Gujarat Pipavav outperforms market

Sound management, cautious approach to capex, zero-debt status keep firm in good stead

While the equity markets have been dull in the past three months, Gujarat Pipavav Port Limited (GPPL), a subsidiary of international container terminals and port company APM Terminals, has gained eight per cent. This is despite the fact that the company reported weak results in the December 2015 quarter with total volumes falling 18 per cent to 3.3 million tonnes, revenues dropping 10 per cent to Rs 165 crore and higher deferred taxes pulling down profits by 40 per cent to Rs 53 crore, on a year-on-year (y-o-y) basis.

While the third quarter of FY16 was disappointing, there are positives for GPPL.

First, despite decline in volumes, operating margins rose 50 basis points y-o-y to 60.5 per cent, helped partly by its recent tariff hike of five per cent (in dollar terms). Also, GPPL has managed to rationalise its costs to a large extent and its impact was felt in the December 2015 quarter where operations costs were down 37 per cent y-o-y.

Volumes dropped mainly due to an important far West Asia shipment shifting from GPPL to Mundra Port. However, the new coastal service added recently along with other expansions should help push volumes.

Analysts at ICICI Securities expect GPPL to maintain 61 per cent operating margins till FY20. GPPL’s dedicated railway network connecting its port to the freight corridor of Indian Railways is a big plus point.

Second, unlike most ports in the western region where coal is an important shipment, GPPL derives only 30 per cent of its volumes from coal. Nearly 60 per cent of its business is from container handling and 10 per cent is from liquid terminals. GPPL’s container-handling capacity of 0.85 million twenty foot equivalent units (TEUs) will also increase to 1.35 million TEUs this month. The capex is completely funded from internal accruals, which would help maintain its debt-free status. Analysts at JM Financial point out a possibility of negative free-cash flows in the medium-term due to capex. But, this far outweighs the cost of external funding, given GPPL’s cautious approach to capex and funding.

With global trade remaining on a weak footing, there are near-term demand challenges. However, analysts at Motilal Oswal Securities say sizable growth options, good quality management and high dividend possibility are the key reasons why the brokerage recommends ‘buy’ on GPPL.