APSEZ has an enviable track record and a strategy of winning share. A global trade recovery, and APSEZ\u2019s strong pricing power, pan-India presence and focus on improving utilisation over capacity creation imply strong core FCF generation. The PEG ratio is not expensive. Improving macro-trade recovery: Our India economist expects a 12% increase in exports for F18-19 (versus 5% in F17) and 14%\/15% rises in imports in F18\/19 (versus a 1% decline in F17), indicating an improving trade environment for India. In our view, ports operators in India are in a relatively sweet spot compared with other infrastructure assets on account of the trade recovery. Strong core FCF generation: APSEZ had negative FCF from F10 (excluding the Abbot divestiture flow in F13) largely driven by capacity creation. While on a reported basis in F17 APSEZ had positive FCF, excluding the reversal of related party advances, core FCF was still marginally negative. A combination of a global trade recovery, and APSEZ\u2019s strong pricing power, pan India presence and focus on improving capacity utilisation over capacity creation implies strong core FCF generation of `75 bn over the next three years. While we assume the dividend payout to rise from 7% in F17 to 20% in F20, our FCF estimates could be at risk if APSEZ decides to pursue an acquisition or any unrelated investments. At the Q4F17 analyst meeting, management mentioned evaluating international opportunities but said it was committed to maintaining net debt\/Ebitda (2-2.5x) and that expansion would only be through the JV route (with a local partner) on a green field basis. Separately, there have been media reports (CNBC) of Gujarat Pipavav being for sale. While any acquisition (s) would be evaluated on merit, APSEZ has a track record of turning around local assets. APSEZ stacking up well compared to its global peers: On operating metrics such as revenue growth, margins, Ebitda growth, net income growth and return ratios (RoCE\/ RoE), and based on bottom-up estimates by Morgan Stanley analysts covering global ports, APSEZ is expected to be in the top quartile across various operating metrics despite the tax holiday for Mundra port coming to an end. APSEZ \u2014 25% upside: We value the stock using DCF and arrive at our PT by assigning probability weights of 10%\/ 80%\/ 10% to our bull\/base\/bear cases. The stock has outperformed Sensex by 15% over the past six months but despite a tax rate increase in F18, on a PEG basis the stock trades at 1.3x, which is in line with the global ports\u2019 average. At our price target, the stock would trade at an F19 PER of 24.2x. Ports operators are in a relatively sweet spot: The Morgan Stanley global economics team expects a synchronous recovery in domestic demand in DMs and EMs for the first time since 2010 which would help revive EM Asia\u2019s exports meaningfully in 2017-18 relative to 2012-16. Our India economist expects 12.5% y-o-y rises in exports in FY18\/FY19 versus a rise of 5% in FY17 and 14.5% rises in imports in FY18\/FY19 versus a 1% decline in FY17, indicating an improving trade environment for India. An improving macro environment bodes well for port volumes: Historically global seaborne traffic growth has enjoyed a 1.0x multiplier with global real GDP growth while India has historically enjoyed a higher multiplier (at 1.1x). The global trade recovery is propping up core organic growth at key ports in India. According to our global shipping analyst, global trade continues to improve significantly, with container port traffic growth rising by 7.4% in Q2. Positive growth was noted across every market, led by South Asia. The momentum is expected to hold in 2H, with July also showing strong growth. Thus, for APSEZ we forecast a 12% volume CAGR in F18-20, driven by a favourable macro environment that supports growth in existing terminals while a ramp-up in new terminals implies a stronger longer term growth trajectory of a 6% volume CAGR in F21-36. APSEZ has a strong business proposition: APSEZ offers exposure to India, where containerisation levels are low, the focus is on O&D cargo, and recent government initiatives are focused on the promotion of coastal shipping. APSEZ has a pan-India presence and also has adequate capacity across the majority of ports it operates. Its assets have strong competitive positioning. Access to well developed hinterland connections, strong logistics, scale and the ability to handle the growing vessel sizes implies strong pricing power while shipping liners are consolidating globally. We think that alliances between large shipping lines and a shift to larger vessels will lead to consolidation of volumes at ports, leading to increased competition among port operators globally. We expect that, as shipping lines deploy larger vessels and consolidate routes, the focus will move to ports with O&D demand over transhipment. Thus, this consolidation will help APSEZ given its scale, pan India presence and existing strong relationships with container liner companies (like MSC and CMA-CGM).