Gujarat Pipavav Port: Location, strong parentage, volume growth to aid profitability

Gujarat

Infrastructure

Initiating Coverage | Sector:

Pipavav Port

Gujarat Pipavav Port

BSE Sensex

22,055

S&P CNX

6,584

CMP: INR83

TP: INR100

Buy

The anchorage

Location, strong parentage, volume growth to aid profitability



Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)

M.Cap. (USD b)

GPPV IN

483.4

87/42

11/74/48

40.1

0.7



GPPV’s location on the prime trade route, access to rich hinterland and proximity

to key infrastructure projects like DFCC, DMIC are key drivers.

These attributes lead to robust volume growth. Future growth is a function of

capacity creation than demand; huge operating leverage to follow.

Earnings CAGR of 39% over CY13-15E, scope of upside exists.

Financial Snapshot (INR Billion)

Y/E Dec

2014E 2015E 2016E

Sales

6.4

7.9

9.5

EBITDA

EPS (INR)

EPS Gr. (%)

BV/Sh (INR)

RoE (%)

RoCE (%)

P/E (x)

P/BV (x)

3.4

2.4

5.0

36.8

32.5

16.1

16.0

16.7

2.6

4.5

3.4

7.0

41.9

37.3

20.2

18.7

11.8

2.2

5.6

3.3

6.7

-4.2

41.6

17.1

19.7

12.3

2.0

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.

Shareholding pattern (%)

As on

Promoter

Dom. Inst

Foreign

Others

Dec-13 Sep-13 Dec-12

43.0

13.0

34.0

10.0

43.0

12.9

33.7

10.5

43.0

14.1

31.3

11.6

Stock Performance (1-year)

24 March 2014

Gujarat Pipavav Port

Prime assets with strong parentage

Long water front, contiguous land, infrastructure are distinctive factors



GPPV is favorably located on the global trade route and has access to the rich northern

hinterland that accounts for 60% of total cargo traffic in India.

Best-in-class infrastructure with long water frontage of 3kms, 1,561 acres of land,

sound rail (access to DFCC)/road connectivity and apt draft offer advantage to handle

large vessels with highest efficiency – a key trait for GPPV’s growth. Crane moves/hour

in CY13 at one of the terminal was among the best in South Asia.

A unique advantage from strong parentage, APM Terminal, with the best global

footprint in container business gives trade and technology edge. Around 30% of

volumes are from A.P. Moller-Maersk

Accessibility to long water front, large contiguous land, rich hinterland, dedicated

support and evacuation infrastructure, pertinent location in Gujarat makes GPPV a

prime asset. It is among the first private sector port in India, own and operated by

APM Terminal, which is owned by A.P. Moller – Maersk Group. APM Terminals

operates a global terminal network in 68 countries with interests in 74 port and

terminal facilities and over 160 Inland services operations making it one of the

largest container terminal operators in the world. Strategic location along with

strong parentage is a key to the port’s success in the long run.

Location advantage

GPPV is one of the principal gateways on the west coast of India, located in the

Saurashtra region of Gujarat, and near the entrance of Gulf of Khambhat. Location in

Gujarat offers the distinct advantage of being gateway to vast North and North West

hinterland (Rajasthan, Delhi/NCR and Punjab), which account for ~60% of the total

cargo traffic in India. Also, it falls on the main maritime trade routes to Middle East,

Asia, Africa, the United States, Europe and other international destinations. Also,

Gujarat is one of India's primary cargo generating states, accounting for ~20% of the

country's export cargo and nearly 40% of its industrial output.

Gujarat provides best location advantage to international market and rich hinterland

Source: Vibrant Gujarat Summit

Port specific advantages

GPPV is located directly across from two islands – Shial Bet and Savai Bet – which act

as a natural breakwater, making the port safe in all-weather conditions. The draught

at container berths is 14.5m, 13.5m at bulk berth and 11.5m at liquid berth. Draft of

14.5 meters can enable the port to accommodate vessels with 100,000dwt or

6,000teus+. Also, GPPV enjoys a long water front of 3kms, which provides huge

scope for expansion, while the current usage is ~1kms.

24 March 2014

Gujarat Pipavav Port

This, along with the right to develop 1,561 acres of land, opens up sizable growth

opportunity (land often is the key bottleneck in a port’s expansion). Of this, GPPV

has used ~700 acres (including lease to Pipavav shipyards, warehouse leased to

Central Warehousing Corporation, liquid storage facility etc), while the balance land

can be utilized for further expansion of port’s operations, including additional

berthing and cargo handling facilities both at the waterfront and in the backup

areas. Currently, GPPV’s operating capacity stands at ~20mt, comprising of 13mt of

container, 5mt of bulk cargo and 2mt of liquid cargo. The port has a 30-year

concession agreement with the Gujarat Maritime Board till September 2028.

GPPV layout: island provides natural break-water, huge water frontage available

Source: Company

Evacuation infrastructure - a key trait of GPPV

Evacuation bottleneck is the key constraining factor for the growth of any port

beyond its land side development and is a key determinant of its operational

efficiency. GPPV has the best access to both rail and road networks and access to

ICDs (inland container depots) enroute rail corridor. It has established a dedicated

broad gauge railway line of 269kms (with 22 parking bays enroute), which connects

to Surendranagar in Gujarat through a JV with Indian Railways -- Pipavav Railways

Corporation (38.8% stake).

The corridor is capable of double stacking the containers (180teus in a train and

capacity to handle 22 trains each way in a day), thus providing huge cost advantage

and faster turnaround. While the existing railway network is apt for connectivity to

northern land, the development of a parallel dedicated freight corridor (DFCC) will

provide significant advantage to GPPV compared to other ports on the west coast of

India -- given its proximity to DFCC and interconnection at two points, Ahmedabad

and Mehsana.

Similarly, a four-lane expressway from the port connects to NH-8E (Bhavnagar)

providing gateway to northern states. Also, the port is set to get connectivity with

the 10-lane Ahmedabad-Dholera spine road, for which 2/3rd of land is already

acquired by the government. GPPV also has the advantage of distance over

JNPT/Mumbai to Delhi and northern region of ~250-300kms.

24 March 2014

Gujarat Pipavav Port

Strong evacuation infrastructure to aid growth in volume

Source: Company

Strong parentage to provide trade and technology edge

APM Terminal, which houses the container terminal business of AP Moller-Mearsk,

handled container volumes of 35.4mteu in CY12, up from 33.5mteu YoY. APM

reported revenue of USD4.8b, while PAT stood at USD723m (v/s USD648m). The

Group targets PAT contribution of USD1b by CY16 from APM Terminal. Similarly, the

Maersk line has a fleet of 600 vessels, with carrying capacity of 4mteus. This

compares with GPPV’s CY13 container volume of 0.66mteus and the scale of parent

would help GPPV in trade/cargo volume growth.

Globally, the carrier/shipping lines map the voyage and have an origination and

destination port of call. Given this, APM’s parentage would play a vital role in the

development of GPPV. Also, the cost of port charges for exporter/importer in total

freight cost is minimal and thus the cost competitiveness of a port vis-à-vis peers is

not a key determinant of cargo volume growth.

Break-up of imported coal cost at power project

Source: Industry, MOSL

Given that a port of call is the prerogative of shipping lines, parentage of APM would

be a key advantage for GPPV. Also, APM’s strong backing will not only help it in

trade but also technology. For instance, the port achieved 34 moves per hour (mph)

for crane in 3QCY13, which is among the best in South Asia.

24 March 2014

Gujarat Pipavav Port

Transfer of shipping line from GPPV to Mundra compensated by another

vessel

In June 2012, Maersk moved one of its shipping lines from GPPV to Mundra as its

long term agreement expired. The service was India-Europe and it led to slackness in

container volumes. APM’s intent has been to keep its strategic position in the major

west coast port, though a lack of consistency could be an issue. However, a shipping

line was added to GPPV for India-USA, which earlier used to call only at JNPT.

Currently, Maersk accounts for 30% of GPPV’s total container cargo.

Revenue contribution by Maersk line (%)

Source: Company

24 March 2014

Gujarat Pipavav Port

Volume growth function of capacity than demand

Expect GPPV to record volume CAGR of 15% over CY13-15E



While cargo traffic at major ports remained flat over CY10-13, non-major ports in

Gujarat (representing 64% of total non-major ports capacity and 73% of cargo in FY12)

posted 19% CAGR over FY09-12. Pertinently, as all India ports capacity utilization

stands at 73%, west coast port utilization remains high and above 100%. It is reflection

of Strong demand-supply mismatch and robust growth in north/north-west corridor.

Capacity constraint on evacuation front could be a factor for any port and that may

retard growth over the medium term. However, award of 40% corridor on the western

dedicated freight corridor, development of Delhi-Mumbai Industrial Corridor (DMIC)

would act as key drivers of long term growth for a west coast port. GPPV is in a sweet

spot given its proximity to DFCC and being part of project influence area of DMIC.

Hence, we believe that GPPV’s volume growth over medium to longer term would be

a function of capacity creation than demand. The port operates its container facility at

77%/51% utilization at yard/quay side and thus timely expansion holds key for further

growth. It has already planned expansion, and has obtained the clearance.

We expect GPPV to record volume CAGR of 15% over CY13-15E as near term capacity

is not a constraint. Growth would be driven by container volumes (78% of incremental

volumes), while commencement of liquid facility may aid growth. Bulk cargo growth

may remain muted.

West coast’s cargo traffic growth has been robust, ports’ utilization at steep

level

Seaborne cargo volume in India witnessed CAGR of 5.6% over FY1971-13 across

major ports. Growth in container volume from FY1992-13 was robust at 14% CAGR

(total cargo growth over the same period was 6.1%). Contribution of volume from

containers has picked up from 5% in FY92 to 22% in FY13. Growth in volume also

saw an improvement in capacity addition, though several ports still operate at

significantly higher utilization levels, while others were at a lower level and mask the

overall utilization levels. To illustrate, capacity of all major ports in India stood at

752mt in FY13 and utilization levels at 73%.

However, certain west coast ports like Kandla (100% utilization), Mumbai (145%

utilization) and JNPT (88% utilization) depict a different picture. Infact, we

understand that container terminals at JNPT operate at 100%+ utilization levels.

Higher utilization levels significantly impact the operational efficiency and

turnaround time for vessels. It is a crucial barometer as loss in ocean freight will

significantly affect the profitability of a vessel for shipping lines. Higher utilization of

west coast ports also signifies the robustness of cargo volume in north/north-west

corridor and demand-supply mismatch.

24 March 2014

Gujarat Pipavav Port

Cargo traffic growth at major ports strong (m tons)

Container traffic has grown even at robust pace (m tons)

Note: Decline in overall cargo is partially due to mining ban of Iron ore

Source: Company, MOSL

Major ports utilization very high, particularly for West coast ports

Major ports

Kolkatta

Haldia

Paradip

Visakhapatnam

Ennore

Chennai

Tuticorin

Cochin

N, Mangalore

Mormugoa

JNPT

Mumbai

Kandla

Total

M tons

Volume

11.8

28.1

56.6

59.0

17.9

53.4

28.3

19.9

37.0

17.7

58.0

64.5

93.6

545.8

Utilization

Capacity

(%)

17.1

46.8

102.3

67.3

31.0

85.6

33.3

44.7

76.8

36.4

65.9

44.5

145

93.2

100

744.9

Source: MOSL, MoPS

Ban on iron ore mining

impacted utilization levels

of these ports

On non-major ports front too, the scenario does not change much. As a large part of

north and north-west hinterland would be addressed through minor ports in

Gujarat, we analyze minor ports in the state. Presently, Gujarat accounts for 64% of

the total capacity at non-major ports and 73% of the total non-major category cargo

(which posted a CAGR of 9.4% over FY1961-12). Volumes at minor ports in the state

clocked a robust CAGR of 12.5% over FY01-12. Pertinently, FY13 capacity of all minor

ports (total 41 ports, including 40 non-major ports) stood at 323mt, up from 135mt

in FY01, a CAGR of 8.3%. Despite this, the total cargo handled by all minor ports in

Gujarat was already at 259mt in FY13 – a utilization factor of ~80%. Hence, the

saturating capacity of existing major west coast ports, lack of sizable growth

opportunity and congestion in cargo movement unveil huge potential for ports like

GPPV.

24 March 2014

Gujarat Pipavav Port

Gujarat non-major ports witness robust growth (mt)

Source: GMDB, MOSL

Several enablers for future growth, GPPV to benefit from DFCC/DMIC

In our view, the evacuation infrastructure would play a vital role in shaping a port’s

growth than capacity. Tughlakabad-JNPT (Delhi-Mumbai) line, one of the highly

trafficked corridors in the country is a case in point, which on account of higher

utilization (upwards of 135%) is facing congestion in handling container traffic due

to passenger and priority cargo. While our interaction with GPPV suggests no major

hiccups on plying container cargo on the route, the accessibility to DFCC and

capacity creation on the Mumbai-Delhi corridor would be a key driver for volume

growth.

Tughlakabad-JNPT (Delhi-Mumbai) line:

With an average line capacity of 50 trains

per day, it has been handling over 67 trains per day, operating at a capacity

utilization of 135%; several sections are being operated at 160% utilization levels.

Roughly 40 trains on this corridor are passenger trains, leaving a limited capacity for

freight trains, which have a lower priority. Congestion at the railways’ Tughlakabad

Inland Container Depot (ICD) near Delhi and on the line itself has resulted in poor

reliability of service, and high value cargo such as containers, which form majority of

the traffic on this corridor, is increasingly shifting to road transport. Presently, less

than one-third of the containerized cargo in this corridor is being carried by

railways. On an average, 9,000 loaded trucks move on this corridor every day,

aggregating ~30mt annually of road freight traffic.

Source: Maritime Agenda 2010-20

Thus, the need for capacity addition is well realized and projects like DFCC are

targeted for the same. Progress on western DFCC is encouraging, with the entire

land acquisition being done and first project award of 640kms double track lane

from Rewari in Haryana to Palanpur in Gujarat is done – this represents 40% of the

entire western DFCC corridor length of 1,483kms. The project is given to a

consortium of L&T and Sojitz (Japan) to build the corridor at a cost of INR67b. Also,

there is a plan to award 1,500kms of projects by end-FY14, of which ~1,000kms is

for the western corridor. While the project is expected to be commissioned by FY17,

it could contribute to cargo traffic movement over the next three to five years,

considering some delays.

24 March 2014

Gujarat Pipavav Port

DMIC plans to develop 9 mega industrial regions, each of 20,000 hectares on 150-

200kms, on either side of DFCC. As GPPV comes under the “project influence area”,

it would be a key beneficiary of DMIC, though over a longer term. Higher utilization

factor of west coast ports, evacuation congestion and importance of DMIC mean

that GPPV’s growth would be a function of capacity than demand.

GPPV to be key beneficiary of DFCC and DMIC

GPPV would be in close proximity to DFCC and

related developments in the periphery area.

While advantages for other key ports on the

west coast like Kandla, Mundra could accrue

over the long term.

Source: DFCC, DMIC

GPPL in expansion mode as utilization levels inch up

In CY13, container volumes stood at 0.66mteus and utilization of container facility,

considering yard capacity, stood at 77% (quay side utilization at 51%). Also, while

bulk cargo handling capacity has been 5mt, volume has grown from 1.7mt in CY07 to

3.12mt in CY13 – a CAGR of 11%. The utilization level has thus moved up from 33%

to 62% in FY13. While GPPV can continue to operate the yard capacity at higher

utilization levels out of its existing capacity of 855,000teus, very high utilization at

quay side would impact efficiency in operation. Given that a berth’s development

would take 20-24 months and as current utilization levels already stand at 51%,

GPPV would have to keep capacity ready to tap growth beyond 1-2 years. This needs

an increase in capacity on the container side, suitably on the expectation that

24 March 2014

Gujarat Pipavav Port

volume growth will remain robust and utilization would reach 67% in CY15

(container volume growth of 15% CAGR over CY13-15E).

GPPV has already laid out expansion plans to increase both its container/bulk

handling capacity and improve the mechanization. Its capacity on the container side

(yard capacity) has grown from 0.6mteus in CY05 to 0.86mteus on the yard side,

while berth/quay side capacity stands at 1.3mteus. Under the expansion, the

container cargo handling capacity is proposed to be increased to 1.5mteus, both on

yard and quay side. Also, the plan is drawn to enhance bulk handling capacity by

5mt, which is however subject to tied cargo with take-or-pay commitment. Given a

situation of despair in power sector, several proposed power projects have been put

on hold and thus the visibility of bulk cargo volume is limited. GPPV has in-principle

decided to not pursue bulk cargo expansion, unless backed by volume commitment.

GPPV’s proposed expansion plan is to increase the container berth and carve out a separate berth for LNG terminal

Source: Company

Entire funding for the project is however tied up and external commercial borrowing

(ECB) equivalent of INR4.5b is already sanctioned. The proposed expansion cost was

estimated at INR11b, including capex of INR2.3b for bulk cargo. While capex on bulk

cargo is unlikely to be taken up soon, the delays in clearance may lead to marginal

increase in project costs. The project’s expansion was put on hold due to lack of final

consent from the Ministry of Environment and Forest (MoEF) on environment

clearance, on an appeal filed by a NGO challenging the earlier clearance granted by

MoEF in the National Green Tribunal (NGT). Since then, GPPV completed hearings

with NGT and the matter was referred back to MoEF for obtaining its clearance,

which is now received.

24 March 2014

Gujarat Pipavav Port

Details of expansion – 15mt of increased capacity and higher modernization

Particulars

Container Cargo

- Yard side

- Quay side

Bulk Cargo

Liquid Cargo

Periphery expansion

Unit

m TEUs

m tons

Capacity

Remarks

Existing Expanded

0.85

1.30

5.00

2.00

1.50

10.00

2.00

Berth length to go up from 385 meters to 735 meters

8 post panamax cranes (vs 5), 3 Panamax (same) and 28 RTGs (vs 18)

800 meter dry bulk berth, vs dedicated 365 meter dry bulk berth now

2 Gottwald cranes (vs 1), dedicated coal conveyor system, along with multi purpose

Relocation of Jetty to accommodate bulk and container berths

- Parallel road to existing road, separate now for Bulk and Container

- Capital dredging for new berths

Source: Company

Volume growth strong over CY13-15E…, further growth to be a function of

capacity creation

GPPV is well poised to grow at higher-than-industry rate. CY13 container volume

grew by 16% YoY, compared to west coast container traffic growth of 3.6%.

Introduction of a new service NMG, an India Middle-East service operated jointly by

Simatech, X-PRESS Feeders and OEL with the first call being on September 19, 2013

would aid volumes in CY14E/15E. The service, which is expected to ramp up in two

to three months time, would have a potential of 50,000-60,000teu pa – ~10% YoY

growth on container volume of 0.66mteus in CY13. Thus, addition of few new lines

with strong parentage, saturated capacity at ports like JNPT etc should help GPPV

achieve superior growth on the container front.

On the bulk front, CY13 show a muted growth in cargo with lower coal, mineral

volumes. CCEA’s decision to allow imported fuel cost as pass-through would be a

key enabler for power projects to use imported coal. However, lack of demand has

led to lower PLFs for projects across the country. Hence, growth in bulk cargo ports

may remain muted. Also, under-recovery in uptown coal cargo (~1.2mt of volume

pa) keeps the volume increase under check. Thus, the reliance on catchment area

cargo, where the current potential is ~2-2.5mt, may lead to lower volume growth.

We expect bulk cargo volumes to post a CAGR of 7.5% (back-ended in CY15) over

CY13-15E.

The other key delta would be from liquid cargo as storage/process facilities by Aegis

Logistics, Indian Molasses Company (IMC) and Shell Gas get commissioned in

1QCY14. Phase I of the expansion would have a capacity to process 0.6mt, which

would be enhanced to 1.4mt in Phase II, compared to nil volumes currently and 2mt

of liquid berth capacity. We expect a slow ramp-up of cargo volumes in CY14E and

CY15E at 0.25mt and 0.4mt, respectively.

We thus expect GPPV’s volume to post a CAGR of 15% over CY13-15E, largely in line

with the 12.2% growth seen over CY09-13. We are optimistic from the fact that

volumes at major ports clocked a CAGR of 0.7%, while at non-major ports it was at

16% CAGR over FY09-13. Growth at GPPV is a reflection of strong customer loyalty,

support/addition of new lines by parent and upsizing in container volumes etc.

While it is difficult to exactly comprehend the possible sources of volume gain,

particularly in the event of a slowdown, we rely on GPPV’s past track record, near

term mismatch in demand-supply and strong parentage. Of the incremental volume

24 March 2014

Gujarat Pipavav Port

growth of 4.1mt over CY13-15E, we expect container volumes to contribute 3.2mt

(213,000teus, of which 60,000teus is now assured due to the addition of a new

Middle East service), bulk cargo at 0.5mt and liquid cargo at 0.4mt.

Steady increase in utilization for container capacity (mt, %)

Bulk cargo growth to remain modest

*Container utilization calculated considering yard capacity and where

utilization levels can be higher, v/s quay side

Source: Company, MOSL

While we assume that the expansion work will commence from 1QCY14, the volume

contribution from such expansion does not yield before CY16. Hence, any

meaningful delay would not impact our CY15E estimate but any sizeable delay may

impact medium term cargo volume growth. Also, expansion/modernization driven

by competitive ports on the west coast could have a bearing on GPPV’s volume

growth.

24 March 2014

Gujarat Pipavav Port

Superior profitability led by operating leverage

Higher operating cash flow, lower capex to keep FCFF positive



Key observations over CY05-09: a) gross margin improved from lows of 54% to 66%

(12ppt improvement), b) entire incremental volume contribution from container

segment, c) EBITDA margin improvement of 29ppt led by lower contractual guarantee

payments made to PRCL, d) savings in interest cost due to debt repayment (gross DER

down from 3.4x in CY09 to 0.2x now).

Gross margin was historically at 80% (CY05) and with more containers, liquid cargo-led

volume growth would mean further improvement in gross margin. We expect 6ppt

improvement over CY13-15E to 72%. Scope of upside exists due to operating leverage

and higher proportion of fixed cost (70%) in container business.

Going forward, 15% volume CAGR, 23% revenue CAGR over CY13-15E would drive 32%

EBITDA CAGR and earnings CAGR of 39%. CY13 was the first year of sizable FCFF (at

INR2b), compared to consistent negative FCFF over CY05-09. Higher operating cash

flow, lower capex would help keep FCFF positive.

Revenue CAGR of 23% over CY13-15E on the back of strong volume growth

Over CY09-12, GPPV’s revenue grew at 23.5%, led by growth in average realization

of 8.3%, while volumes posted a CAGR of 12%. The growth in average realization

was partly aided by increasing scope of services, higher value added activities and

revision in rates in dollar denomination (August 2012). Volume growth was however

largely driven by container volumes (CAGR of 21%), while bulk cargo de-grew (CAGR

of 4%). De-growth was primarily driven by lower fertilizer and coal cargo.

Going forward, we expect GPPV to record revenue CAGR of 23%, in line with CY09-

12 growth. Volume growth is expected at 15%, while realization would clock 7.5%

CAGR. Container volumes are expected to post 15% CAGR, while bulk cargo would

volume growth in CY15 for coal/other cargo, as demand environment looks up. We

expect marginal contribution from liquid cargo at 0.4mt in CY15, as all three

concessionaires’ storage/processing facility would be operational by 1QCY14.

Growth in realization is also partly a function of cargo mix led by higher contribution

from container cargo.

24 March 2014

Gujarat Pipavav Port

Revenue growth robust, CY13-15E estimate achievable…

…led largely by volume growth, realization growth steady

Source: MOSL, Company

Huge operating leverage, higher utilization to drive EBITDA margin further

GPPV’s EBITDA margin rose from -11.1% in CY05 to 20% in CY09 and further to 50%

in CY13. We decipher EBITDA margin expansion from gross margin led improvement

and savings in other expenditure. We note that the 29.5% increase in EBITDA margin

for GPPV over CY09-13 comprised of 12% expansion in gross margin and 17.5%

increase due to savings in other (SG&A) expenditure. We calculate gross margin for

the port after excluding operating and staff cost, while savings in other expenditure

is attributable to EBITDA margin expansion. Pertinently, the entire incremental

cargo growth over CY09-12 was due to container cargo.

We note that GPPV’s gross margin was 80% in CY05, which declined to 54% in CY09

(port under development phase) and inched up to 66% in CY13. Higher container

volumes above minimum economic size enabled modernization such as installation

of rail mounted gantry cranes, compared to reach stacker. This is significant as the

margin profile of cargo is typically highest for liquid, followed by container and then

bulk. Thus, the higher contribution from container cargo would continue to enable

gross margin expansion, as ~70% of the operating cost remains fixed. We estimate

gross margin to inch up to 72% in CY15E (6ppt improvement). We believe that GPPV

may see a further increase in gross margin as the margin contribution over break-

even volume, benefit of mechanization would be sizable.

Cargo volume mix in favor of container (m tons)

Container

Bulk

Liquid

Total

CY09-12

3.7

(0.4)

3.3

% of total

112

(12)

100

CY13-15E

% of total

3.2

0.5

0.4

4.1

100

Source: Company, MOSL

Gross margin – scope exists for sizable improvement

Source: Company, MOSL

24 March 2014

Gujarat Pipavav Port

The gain on EBITDA margin expansion is on account of savings in other expenditure.

This was due to savings in miscellaneous expenditure portion of other expenditure

to a large extent. We note that the savings in other expenditure has come due to

discontinuation of contractual guarantee payments made to Pipavav Rail

Corporation (PRCL) from CY10 onwards. GPPV had guaranteed volume commitment

of 3mtpa and thus had to bear the guarantee payments. Thus, lower margin in the

past was not a true reflection of the port’s operating margin.

Traffic guarantee shortfall payment by GPPV (INR m)

CY03/

FY04

Traffic guarantee shortfall

SG&A expenses

- % to SG&A Expenses

EBIDTA

EBIDTA margin

CY04/

FY05

200

CY05/

FY06

322

613

52.5%

(75)

-11.1%

CY06/

FY07

234

937

25.0%

118

8.7%

CY07/

FY08

228

1,132

20.1%

4.7%

CY08/

FY09

306

876

35.0%

127

7.6%

CY09/

FY10

172

749

22.9%

445

20.1%

*Numbers taken from PRCL accounts, which follows March year ending. Thus, too that extent, the

number may not be directly comparable but offers insight to lower EBIDTA margin of port in the past

Source: Company, MOSL

Going forward, we expect GPPV to record an EBITDA margin improvement of 13ppt

over CY13-15 and expect EBITDA margin at 56%. This is partly led by revenue growth

of 23%, compared to expenditure growth of 14% CAGR. Pertinently, we expect

higher CAGR in total expenditure at 14%, compared to a CAGR of 10% in CY09-12,

and thus there exists scope of an upside. Given higher contribution from container

and liquid cargo over CY13-15, the margin expansion could be even higher. Also, the

higher liquid volume contribution may not carry an additional cost as

interest/depreciation is already being charged in P&L, and cost of operations would

be very less.

EBITDA margin expansion of 13ppt over CY13-15E

Overall utilization levels to go up at port

Source: Company, MOSL

Lower finance cost, flat depreciation to aid profitability further, earnings

CAGR of 39% over CY13-15E

We expect GPPV to record earnings CAGR of 39% over CY13-15E, driven by EBITDA

growth of 32%, and aided by lower financing cost and flat depreciation. Finance cost

for the port has come down from INR1.3b in CY10 to INR374m in CY13 as it repaid

INR3.5b loan in July 2012. The outstanding debt on books stands at INR3b as in

December 2013, compared to INR10.9b in CY09. Depreciation charge has been

24 March 2014

Gujarat Pipavav Port

rather muted and has come off from 22% of revenue in CY08 to 12% in CY13. Given

that GPPV has outstanding losses of INR5b, the tax liability remains nil. Hence, we

expect the port to report net profit CAGR of 39% over CY13-15E.

Interest cost has been key driver of profitability

Net profit growth robust

Source: Company, MOSL

Higher return ratio, net DER near zero; capex funding in place

Given debt repayment and sizable increase in cash due to QIP and preferential issue

(raised INR3.5b in June 2012) as also higher profitability, the net debt on the books

stands at INR914m, compared to INR9.8b in CY09. DER for GPPV has thus declined

from 3.4x in CY09 to 0.2x now on gross basis. It has readied a blue print for

expansion of INR10.5b on enhancing its port capacity (both at container and bulk)

and related modernization. This would involve debt drawl of INR4.5b and is not yet

started. The return ratios too would thus look up. We expect reported RoE to

improve from 7.4% in CY12 to 20.2% in CY15E, while RoCE would improve from 9.5%

in CY12 to 18.7% in CY15E.

Net DER for GPPV low, but may inch up with capex (INR m)

Return ratios improve on the back of profitability growth

Source: Company, MOSL

24 March 2014

Gujarat Pipavav Port

Planned capex by GPPV (INR m)

Particulars

Berth

Dredging

Yard

Conveyor

Equipment

Roads

Others

Total

Container

2,280

940

2,380

472

6,072

Bulk

545

1,380

285

2,285

Common

Infra

2,070

545

Total

2,825

2,070

940

1,380

2,665

545

547

2,615

10,972

Source: Company

FCFF to increase sizably aided by operating cash flows, better working

capital and low capex

Higher profitability and favorable working capital change has led to strong operating

cash flows for GPPV in CY13 at INR3.2b, up from INR889m in CY10. Free cash flow

stood at INR2b in CY13, despite capex of INR1.2b, up from INR434m in CY10. For

CY09-12, the total capex incurred by the port has been INR6b. Going forward, we

expect GPPV to begin expansion work from CY14 and thus free cash flow would look

to taper off. However, this does not reflect the true potential of assets as volume

growth/capex recovery would happen over a period of time. Thus, FCFF beyond

CY15E would look robust. However, from consistent negative FCFF before CY10,

GPPV would now be always FCFF positive.

FCFF to improve going forward (INR b)

Source: MOSL

24 March 2014

Gujarat Pipavav Port

Comfort in earnings growth, cash flows

Scalable business model, with strong operating leverage

We have valued GPPV using DCF method as the near term earnings growth and

valuation linked to the same may not fully capture the growth potential. In our view,

GPPV’s business model offers comfort in earnings and cash flow, as large part of

near term growth can be catered to without any major capex. Also, the medium

term capex funding is already tied up and thus may not entail any cash flow issues.

Our DCF-based method discounts explicit cash flow projections till FY28 and

assumes 2% terminal growth rate, which in our view would be a fair reflection of

possible cash flow generation opportunity. Also, it is pertinent to note that while

GPPV’s current concession of 28 years ends in FY28, there is high possibility of an

extension, given that other development projects in Gujarat have a clause of

additional concession period. GPPV was among the first private sector project by the

Gujarat Maritime Board (GMB) and hence the extension clause was not included.

We arrive at a DCF-based target price of INR100/sh. At current market price, the

stock trades at PER of 10x CY15E, P/BV of 1.9x (RoE of 20%). We believe that a

scalable business model, with strong operating leverage would continue to offer

upsides. Initiate coverage with a

Buy

rating.

DCF Valuations summary

PAT

Add: Depreciation

Add: Interest*

Add: Wkg capital changes

Add: Capex

Free cash flow (FCF)

Discount factor

Discounted cash flow

Sum of DCF

Add: Cash (INR mn)

Less: Debt

Equity value

Equity shares o/s

Value per share

*Net off tax

CY13

1,754

608

374

464

(1,208)

1,992

CY14E

1,680

684

501

641

(2,390)

1,116

0.90

1,009

CY15E

2,301

724

587

340

(4,764)

(811)

0.82

(662)

CY16E

2,087

838

816

(5,809)

(2,037)

0.74

(1,502)

CY17E

2,519

972

1,036

328

(5,910)

(1,055)

0.67

(703)

CY28E

8,309

2,408

867

1,435

13,019

0.22

2,839

Terminal

152,893

0.20

30,126

48,232

3,374

3,673

47,933

483

100

Comparative financials and valuation

Company Name

Gujarat Pipavav Port Ltd

Adani Ports and Special Econom

Essar Ports Ltd

EPS Growth (%)

FY13FY14E FY15E FY13

137.2 36.8

47.3 5.7

400.7 9.0

41.9 13.4

23.8 29.0

11.6 13.5

RoE (%)

FY14E

16.1

23.2

12.6

FY15E

20.2

21.6

13.7

EV/EBIDTA (x)

16.0

14.2

8.3

11.9

16.8

6.2

9.4 22.9

14.1 22.6

5.1 6.4

PE (x)

16.7

21.4

5.8

PB (x)

11.8 2.9

2.6

2.2

17.3 5.7

4.3

3.5

5.2 0.8

0.7

0.6

Source: Bloomberg, MOSL

FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E

24 March 2014

Gujarat Pipavav Port

Key risks

Consistency in container cargo is minimal

A large part of container cargo of shipping lines are based on voyages and have

short term charter hire contract, berthing contracts and small proportion of long

term contracts. Thus, there exists possibility of shift in container volumes from one

port to competing port for better rates, operational efficiency/turnaround time etc.

We already have precedence in case of GPPV, where Mearsk shifted one of the

shipping service to Mundra port.

Competition and upcoming capacity may impact volume growth

Currently, the competing ports of GPPV -- JNPT, Mundra, Kandla either have spare

capacity or are undergoing huge expansion plans. To illustrate, Mundra port’s

container capacity stands at 4mteus, while volume stands at 1.7mteus – 40%

utilization. Similarly, JNPT has awarded 0.8mteus terminal to DP World in 2013 and

has recently awarded 4.8mteus terminal development to Port of Singapore (PSA).

This existing and upcoming capacity may exert pressure on the volume growth and

realization.

Regulatory change may impact port operations

Being an infrastructure project, GPPV is governed by several regulations, which have

direct bearing on its operations. To illustrate, the revision of railway tariffs based on

new slabs have placed GPPV at some disadvantage to few of its customer on cargo

movement. To this extent, there is an under-recovery in cargo volumes. Any

unforeseen regulatory changes may thus impact port’s profitability and operations.

24 March 2014

Gujarat Pipavav Port

Operational matrix

Y/E Dec (INR m)

Container (mTEUs)

% YoY

Bulk (m tons)

% YoY

Liquid (m tons)

% YoY

Total (m tons)*

% YoY

Revenue

% YoY

EBIDTA

Margin (%)

% YoY

PAT

Margin (%)

% YoY

CY06

0.14

2.15

CY07

0.19

42.1

1.66

-22.8

CY08

0.20

1.8

2.07

24.9

CY09

0.32

64.4

3.40

64.1

CY10

0.47

45.0

3.36

-1.2

CY11

0.61

30.9

3.69

9.8

CY12

0.57

(6.5)

3.01

-18.4

CY13 CY14E CY15E

0.66

0.76

0.87

15.8

15.0

3.12

3.27

3.60

3.6

5.0

10.0

0.25

0.42

68.0

13.0

14.9

17.1

12.6

14.5

14.8

5,179

24.5

2,568

49.6

41.2

1,754

33.9

137.2

6,385

23.3

3,386

53.0

31.8

2,400

37.6

36.8

7,861

23.1

4,469

56.9

32.0

3,404

43.3

41.9

4.2

4.5

8.3

1,516

12.3

4.7

(39.9)

(460)

(30.4)

(11.2)

5.0

10.1

8.2

64.2

10.4

25.9

12.8

24.1

11.6

(9.9)

4,160

5.1

1,819

43.7

0.1

740

17.8

29.5

1,350

118

8.7

(518)

(38.4)

1,673 2,207

10.4

31.9

127

445

7.6

20.1

79.4 249.6

(676) (1,164)

(40.4) (52.7)

46.9

72.2

2,839 3,959

28.6

39.4

1,106 1,817

38.9

45.9

148.7

64.3

(547)

571

(19.3)

(53.0) (204.3)

Per ton summary

Revenue

322

334

268

274

Operating cost

293

318

309

214

167

EBIDTA

107

PAT

(124) (101) (135) (142)

(53)

TEUs converted in to m ton for simpler representations

308

167

141

360

202

157

397

428

459

200

201

198

197

227

261

135

161

199

Source: MOSL

24 March 2014

Gujarat Pipavav Port

Pipavav Railways Corporation – Operational & Financial summary

INR m

- Container

- Bulk

Cargo volumes (m tons)

% YoY

- From Traffic

- Guarantee payments

- Other income

Revenue

% YoY

Expenses

- Operating expense

% of revenue

- Administrative expenses

% of revenue

- Lease rent to WR

- Prov for doubtful debt

Total

% of revenue

EBIDTA

% of revenue

% YoY

Interest

Depreciation

Profit before tax

EO Items

Profit before tax

Tax

% of PBT

PAT

% of revenue

% YoY

Per ton summary

- Revenue

- EBIDTA

- PAT

FY04

0.1

0.2

0.4

FY05

0.8

0.0

0.8

122.9

200

302

59.2

FY06

1.0

0.1

1.1

43.6

190

322

515

70.2

FY07

1.3

0.4

1.6

43.8

408

234

676

31.3

FY08

0.9

0.6

1.5

-7.5

430

228

673

(0.5)

FY09

0.7

0.6

1.3

-13.4

377

306

691

2.7

FY10

1.3

1.2

2.5

90.7

594

172

803

16.2

FY11

2.3

1.5

3.8

54.5

896

914

13.9

FY12

4.2

1.9

6.1

60.3

1,513

1,530

67.4

FY13

4.7

1.6

6.3

3.3

1,790

1,858

21.4

190

117

175

162

203

576

208

139

(247)

(82)

203

245

270

172

166

146

(42)

(1)

(42)

(8)

215

259

417

204

147

420

259

260

305

368

(12)

237

144

(13)

(3)

(14)

(2)

452

247

(9)

453

524

167

(55)

192

144

(169)

(83)

(251)

(36)

641

691

112

(33)

163

147

(198)

(183)

(23)

544

122

712

203

166

149

(113)

147

241

786

904

627

209

137

145

345

437

(116)

(27)

553

1,503

939

989

868

153

675

209

466

(16)

204

141

(330)

(173)

543

(942)

388

127

(317)

459

241

(38)

536

130

(195)

326

(75)

251

295

103

138

Source: Company

24 March 2014

Gujarat Pipavav Port

Financials and valuation

Income statement

Y/E December

Net Sales

Change (%)

EBITDA

Margin (%)

Depreciation

EBIT

Int. and Finance Charges

Other Income - Rec.

PBT bef. EO Exp.

EO Expense/(Income)

PBT after EO Exp.

Current Tax

Tax Rate (%)

Reported PAT

PAT Adj for EO items

Change (%)

Margin (%)

2011

3,959

39.4

1,817

45.9

558

1,259

852

164

571

0.0

571

-204.3

14.4

2012

4,160

5.1

1,819

43.7

549

1,269

684

155

740

0.0

740

29.5

17.8

2013

5,179

24.5

2,568

49.6

608

1,960

374

168

1,754

-164

1,918

0.0

1,918

1,754

137.2

33.9

2014E

6,385

23.3

3,386

53.0

684

2,702

501

200

2,400

0.0

2,400

36.8

37.6

(INR Million)

2015E

7,861

23.1

4,469

56.9

724

3,745

587

247

3,404

0.0

3,404

41.9

43.3

2016E

9,471

20.5

5,635

59.5

838

4,797

1,020

298

4,075

815

20.0

3,260

-4.2

34.4

Balance sheet

Y/E December

Equity Share Capital

Total Reserves

Net Worth

Total Loans

Capital Employed

Gross Block

Less: Accum. Deprn.

Less:Impairment of Assets

Net Fixed Assets

Capital WIP

Total Investments

Curr. Assets, Loans&Adv.

Inventory

Account Receivables

Cash and Bank Balance

Loans and Advances

Curr. Liability & Prov.

Account Payables

Provisions

Net Current Assets

Appl. of Funds

2011

4,236

3,694

7,930

6,759

14,688

17,515

3,063

1,754

12,698

830

2012

4,834

7,283

12,117

3,207

15,324

17,821

3,606

1,754

12,462

1,577

830

2013

4,834

9,201

14,035

2,938

16,973

20,606

4,214

1,754

14,639

830

2014E

4,834

10,881

15,715

3,673

19,388

21,500

4,898

1,754

14,848

1,497

830

(INR Million)

2015E

4,834

13,182

18,017

5,324

23,341

23,082

5,622

1,754

15,706

4,679

830

2016E

4,834

15,269

20,103

8,225

28,328

28,481

6,460

1,754

20,267

5,088

830

2,224

1,765

3,197

4,794

5,377

5,788

115

120

122

135

167

324

418

344

424

538

649

705

511

2,023

3,374

3,627

3,675

1,138

722

710

875

1,077

1,297

1,154

1,310

1,694

2,581

3,251

3,645

1,079

1,133

1,287

1,393

1,610

1,853

177

407

1,188

1,641

1,792

1,070

455

1,504

2,213

2,126

2,143

14,688

15,324

16,972

19,388

23,341

28,328

E: MOSL Estimates; E: MOSL Estimates; Adjusted for treasury stocks

24 March 2014

Gujarat Pipavav Port

Financials and valuation

Ratios

Y/E December

Basic (INR)*

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x) *

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

Return Ratios (%)

RoE

RoCE

Working Capital Ratios

Asset Turnover (x)

Inventory (Days)

Debtor (Days)

Leverage Ratio (x)

Current Ratio

Debt/Equity

2011

1.3

2.7

18.7

0.0

2012

1.5

2.7

25.1

0.0

2013

3.6

4.9

29.0

0.0

22.9

17.0

2.9

7.9

16.0

0.0

7.5

9.5

0.3

5.3

1.9

0.9

7.4

9.5

0.3

10.0

1.3

0.3

13.4

13.2

0.3

8.5

1.9

0.2

2014E

5.0

6.4

32.5

1.2

30.0

16.7

13.0

2.6

6.3

11.9

1.5

16.1

16.0

0.3

7.0

1.9

0.2

2015E

7.0

8.5

37.3

1.9

32.4

11.8

9.7

2.2

5.3

9.4

2.3

20.2

18.7

0.3

6.3

1.7

0.3

2016E

6.7

8.5

41.6

2.0

36.0

12.3

9.8

2.0

4.7

7.9

2.4

17.1

19.7

0.3

6.4

1.6

0.4

Cash flow statement

Y/E December

NP/(Loss) bef. Tax & EO Items

Depreciation

Interest & Finance Charges

Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

Others

CF from Operating incl EO

(inc)/dec in FA

Others

CF from Investments

Issue of Shares

(Inc)/Dec in Debt

Interest Paid

Dividend Paid

Others

CF from Fin. Activity

Inc/Dec of Cash

Add: Beginning Balance

Closing Balance

2011

571

558

729

-1,201

622

-14

608

-525

514

-10

-1,215

-926

300

-1,841

-1,244

1,949

705

(INR Million)

2012

2013

2014E

2015E

2016E

740

1,754

2,400

3,404

4,075

549

608

684

724

838

606

374

501

587

1,020

815

849

464

641

340

2,661

3,200

4,227

5,056

5,149

-40

2,621

3,200

4,227

5,056

5,149

-1,751

-1,208

-2,390

-4,764

-5,809

123

-1,628

-1,208

-2,390

-4,764

-5,809

3,500

164

-3,669

-269

736

1,651

2,901

-667

-374

-501

-587

-1,020

-720

-1,103

-1,174

-352

-1,188

-480

-486

-39

708

-195

1,513

1,351

253

705

511

2,023

3,374

3,627

511

2,023

3,374

3,627

3,675

E: MOSL Estimates; * Adjusted for treasury stocks

24 March 2014

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