Gateway Distriparks
Cluster: Cannonball
Recommendation: Buy
Price target: Rs250
Current market price: Rs173
Results below expectations
Result highlights
- Gateway Distriparks Ltd (GDL) reported a net profit of Rs18.8 crore for Q3FY2007, which is below our expectations.
- The revenues increased by 20% year on year (yoy) to Rs41.7 crore led by a strong volume growth of 112%, 51.5% and 392.9% at Garhi, Chennai and Vizag container freight stations respectively and a realisation growth of 9% year on year.
- The operating profit declined by 2.4% yoy to Rs20.3 crore and the margins were under tremendous pressure on account of the strong competition and lower realisations at Chennai and Vizag. This consequently led to the margins declining by 1,130 basis points quarter on quarter (qoq) to 48.7%.
- The other income grew by 109% yoy to Rs5.4 crore due to the interest income on the higher surplus cash of Rs200 crore during the quarter.
- Depreciation grew by 36% yoy due to the amortisation of Snowman's goodwill during the quarter.
- The tax rate for the quarter was at 14.5% as the company had 80IA benefits for its investments in inland container depot (ICDs). As a result the pre-exceptional net profit grew by 5.0% yoy to Rs18.8 crore in Q3FY2007.
- During the quarter GDL acquired Snowman Frozen Foods, a cold chain logistic services business, at a cost Rs48.1 crore. The company incurred an expenditure of Rs2.1 crore for the acquisition, which has been treated as extraordinary expenditure. Thus the post-exceptional profit stood at Rs16.7 crore.
- Snowman moves close to 9,000 tonne of frozen and chilled products across India and provides the entire spectrum of supply chain solutions with HLL being one of its major clients. We believe this acquisition will enable the company to cash in on the growth in the nascent food retailing market in India.
- The company has recently won the bid for a 15-year operations and management (O&M) contract of the Punjab Conware container freight station (CFS) at the JNPT port. GDL will be able to expand the volumes at the Punjab Conware CFS considering the dominant position of the company at the port and its expertise in operating CFS' and ICDs.
- We maintain our positive outlook on the company, as GDL will be one of the prime beneficiaries of the growth in container traffic, which currently just accounts for 10% of the total cargo. The company's strategy to become an integrated player by entering into rail-based container movement will help the company to offer better services to its clients. With the large players like Reliance and the AV Birla group betting huge on food retailing, the company's strategy to enter the cold chain business comes at a right time and will add significant value to the company's business going ahead. At the current market price of Rs173, the stock discounts its FY2007 earnings per share (EPS) by 20x and FY2008 EPS by 14x. We believe that the valuations are attractive and thus maintain our Buy recommendation on the stock with a price target of Rs250.
Hindustan Lever
Cluster: Apple Green
Recommendation: Buy
Price target: Rs280
Current market price: Rs195
A little cold
Result highlights
- The Q4CY2006 net profit of Hindustan Lever Ltd (HLL) grew by 10.15% year on year (yoy) to Rs483.0 crore, which was below our expectations.
- The net revenues grew by 6% yoy on the back of a 7% year-on-year (y-o-y) growth in the home and personal care (HPC) segment, which comprises the soap and detergent, and personal care businesses.
- The profit before interest and tax (PBIT) margin showed a contraction of 40 basis points to 18.1%.The contraction in the PBIT margin was attributable to the lower growth in the personal care segment as well as higher input cost.
- The soap and detergent business has shown a growth of 10% whereas the personal care product business has reported a lower growth of 2.5%. The growth was lower in the personal care product business mainly on account of a shorter winter season in 2006 and the high base effect of Q4CY2005 (the sales of personal care products were higher due to the relaunch of Clinic shampoo in the quarter).
- The beverage business has shown a growth of 8.6% yoy whereas the processed food business has grown by 18% yoy.
- The operating profit margin (OPM) of HLL contracted by 36 basis points to 15.84% on a y-o-y basis due to a higher raw material cost. The selling and administrative expenses as a percentage of sales were maintained at 9% compared with 11% for M9CY2006, which helped it to prevent further erosion in the margin.
- The soap and detergent segment has been able to maintain its earnings before interest and tax (EBIT) margin at 15.6% yoy whereas the EBIT margin in the personal care product range has shown an improvement of 30 basis points to 31.9%.
- At the current market price of Rs195, the stock is quoting at 23x its CY2007E earnings per share (EPS) of Rs8.5. We maintain our Buy recommendation on the stock with a price target of Rs280.
SECTOR UPDATE
Automobile
Racing ahead despite hardening rates
The automobile industry has begun CY2007 on a positive note with a strong volume growth of 14.8% for the first month of the year, January. However, there are some concerns on the horizon. Will the growth sustain on the high base of last year? How would the rising interest rates affect the demand in future? In this report, we have tried to assess the impact of the high base effect and rising interest rates on the demand for automobiles.