'Reduce' ratings on Gujarat Pipavav shares: Nomura

Updated: Mar 3 2014, 15:13pm hrs
Gujarat Pipavav'Reduce' ratings on Gujarat Pipavav shares: Nomura
Action: Downgrade to Reduce rating on over 60% stock price rally in 6M: Gujarat Pipavav Ports (GPPV) Q4CY13 results beat street estimates by a wide margin led by better margins (due to a better cargo mix) and higher other operating income. Volumes though were below estimates due to poor show in the bulk cargo segment, even as container volumes jumped 24% year-on-year. Overall, CY13 has been good for GPPV as the company recouped most of its lost container traffic share (in CY12) from peers such as Mundra port.

However, with the container capacity utilisation levels close to 88% now (on Q4 run-rate), we see limited near-term upsides. Original capacity expansion plans have now been pushed back by a year for the company, thus implying that the next phase of growth is likely only from CY16. Despite an experienced promoter group in APM Terminals and proximity to Indias largest container port JNPT, GPPV lags behind Mundra port given its smaller scale and infrastructure build-out.

Further with Mundra port now ready with 50% spare container handling capacity which is almost 2.5x (times) the total capacity of GPPV, we believe further tariff hikes at GPPV will be difficult. Post the strong ~60% stock rally over the past six months, we downgrade the stock to Reduce rating and reiterate Adani Port (Buy) as our preferred pick in the sector.

Valuation: 10% downside to our new TP (target price) leads to Reduce rating. We use DCF (discounted cash flow) methodology to arrive at our new TP of Rs64 for GPPV. We also tweak estimates upwards to factor in better-than-expected realisations leading to EPS upgrades of 23%-11% over CY14/15. However, the stock is trading at an expensive 11.1x CY14f (forecast) EV/Ebitda despite only 15 years of concession life.

Q4CY13 results

Gujarat Pipavav reported a good set of numbers, beating the Streets Ebitda & PAT estimates by nearly 28% and 33%, respectively. The beat at operating level was driven by higher other operating income as well as better margins. The key numbers are:

Container volume at ~194,000 TEU (twenty foot equivalent unit) was 4% higher than our expectations. Volume grew 24% y-o-y helped by: (i) upsizing of Maersk line which was added in May-13, and (ii) addition of new Middle East service line started in Q2.

Bulk cargo volume was weak at ~0.54 mnT (declining 29% y-o-y and 45% q-o-q) on the back of lower coal & mineral volumes.

Due to lower bulk volume, container mix was higher at 81% vs 71% in Q4CY12 vs 66% in Q3CY13). Higher container mix coupled with higher realisation led to overall realisation boost to Rs 450 per tonne (up +10% y-y & 12%q-q).

On the back of significantly lower bulk volume, overall volume (bulk + container) was at 2.86mnT, which was 12% lower than our estimates. However, this was more or less offset by strong realisations resulting in revenue missing our estimates by only 4%.

Revenue including other operating income was 8% & 2% ahead of the Streets and our estimates, respectively.