Edelweiss report on Gujarat Pipavav Port results

Cost rationalisation continues to bear fruits; brokerage continues to maintain Buy

Gujarat Pipavav Port (GPPV IN, INR 164, Buy)

Key highlight of Gujarat Pipavav Port’s (GPPV) Q4FY17 result was sustained EBITDA margin improvement (up 370bps YoY) trend, predominantly led by cost tightening measures. Despite ~20% YoY dip in dry bulk volumes and 11% drop in container volumes (158k TEUs versus 177k TEUs last year), revenue grew 8% YoY as realisations (implied) improved 22% YoY on account of better cargo mix. While interim challenges of consolidation among shipping lines persist, we believe with end of capex cycle, ~3% dividend yield and GPPV being a net cash company, the risk to the business reduces significantly. Moreover, management’s focus on pruning operational cost has been compensating for lacklustre volumes. Maintain ‘BUY’.

Dry bulk and container businesses dent overall volumes

Dry bulk volumes tumbled 20% YoY due to lower fertilizer volumes, which were pushed to ensuing quarters due to postponement of the urea policy. Also, container volumes dipped 11% YoY due to lower reefer volumes during the quarter. However, liquid cargo volumes remained steady and RoRo volumes scaled up—24,000 cars versus 8,700 in Q4FY16. GPPV is positive on prospects of both these cargo segments.

Cost cutting efforts yielding benefits

GPPV sustained focus on improving profit via cutting costs, evident from the fact that despite mere 8% increase in revenue, EBITDA jumped 15% YoY. The EBITDA spurt was also aided by better cargo mix—strong volumes of high-margin RoRo and liquid cargo. The company reported highest-ever EBITDA margin of 66% in Q4FY17.

Outlook and valuations: Focus on cost cutting; maintain ‘BUY’

Management stated that it will continue to focus on cutting costs and maintaining 60% plus EBITDA margin going ahead. Moreover, GPPV has no major capex planned and is optimistic on prospects of liquids and RoRo businesses. Hence, we believe the company is well positioned to benefit from anticipated revival of India trade. We arrive at a revised SOTP-based target price of INR177 (INR175 earlier). We maintain ‘BUY’.

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