Gujarat Pipavav's Q2FY19 results (Neutral) - Lower realization masks strong volume performance

Q2FY19 result highlights

• GPPL’s Q2FY19 PAT grew 25.2%yoy to Rs553m, below estimate of Rs572m, led by lower container and bulk realizations.
• Container cargo growth was robust at 48.8%yoy to 238K TEUs led by strong growth of 15% in EXIM cargo.  Bulk cargo growth was subdued at 2.9%yoy to 532k MT due to lower fertilizer cargo (228k MT, down 39.4% yoy). Liquid cargo volumes declined 65.9%yoy to 94K MT. Total cargo grew 30%yoy to 3.8mt.
• However, this robust cargo growth did not translate into a similar revenue and EBITDA growth due to lower realizations. Revenue grew 12.8%yoy to Rs1.71bn (estimate of Rs1.81bn), EBITDA grew 17.8%yoy to Rs975m (estimate of Rs1.1bn) and EBITDA margin expanded 240bp yoy to 57.0% (estimate of 58.8%).
• Despite retaining benefit from 4% qoq currency depreciation, the average realization declined by 13.2% yoy to Rs446/MT due to adverse cargo mix. Adverse mix was led by lower share of fertilizer in bulk volumes and higher share of transhipment in container volumes.     
• The management mentioned that the coastal volumes have declined materially due to loss of a coastal shipping service. However, the management will continue to pursue growth opportunities in the transhipment segment.
• Other income grew 22.4% yoy to Rs149m due to receipt of dividend of Rs 38m from PRCL.
• GPPL declared interim dividend of Rs1.7/ share, which including DDT accounts for 96.3% of H1FY19 earnings.

Key positives: Strong container cargo volumes.

Key negatives: Lower container and bulk realizations and lower liquid cargo volumes.

Impact on financials: No material change in earnings

Valuations & view

GPPL has shown a strong recovery in cargo volumes in H1FY19. However, the adverse cargo mix has led to lower average realization which would likely impact the company’s long term profitability. Consequently, we have revised our earnings downwards by 3.1%/3.7% in FY19E/FY20E. The stock meanwhile trades at 23.5x/19.6x FY19E/FY20E earnings and at EV/EBITDA of 11.4x/9.4x on FY19E/FY20E, respectively. We maintain our Neutral rating on the stock with a revised DCF based price target of Rs107.