GPPL: Attractive port of call

Gujarat Pipavav has a positive structural story, with better days ahead; however, the stock seems expensive

Gujarat Pipavav Port (GPPL) has started to reap the benefits from its investments in capacities, helping it to take advantage of growth in the region and congestion at ports in Mumbai.

Support from its parent, APM Terminals, the world's largest terminal and port operator, and the location of its port (10 hours from Mumbai verses Mundra's 24 hours) have added to its attractiveness. Further, given the likely addition of 15,000 Mw of new coal-based power generation capacities, there is higher demand compared to overall industry growth, which has been hemmed in by the economic slowdown and drop in external trade.

Better days lie ahead, as the benefits of operating leverage, positioning and higher industry volumes will drive growth. GPPL’s present capacity is 850,000 TEUs (twenty foot equivalent units) and is operating at 77 per cent utilisation. Beside higher volumes from the existing capacities, it will benefit as a result of its plans to expand capacities to 1.35 million TEUs by converting its multipurpose berth into a fully operational container handling one.

“GPPL has ample flexibility and regulatory clearances (valid till 2019) in terms of capex to extend its bulk handling capacity as and when required. Further, GPPL has set up tank farms with partners to improve its value proposition, as well as add another stream to its revenue, which is expected to scale up significantly over the time period,” said Bharat Chhoda, analyst at ICICI.

Direct.com analysts are expecting its container volumes to go up from 662,000 TEUs in calendar year 2013 to 801,000 TEUs in CY16. Also, bulk volumes will go up from 2.9 million tonnes in CY13 to 3.5 mt in CY16. Given the growth prospects, it is not surprising that the Street is expecting strong 22-24 per cent growth in earnings over the next two years.

Due to the location and its expertise, plus superior infrastructure, the company enjoys healthy operating margins. In the March quarter, it reported a strong 1,283 basis point improvement in operating margins to 58.6 per cent, led by operational efficiency, higher utilisation and introduction of new cranes, plus faster execution. In the coming years, with higher earnings and margins, coupled with low capex, this will bring higher free cash flows. In CY14, analysts are expecting its free cash flow to be around Rs 60 crore,to rise to Rs 180-190 crore in CY16.

Though the structural story remains positive, in the near term because of valuations, there is high possibility that investors might expect moderate returns.

“Despite our overall positive stance on the sector and GPPL, given its experienced promoter group in APM Terminals, we believe the strong stock rally over the past six months has pushed GPPL into expensive territory,” says Amar Kedia, who tracks the company at Nomura. At the current market price of Rs 105.8, the stock is trading at 16 times its estimated earnings and 2.5 times its estimated book value in 2014-15. This is marginally higher, considering a large part of the valuations are due to the 22-24 per cent earnings growth expected over the next two years. Investors have also started to discount the 200 basis points improvement in return on equity and free cash flows.