Friday, June 8, 2012

>GUJARAT PIPAVAV PORT LIMITED (GPPL): Strong parentage of AP Moller Maersk; hinterland connectivity

PRICE: RS.56                                                           RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.64                                                            CY13E P/E: 18.6X

GPPL is the first private sector port concessionaire which is responsible for introducing the concept of private sector investment in landlord port model in India. The multi-commodity port currently has a capacity to handle 5 mn tonnes of bulk cargo and 1.3 mn TEUs (Quay side) besides a berth to handle LPG cargo. Strong parentage of AP Moller Maersk (APMM) with a 43% stake provides assured container volumes to the port. This forms ~50% of the container traffic at the port. With congestion at JNPT and proximity to NCR, the company is strongly placed to attract container volumes going forward. We expect container volumes for the port to grow at a healthy 12% CAGR over CY11 to CY13E. We are not very optimistic about the bulk and liquid cargo in near term as captive liquid and bulk volume would depend on revival or restart of certain stalled projects in the vicinity. Overall we estimate volumes for the port to grow at 12% CAGR over CY11 to CY13E with significant contribution from containers. With improving operating leverage, we expect the margins of the company to improve. The stock at
CMP trades at 18.6x CY13 earnings. We also expect the debt situation of the company to improve going forward. We are optimistic about the future performance of the company and initiate coverage on the company with a ACCUMULATE rating with a target price of Rs.64 for the stock.

Investment arguments
■ Strong infrastructure already in place to support medium term growth.
The container terminal at GPPL is fully mechanised and professionally managed. It has five reach stackers and 18 rubber-tyred gantry (RTG) cranes. Plus it has two mechanised bulk berths (with a conveyor belt from the berth to the storage yard). Total channel length of 1,075 metres is used for handling bulk and containerized cargo with a room to expand upto 4,550 meters. We believe its infrastructure is adequate for three to four years of strong growth. The capex requirement is expected to be small. We thus believe the port is poised for strong traffic growth, which we estimate at 12% CAGR over CY11-13E for container traffic (0.77 mn TEU in CY13E from 0.61 mn TEU in CY11) and 4% CAGR over CY11-13E for bulk cargo traffic (4 mn tonnes in CY13E from 3.69 mn tonnes in CY11).

■  Strong parentage of AP Moller Maersk helps the port. APMM (AP Moller Maersk) is one of the world's largest port operators, with CY11 revenue of ~US$60bn. It currently operates 50 terminals in 34 countries; in CY11, APM Terminals handled 35 mn TEUs with revenue of ~US$4.7bn. Strong parentage provides GPPL with benefits like 1) alignment with international shipping routes, 2) professional and experienced management, 3) best in class governance and business practices, 4) access to modern technology, 5) increased bargaining power and competitive rates for purchase of port equipment and 6) assured volumes.

■  Potential for coal and liquid cargo. The potential for thermal coal is huge for GPPL as some big corporate houses like Videocon, Torrent, Patel engineering and Sintex are in different stages of setting up thermal power plants at Pipavav. We estimate these power plants may come up in the next 3 to 4 years from today as currently the power sector is facing concerns like coal availability, environmental clearance and so on. These power plants can be a potential source of bulk cargo for GPPL and may entail a demand of 11 mn tonnes of thermal coal post CY15E. In addition, the company is negotiating with Aegis to revitalize the 2 mtpa liquid cargo berth. If these initiatives come through, the company's bulk cargo traffic could increase by about 13 mn tonnes post CY15E.

 Good location and hinterland connectivity. GPPL is strategically located at the entry point of the Gulf of Khambat, and is the largest port in the Saurashtra region of Gujarat. This gives Pipavav good access to the fast-growing hinterland. We believe competition for this market will not arise any time soon, as the proposed ports in the vicinity - Chhara, Mahuva and Sutrapada - are still on the drawing board. However, the port is at a disadvantage vis-à-vis south Gujarat ports such as Hazira, Dahej and (the proposed) Dholera as they have better connectivity to the north Indian hinterland. That said, Pipavav port is well connected via a 269 km long dedicated broad gauge railway link. It has also achieved a draft of 14 metres in its channel which can easily accommodate large container vessels.

■ Healthy overall volume growth of 12% CAGR expected over CY11 to CY13E amidst bad times. We expect GPPL to post strong growth in cargo traffic of 12% CAGR over CY11-13E. Traffic growth is likely to be driven by 1) APMM group - contributes over 50% of container traffic, 2) location advantage with access to hinterlands of Saurashtra and north India, 3) closeness to JNPT (150 nautical miles) to receive spill over traffic particularly from parent's Gateway terminal in JNPT and 4) robust demand for coal (from upcoming units in the region) and for containers from north and western India.

■ Margins to improve with increasing volumes and shift towards high margin business. We expect significant improvement in operating leverage. EBITDA margin is likely to improve from ~16% (CY09) to ~48% (CY13E) and EBITDA to post 17% CAGR over CY11-13E, in our view. Net profit margin is likely to rise from 14% in CY11 to 25% in CY13E. Other large private ports including ADSEZ have EBITDA margin of 65-70% and NPM of 25-30%.

We expect traffic at GPPL to see a strong CAGR of 12% over CY11-13E - dry bulk (4% CAGR) and container volumes (12% CAGR) driven by natural advantages, integrated logistics, good infrastructure, good hinterland connectivity & strong execution. The company's strong parentage and tie-ups will add value to the company. At CMP of Rs.56, valuations are rich with the stock trading at 18.6x P/E and 11.1x EV/EBIDTA CY13E, which is almost 20% premium to valuation of major global ports. However, we believe GPPL's superior growth in volumes (12% CAGR Vs. 6% for global companies), improving margins and healthy growth in profitability (+17% versus ~10% for global companies) and assured contracts makes a strong investment case. Our estimate of the net present value of equity cash flow of the existing businesses equals to Rs 61 per share. Pipavav Rail Corporation contributes ~ Rs 3 per share to the value of GPPL valuing the company at Rs 64 per share. We initiate coverage with an ACCUMULATE rating and target price of Rs 64.

Risk and Concerns

  • High dependence on container segment - less diversified cargo profile
  • Single client risk - 50% contribution only from Maersk Line
  • Increasing competition from other ports in Gujarat (such as Dahej, Hazira and capacity expansion at Mundra)
  • Coal imports for power plants may not materialize as expected
  • Inability to sustain tariffs
  • Concentration of container volumes amongst few customers (Maersk)
  • Lower-than-expected economic growth