Gujarat Pipavav Port - Location, strong parentage, volume growth to aid profitability - Motilal Oswal

Prime assets with strong parentage: Gujarat Pipavav Port (GPPV) possesses distinct advantages such as a) location, which enables access to the global trade route/rich northern hinterland (60% of cargo traffic in India), b) infrastructure advantages with long water frontage (3kms of which only 1kms is utilized), contiguous land (1,561 acres, 45% unutilized) and rail/road connectivity, proximity to dedicated freight corridor (DFCC) and c) strong parentage that provides "trade and technology" edge (~30% of current volume). Thus, GPPV is best placed to tap the high growth in container traffic volumes on India's west coast (GPPV grew 16% in CY13, vs 3.6% container traffic growth on West Coast).

Volume growth to be a function of capacity than demand: In our view, growth for west coast port would be driven by capacity creation than demand given higher (85-140%) utilization, while traffic growth remains robust (non-major Gujarat-based cargo volume posted 19% CAGR over CY09-12). GPPV will further tend to benefit from projects like DFCC, DMIC being in close proximity. Expansion plans include increase in capacity by 15mt to support volume growth beyond CY15, while we expect 15% volume CAGR over CY13-15E.

Operating leverage to aid profitability: GPPV witnessed 30ppt EBITDA margin expansion over CY09-12, comprising of 12ppt gross margin and balance due to savings in other expenditure. This was driven by discontinuation of guarantee payments to Pipavav Rail Corporation (38.8% stake) towards volume commitment, paid till CY10. Also, incremental cargo growth over CY09-12 was due to 100% container cargo, and given the higher fixed cost structure for container segment (70% is fixed), gross margin grew from 54% in CY09 to 66% in CY13 (v/s 80% in CY05). Higher container volume growth hereon would have a greater marginal contribution and thus can aid gross margin - we expect 6ppt improvement over CY13-15E. While upside exists to margins, EBITDA CAGR of 32% (revenue CAGR of 23%), flat depreciation and interest cost savings would drive 39% earnings CAGR over CY13-15E.

Initiate coverage with a Buy, future growth opportunity is huge: We value GPPV using the DCF method and assign terminal growth rate of 2% and WACC of 10.7% as point valuation may not fully capture the available growth opportunity. We derive DCF valuation of INR99/sh. Stock trades at 11.8x PER and 2.2x P/BV (RoE of 20%) on CY15E basis. Near debt-free status, strong earnings/cash flow visibility and professional management are the key differentiators. Initiate coverage with a Buy and target price of INR100.

Source : Equity Bulls

Keywords