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Gujarat Pipavav Port's Q3FY18 results (Neutral) - Improved outlook for cargo growth

Q3FY18 result highlights

• GPPL’s Q2FY18 PAT declined 22.5%yoy to Rs500m, above estimate of Rs461m. Container cargo and liquid cargo numbers have improved both yoy and mom basis.
• Revenue declined 3.8%yoy to Rs1.6bn (in line). However, the reported realization declined 10.6%yoy to Rs521/MT below our estimate of Rs542/MT due to one off rebate of ~Rs79m and adverse cargo mix. Average realization was also impacted due to 4%yoy INR appreciation against the USD. Adjusted for the one off rebate, realization declined 6.3%yoy to Rs546/MT.   
• EBITDA declined 9.3%yoy to Rs947m (est: Rs890m) and EBITDA margin declined 350bp yoy to 58.2% (est: 55.6%). EBITDA margin adjusted for one off rebate stood at 60.1%. Other income declined 31.9%yoy to Rs74m (est: Rs100m) due to absence of dividend income from PRCL (Rs38m LY).
• Container cargo volumes grew 3.6%yoy to 173k TEUs (est: 167k TEUs) led by higher reefer cargo and local cargo volumes of 68k TEUs. Bulk cargo volumes grew 9.6%yoy to 550k MT (in line) led by improvement in coal cargo volumes, the sustainability of which is however not certain at present. Liquid cargo volumes saw a sharp growth of 40.9%yoy to 324k MT (est: 230k MT) driven by higher LPG volumes and were the highest ever quarterly volumes.
• GPPL has added two services in Q4FY18, (i) CIMEX 2N (FI3) operated by consortium of CMA-CGM, Maersk & OOCL commenced service on Jan 15, 2018 & (ii) Consortium of Wan Hai & Cosco has launched China India (CI 6) service which will commence wef Feb 2018. However, ME1 service has discontinued its Pipavav call wef Jan 12, 2018 (had started in Jun-17).

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

Key negatives: Discontinuation of ME1 service.

Impact on financials: Upgrade in PAT by 3.8%/2.4% in FY18E/19E due to higher volumes. Introduced FY20E earnings.

Valuations & view

The cargo outlook remains buoyant and should drive improved earnings starting Q4FY18 and in FY19. 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. While we expect improvement in near term earnings due to client additions, but we believe the current stock price factors this recovery. The stock trades at 25.5x/21.2x FY19E/FY20E earnings and at EV/EBITDA of 13.2x/11x on FY19E/FY20E, respectively. We maintain our Neutral rating with a DCF based price target of Rs157.