Gujarat Pipavav Port's Q4FY18 results (Neutral) - Strong rebound in container cargo

Q4Y18 result highlights

• GPPL’s Q4FY18 PAT declined 26.6%yoy to Rs486m (est: Rs594m) led by lower bulk and liquid cargo volumes as well as lower realization and maintenance dredging expense.
• After almost three years, container cargo reported a robust volume growth of 29.7%yoy to 205K TEUs led by addition of new services of  (i) CIMEX 2N (FI3) - consortium of CMA-CGM, Maersk & OOCL and (ii) CI6 - consortium of Wan Hai & Cosco. This was further aided by ad hoc strong transhipment volume of 10-13K TEUs, higher empty container volumes and higher coastal cargo volumes (23-25K TEUs). However, average realizations were adversely impacted due to lower tariff on transhipment, coastal and empty containers. In Q4FY18, container cargo realization stood at ~Rs6,200/TEUs as against ~Rs6,500/TEUs last year.    
• Bulk cargo volumes declined 11.6%yoy to 266K MT (est: 553K MT) due to lower fertilizer and coal cargo volumes. Liquid cargo volumes declined 16%yoy to 210K MT (est: 275K MT). The management indicated that notwithstanding the quarterly volatility in liquid cargo volumes, future prospects continue to remain bright.  
• Revenue declined 5.2%yoy to Rs1.7bn below estimate of Rs1.8bn due to lower bulk and liquid cargo volumes. The average blended realization declined 8.1%yoy to Rs527/MT (est: Rs541/MT) due to adverse cargo mix and also due to pricing pressure.
• EBITDA declined 18.9%yoy to Rs930m (est: Rs1.1bn) and EBITDA margin declined 950bp yoy to 56.2% (est: 60%). EBTIDA was impacted due to maintenance dredging cost of Rs60m (Further Rs50m likely in Q1FY19) and lower cargo volumes. For FY18, GPPL has declared a total divided of Rs3.4/sh (100% of distributable profits after including DDT).
• GPPL expects the Q4FY18 container cargo run rate to sustain/grow in FY19.

Key positives: Addition of new container services of FI3 and CI6.

Key negatives: Lower bulk and liquid cargo volumes.

Impact on financials: Downgrade in earnings by 8.8%/7.6% in FY19E/20E due to lower than expected bulk and liquid cargo volumes.

Valuations & view

The container cargo outlook remains buoyant starting FY19 led by addition of new services. We however remain concerned on the scalability potential of the asset in the long term, especially in the wake of competition from Mundra and incremental capacity additions at JNPT. The stock meanwhile trades at 25.6x/20.9x FY19E/FY20E earnings and at EV/EBITDA of 13.2x/10.7x on FY19E/FY20E, respectively and appears to be factoring the recovery in container cargo. We maintain our Neutral rating with a revised DCF based price target of Rs145.