rail freight business.

Integration for growth
Gateway has identified the area of cold chain logistics and non-vessel owning common carrier (NVOCC) as the two areas it could get into for growth. An NVOCC does not own the ship but acts as a consolidator of cargo and sells space to smaller shippers.

While this is a high volume low margin business, its entry into cold chain management in the booming retail business especially the pharmaceutical cold chain segment could boost its bottomline.

Valuation
In its second quarter of FY 07, Gateway reported a net profit of Rs 20 crore which is up 8.2 per cent y-o-y. Capacity (no of TEUs) is also up at 20.7 per cent y-o-y and 5.3 per cent sequentially. For FY 06, the company has seen its income grow by 50 per cent and its operating profit by 76 per cent. 
 

GOING STRONG
FY06 (Rs crore)	Gateway	Allcargo	Sical
Sales	141.00	274.00	969.00
y-o-y growth (%)	50.00	18.00	-20.00
Operating Profit	92.00	62.00	105.00
y-o-y growth (%)	76.00	67.00	12.00
OPM	65.24	22.62	10.83
Net Profit	72.00	49.00	53.00
NPM	51.06	17.88	5.46

The stock has moved up from its IPO price of Rs 72 in March last year to Rs 171 now. At its current price the stock trades at 19 times FY 06 earnings. It is trading at 18 and 14 times its estimated EPS of 9.3 for FY 07 and 11.8 for FY 08.

Having taken a lead in the rail freight business and expanded its presence in key ports and ICDs within the country, Gateway is the best positioned among all private sector logistics players to log on to the growth that will happen in transport infrastructure over the next five years. If it is able to do that then its rivals will have a lot of catching up to do.