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Good quarter; bulk cargo surprises positively

Gujarat Pipavav Port’s (GPPV) 2QFY23 revenue grew 9% QoQ (+6%, 3-year CAGR) to INR 2.3bn (5% above JMFe) led by strong volume (+10% QoQ) while blended realisation fell 1% QoQ. Container volume was flat QoQ largely due to 3% decline in EXIM volume (+10% YoY; -5% 3-year CAGR). Bulk and Liquid volumes grew 40% and 2% QoQ (+25% and -4% 3- year CAGR) respectively. EBITDA grew 7% QoQ (+1%, 3-year CAGR) to INR 1.2bn (7% below JMFe on lower gross margin due to product mix). GPPV remains optimistic on near-tomedium term outlook (despite some global headwinds) led by a) introduction of new service lines (Middle East), b) addition of new commodities like wood pulp, rice, etc. in the bulk segment, and c) leveraging GPPV’s associate’s (PRCL) rail container operations. It continues to actively engage with Gujarat Maritime Board (GMB) on concession extension. The board approved the highest-ever interim dividend of INR 2.7/ share (to be paid by 1st Dec). We revise our estimates by 3-4% and maintain Sep’23TP of INR 100. Key risks to our call: A delay in recovery and lower realisation.

* 2QFY23 summary: Revenue grew 9% QoQ (+17% YoY; +6% 3-year CAGR and 5% above JMFe) with volume up 10% QoQ while blended realisation fell 1%. Container cargo volume was flat QoQ (+18% YoY, -6% 3-year CAGR) as EXIM volume fell 3% QoQ (+10% YoY). Bulk volume continue to be robust, growing by 40% QoQ (+24% 3-year CAGR) led by 86% QoQ growth in fertiliser volume. Liquid volume was steady QoQ, growing by 2% (-4% 3-year CAGR; +6% YoY) and is expected to sustain this rate over the coming quarters. EBITDA grew 7% QoQ (+11% YoY; +1% 3-year CAGR) to INR 1.2bn (7% below JMFe). Adjusting for repairs worth INR 53mn (cyclone Taukate), PBT at INR1bn (+12% QoQ, +23% YoY and +2% 3-year CAGR) was 1% below JMFe. Adjusted PAT grew +12% QoQ (+46% YoY on lower ETR; +6% 3-year CAGR and 2% below JMFe).

* Cargo mix and higher cost impact margin: GPPV’s EBITDA margin declined by 110bps QoQ largely on account of 410bps increase in operating expenses. This is largely attributable to increasing share of bulk cargo in overall cargo mix. Bulk cargo being more labour intensive (less mechanisation) leads to higher variable costs. Moreover, GPPV is seeing higher transhipment volumes (due to the Sri Lankan crisis) which have lower realization. Within bulk cargo, coal volume fell 5% QoQ while fertilisers saw 86% growth in volume. Addition of new commodities and customers bodes well for dry bulk volume, going ahead

* Container volumes continue to trend upwards; outlook positive: Container volumes have witnessed sustained MoM improvement since Jan’22 with easing of global congestion at major ports and reduction in skipping calls as service lines and networks have started stabilising. Despite signs of recession in some parts of the world, GPPV remains optimistic on 2HFY23 outlook led by a) new service lines (Middle East) b) addition of commodities like wood pulp, etc. c) modal shift from road to rail as DFC benefits start accruing, and d) future opportunities arising out of GPPV’s associate company (PRCL) which has commissioned rail container operations. Earlier tariff hikes have been accepted by customers and no further tariff hikes are in the offing. Moreover, GPPV’s communication with Gujarat Maritime Board (GMB) for concession extension beyond 2028 remains conducive and the company expects an update on this soon post the Gujarat elections in Dec’22. GPPV remains committed to making required investments over the next 5 years.

* Maintain HOLD: We revise our FY23-25E earnings by 3-4% to reflect 2QFY23 performance and commentary. We continue to value GPPV on DCF basis and arrive at a Sep’23TP of INR 100. While we like GPPV for its strong balance sheet and robust cash flow generation, we are concerned about concentration (single port company) amid rising competitive intensity and uncertainty on the concession extension timelines. We maintain HOLD. Key Risk: Delay in recovery and lower volume growth / realisation as a result.

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