Monday, March 14, 2005

IPO - Gateway Distriparks

The Gateway Distriparks offer hasn’t quite generated the frenzy that generally characterizes Indian IPOs. Oversubscribed by 6-7 times overall, the retail segment has seen remarkably little action, remaining undersubscribed up till the close of the offer. Perhaps the fact that Punjab National Bank and Emami were also available at the same time had something to do with the lack of enthusiasm…

What Makes Gateway Distriparks Interesting?

The following points indicate the company is a good buy:

It's a mid-cap company with significant presence in a growing industry

The company is in the logistics industry, dealing mainly with packaging of goods into containers and storage of incoming and outgoing goods in company-owned facilities. They have a significant presence in major shipping hubs like Mumbai and Vizag, with plans to acquire a facility in Chennai. They also have a presence in Gurgaon, thereby catering to road transport. The company plans to expand its presence geographically as well as in different transport sectors.

The offer proceeds are to be used for business expansion and other strategic purposes

GDL aims to use the proceeds to retire high-cost debt, acquire a facility in Chennai and improve its facilities in Mumbai and Gurgaon, all of whicih will lead to profit growth in the medium term.

GDL has displayed strong revenue and profit growth over the past five years

The company has shown a CAGR of 55% in revenues, with no year recording less than 20% growth. Costs have shown a more gradual increase, leading to excellent profit growth.

RONW and ROCE have been consistenly improving over the past few years

RONW has improved from about 8.3% to 23.5% over the past 3 years and ROCE from 4% to 19% over the same period.

Debt components have been steadily declining

Overall debt to equity and interest liabilities have been falling over the past 5 years and current interest coverage is at comfortable levels, suggesting that the company will at least not go under on account of debts!

There's evidence of improving business efficiency and movement up the value chain

The primary income streams are rental for goods storage and service charges for packaging and handling. While both have been on the rise, the share of rentals in the overall revenue has fallen, indicating the company has been able to command premium rates for services, indicating a move up the value chain. Further, reducing dependence on rentals also reduces the need to constantly acquire storage facilities involving high capital investments.

Price Attractiveness

At the offer price band of Rs 60 – Rs 72, the PE Ratio (using diluted EPS) is between 24 and 28, which is a tad high for a company that’s growing at an average of 30% year on year. However the overall business is attractive enough to buy at the price, especially at the lower end of the band.