Gujarat Pipavav's Q3FY19 results (Neutral) - Profitability impacted by adverse cargo mix

Q3FY19 result highlights

• GPPL’s Q3FY19 PAT at Rs522m (up 4.5%yoy) was below our estimate of Rs557m, due to lower bulk volumes and forex loss of Rs25m.
• Container cargo growth was robust at 45.1%yoy to 251K TEUs led by strong growth of 15% yoy in EXIM cargo.  Bulk cargo volumes contracted by 39.5% yoy and 37.4% qoq to 333k MT due to lower fertilizer cargo (241k MT, down 24.5% yoy). Liquid cargo volumes also declined significantly by 54% yoy to 149k MT. Total cargo grew 20.6%yoy to 3.9mt led by strong container cargo volumes.
• However, this robust cargo growth did not translate into a similar revenue and EBITDA growth due to lower realizations and adverse cargo mix. Revenue grew 7.4%yoy to Rs1.75bn (estimate of Rs1.76bn), EBITDA grew 4.3%yoy to Rs987m (estimate of Rs1.1bn) and EBITDA margin contracted 170bp yoy to 56.5% (estimate of 57.9%). EBITDA was impacted due to higher other expenses led by currency fluctuations and maintenance dredging expense (Rs10m).
• Average realization declined by 10.9% yoy to Rs451/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 will continue to pursue growth opportunities in the transhipment segment.
• Other income grew 39.5% yoy to Rs103m (our estimate: Rs110m).

Key positives: Strong container cargo volumes.

Key negatives: Lower realizations and lower bulk cargo volumes.

Impact on financials: Earnings upgrade by 4.9% in FY19E due to strong growth in container cargo

Valuations & view

GPPL has shown a strong recovery in container cargo volumes in 9MFY19. However, the adverse cargo mix has led to lower average realization which would likely impact the company’s long term profitability. Also, bulk and liquid volumes continue to remain weak and impact the overall earnings. The stock meanwhile trades at 19.7x/17.1x FY19E/FY20E earnings and at EV/EBITDA of 9.4x/8.1x on FY19E/FY20E, respectively. We maintain our Neutral rating on the stock with a revised DCF based price target of Rs95. Our price target revision mainly reflects a downward revision in our medium term growth expectations for cargo.