Gujarat Pipavav's Q1FY19 results (Neutral) - Margins impacted by pressure on realizations

Q1FY19 result highlights

• GPPL’s Q1FY19 PAT declined 15.4%yoy to Rs471m, below estimate of Rs550m, led by lower bulk realizations and higher operating costs.
• Container cargo grew 18.2%yoy to 195K TEUs led by addition of new services and  incremental cargo of 7-8k TEUs from transhipment (10-13k TEUs in Q4FY18) and 18-20k TEUs from coastal movement (23-25k TEUs in Q4FY18). EXIM cargo growth in containers was 14%yoy. Bulk cargo grew 22.6%yoy to 619k MT aided by higher fertilizer cargo (472k MT). Liquid cargo volumes declined 25%yoy to 160K MT. Total cargo grew 15.8%yoy to 3.3mt.
• Average realization remained flat qoq (on an adjusted basis) at Rs531/MT despite lower transhipment and coastal volumes and tailwind from 4% qoq depreciation in INR against the USD (nearly 70% of GPPL’s revenue is USD denominated). This is likely due to lower refeer cargo and lower tariffs in bulk cargo (especially in fertilizer cargo which grew 341%qoq).   
• GPPL’s Q1FY18 earnings included project/offshore revenue of Rs150-170m) leading to a higher base for yoy comparison. Revenue grew 4.1%yoy to Rs1.76bn (estimate of Rs1.7bn), EBITDA declined 11.9%yoy to Rs914m (est: Rs1bn) and EBITDA margin declined 940bp yoy to 51.9% (est: 59.9%). EBITDA remained impacted by dredging expenses of Rs45m and higher operating expenses (related to higher fertilizer handling), not adequately compensated through higher realizations.
• GPPL expects improved/sustained container cargo momentum in FY19, though bulk and liquid cargo streams could remain volatile.

Key positives: Higher bulk cargo.

Key negatives: Lower bulk realizations and lower liquid cargo.

Impact on financials: Downgrade in earnings by 17.4%/18.4% in FY19E/20E due to lower liquid cargo, lower Ro-Ro volumes and lower realizations.

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. Also, part of the growth recovery in container cargo is being driven by transhipment and coastal cargo which are margin dilutive. The added pressure on bulk tariffs is also an incremental negative. The stock meanwhile trades at 26.4x/21.9x FY19E/FY20E earnings and at EV/EBITDA of 12.7x/10.5x 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 Rs123.