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Robust volume growth: Post enhancement and alignment of Port infrastructure,
bulk volumes have doubled between CY09-07, while container volumes have
been witnessing strong growth since CY09 at Gujarat Pipavav Port (GPPV). With
total and container volumes at Indian ports projected to grow at 10% and 14%
CAGR, respectively during FY12-20 and with capex at major ports delayed, GPPV
sits on a large opportunity. Container and bulk volumes at the company are
expected to grow at 24.2% and 11.3% CAGR, respectively, in the CY09-15 period.
Strong capacity build-up: GPPV plans to use its 2km waterfront for further
expansion. In the first phase, land-side container capacity will be increased to
match quay-side capacity of 1.2m TEUs from the existing 0.6m TEUs, post which,
further capex will be undertaken for bulk and container cargo.
Operating leverage to kick in: Due to high proportion of fixed costs, increase in
volumes will lead to operating leverage kicking in. Besides, with GPPV meeting
the minimum traffic requirement of its agreement with Pipavav Rail Corporation
(PRCL), there shall be no penalties. Margins are likely to grow from 20.1% in
CY09 to 55.4% in CY13.
Interest costs to reduce: GPPV has repaid Rs3.1bn of debt from its IPO funds,
leading to debt reducing to Rs7.9bn, translating to DER of 1.07 as against 3.9
(pre-IPO). Further, debt has been refinanced from the earlier 14% to 11%,
reducing interest burden.
Valuations: We have valued the port for its 30-year concession on a DCF basis.
The PV of FCF, using a WACC of 13.5%, stands at Rs28bn, while equity value,
post debt, stands at Rs22.8bn, translating to Rs54/share. Further, we have
valued the possibility of a 20-year extension, assigning a 50% probability to the
same which translates to Rs11/share. SOTP of both gives us a value of
Rs65/share. We rate the stock ‘Accumulate’.
Investment Highlights
Port has been witnessing strong growth in volumes
GPPV has witnessed a strong growth in bulk and container volumes over the last few
years. Between CY07–09, bulk volumes have doubled from 1.66m tonnes to 3.37m
tonnes and during 9MCY10, volumes stood at 2.6m tonnes as against 2.4m tonnes in
9MCY09.
Container volumes have witnessed a strong growth. However, a major spurt in
volumes within this segment has been during CY08-09, where volumes grew by 64%
to 321,400 TEUs. The YoY growth in 9MCY10 volumes has been 53% to 323,858
TEUs.
Port capacities to steadily expand
In the first phase, GPPV is in the process of expanding its land-side container
capacity, which currently stands at 0.6m TEUs, to match the quay-side capacity
which is 1.2-1.3m TEUs. The company is likely to entail expenditure of Rs0.7bn for
this which shall be funded through the IPO proceeds. Currently, there are four
operational berths catering to container and bulk cargo (Berth 1 & 2 are exclusive
bulk berths, Berth 3 is a multipurpose berth, while Berth 4 is a container berth) and
one LPG berth.
In the second phase of expansion, GPPV is looking at utilizing its 2km of remaining
waterfront. The plan is to add another container Berth (Berth 5) next to Berth 4 and
shift the LPG berth on the other side of Berth 5. By doing this, the company shall free
up the multipurpose berth which is currently being used for container and bulk cargo
exclusively for bulk cargo (Coal and Fertilizers). This shall take the capacity of bulk
cargo up to 8-10m tonnes and gradually up to 12m tonnes. Further, the company
also plans to add another small (100m) bulk berth ahead of Berth 1. This will result in
a total of four bulk berths with a total length of ~800m. Gradually, the capacity is
likely to extend to 20m tonnes for bulk cargo handling.
Addition of the Berth 5 is likely to increase container capacities. However, the
conversion of the multipurpose berth to an exclusive bulk terminal will conversely
reduce container capacities as well. Overall, we expect net capacities to stand at
~1.7m TEUs by CY15. Addition in container berths, post this, is likely to take place by
the side of Berth 5, with the LPG berth being shifted on the other side of the last
container berth.
We expect the company to entail a capex of ~Rs15bn on the second phase of
expansion which shall result in 20m tonnes of bulk capacity and 2.5m TEUs of
container capacity.
Strong volume growth expected led by container cargo in India
Strong growth in container volumes in India is likely to drive volumes at the Pipavav
port. With container volumes expected to grow at a CAGR of 15% on the West coast
of India and with Jawaharlal Nehru Port Trust (JNPT) being choked, Pipavav and
Mundra are likely to witness a spill over. With the expansion in capacities at Pipavav,
we expect container volumes to grow at 24.4% CAGR over CY09-15 from 0.32m TEUs
to 1.91m TEUs.
Bulk volumes are also expected to grow; however, at a slower pace of 11.3% CAGR
between CY09-FY15. Bulk volumes in CY09 and 9MCY10 stood at 3.37m and 2.6m
tonnes, respectively and are expected to grow to 6.41m tonnes by CY15.
Coal requirements are likely to increase with upcoming power plants in the region.
Videocon is setting up a 1200MW thermal coal-based power plant in the region. This
is planned over two phases, whereby, the first phase is likely to commence
operations over the next three years. Total coal requirement for the 1200MW power
plant is estimated at ~6m tonnes p.a.
GPPV - a beneficiary of increasing market share of non-major ports
India‘s port volumes have grown at a CAGR of 9% in the last decade. However, nonmajor
ports have gained significant market share in this period, accounting for 34%
of the total port volumes in 2010 compared to 24% in 2001. The primary reason for
this has been the inordinate delay in capacity expansion at major ports. Capacity
utilizations at major ports have remained at levels of >90% in the last few years.
Optimum level of capacity utilization, as can be seen the world over, is ~70%. Any
level higher than this leads to deterioration of operating performance parameters.
For instance, average turnaround time is 1.77 days for containerships at major ports
compared to 0.5 days for Port of Singapore. On the contrary, non-major ports have
invested in creating infrastructure at par with international standards and are
operating at ~70% capacity utilization.
This has resulted in cargo traffic growing at a CAGR of 13% at non-major ports
compared to 7% for major ports in the last decade.
Non-major ports are expected to continue to benefit, going forward, from the
problems plaguing major ports and as a result, non-major ports are expected to
grow at a significantly faster pace than the growth in port traffic on India’s shores.
As per the Maritime vision document 2020, volumes at non-major ports are
expected to grow at a CAGR of 14% in FY12-20 compared to CAGR of 8% for major
ports. This would be on the back of rapid capacity expansion at non-major ports over
the next decade, resulting in non-major ports accounting for 53% of the total port
capacity in the country by FY20 from ~40% now.
Currently, JNPT, Mundra and Pipavav cater to container trade originating from the
North-western hinterland. JNPT has seen little growth in container volumes owing to
capacity constraints at the port, leading to traffic diverting to Mundra and Pipavav.
Both Mundra and Pipavav have grown at a rapid pace over the last three years, with
H1FY11 growth of 34% and 31%, respectively, compared to a 6% growth in volumes
at JNPT.
The trend of traffic overflow from JNPT is expected to continue as the planned
fourth container terminal (capacity of 4m TEUs) at the port is yet to be bid out and is
expected to come on stream only in H2FY14.
Rapid growth in container volumes in the country to drive volume
growth at GPPV
According to the Maritime Agenda 2020, container volumes at India’s ports are
expected to grow at a CAGR of 14% in the period FY12-20.
Growth in container volumes at non-major ports (i.e. Mundra and Pipavav) in
Gujarat is expected to be at a CAGR of 16% in the period FY12-20. GPPV is well
positioned to benefit from the growing container volumes at India’s ports.
Additional shipping lines contributing to revenues
Additional shipping lines have been calling at the port which gives us surety that
volumes are likely to expand, going forward. Currently, 20 lines have been calling at
the port, of which five lines have started operations over the last 12 months.
Besides, shipping lines are also increasing the number of services from Pipavav.
Increase in shipping lines gives surety to volumes, especially in container trade, since
container vessels follow a set route. Hence, if a particular port falls on that route,
volumes will also follow.
Currently A.P. Moller - Maersk (APMM) contributes to ~50% in volume terms and
~29-30% in value terms, thus, providing certainty to the port’s volumes. Maersk and
Safmarine have signed a MOU to use the GPPV as the exclusive port of call in Gujarat
up to March 31, 2012.
Shipping lines operating at the port for more than a year
Maersk Line Mitsui OSK Lines
Safmarine Container Lines Samudera Shipping line
Shreyas Shipping & Logistics Hyundai Merchant Marine India
SCI Emirates Shipping Line
Malaysia International Shipping Corp Orient Overseas Container Line
United Arab Shipping Co Jindal
Evergreen Regional Container lines
STX Pan Ocean
Shipping lines added in the last 12 months
CMA CGM Agencies Mediterranean Shipping Company
Hamburg Wan Hai Shipping
Yang Ming Line
Removal of infrastructure hurdles to boost volumes
In the 2006-09 period, GPPV has enhanced port infrastructure significantly to aid
volume growth. The company has undertaken capital dredging at the port and has,
thereby, increased the port draft from 12m to 14.5m. Besides, it has also installed 18
rubber gantry cranes and five post-panamax quay cranes to facilitate port
operations. Additional railway sidings have been commissioned with the addition of
2km of internal railway tracks. Jetty no 4 has been commissioned and the
modification of Bulk Liquid jetty has been completed.
All these factors have resulted in strong growth of container and bulk traffic in the
2008-10 period contrary to the 2006-08 period where volumes remained subdued.
Key Events/ Milestones
Month Year Key Event/ Milestone
Sept 1998 Concession agreement entered into with GMB and GoG
May 2000 Incorporation of PRCL for dedicated line from Surendranagar to Pipavav
June 2001 Concession agreement entered into between PRCL and Indian Railways
June 2001 APMM group acquires 13.5% stake in the company as a strategic investment
April 2002 Commercial operations commenced
May 2003 Broad gauge rail connectivity from Surendranagar to Pipavav commissioned
Aug 2004 Three panamax quay cranes commissioned
April 2005 APM Terminal along with financial investors acquire SKIL's stake in the company
March 2006 First port to receive Double stack container from ICD Kanakpura (Jaipur)
May 2006 Phase 1 capital dredging completed enabling 12.5m vessel acceptance draft
May 2006 Mainline container vessel services commenced
Nov 2006 Eight rubber-tyred gantry cranes commissioned
Dec 2007 Environmental friendly coal yard commissioned
Jan 2008 Three post panamax quay cranes commissioned
Jan 2008 Ten eco friendly rubber-tyred gantry cranes commissioned
April 2009 Two post panamax quay cranes commissioned
May 2009 Construction of Jetty no 4, modification of bulk liquid jetty completed
May 2009 Phase II capital dredging completed enabling vessel acceptance draft of 14m.
July 2009 Development of 2.6 hectare of paved container yards completed
Oct 2009 Three railway sidings completed adding about 2km of internal tracks
Feb 2010 Development of 2.4 hectare of paved bulk storage yard completed
Source: Company RHP
The port is blessed with natural breakwater from two islands which enables it to
operate in all weather conditions (incl. monsoon) throughout the year. Currently,
four cargo berths with a total length of 1075m are operational, two bulk cargo
berths, one multipurpose berth (bulk + container) and one container berth. In
addition, there is liquid berth of 65m length to handle LPG cargo.
Bulk cargo at the port primarily consists of coal and fertilizers, with adequate
infrastructure support
In aggregate, the infrastructure facilities ensure strong operating performance for
the port. For instance, the vessel turnaround time for the container berth is 10.5
hours and crane productivity is 30.85 moves per hour, which is comparable to
international standards.
Savings from PRCL penalty to boost profitability
PRCL operates a 269km broad-gauge railway line between GPPV and Surendranagar,
carrying almost 35% of the container volumes out of the port. GPPV had entered
into a traffic guarantee agreement with PRCL in January 2003, whereby, the
guaranteed traffic was 1mt in the first year, 2mt in the second year and 3mt from
the third year onwards up to 2034. On account of GPPV’s inability to match the
guaranteed volumes, the company has been paying penalties till Q1CY10. Till date,
the company has provided Rs1,437m as penalties for the shortfall in traffic as per the
agreement and has paid Rs1,202m towards the same.
Going forward, we are quite confident of the company achieving its traffic
obligation, which shall result in substantial savings for the company and hence,
boost EBITDA margins. PRCL penalty, as a percentage of revenues, stood at 21% in
CY06 and declined to 16% and 5% in CY08 and CY09, respectively.
GPPV owns 38.8% in PRCL and has invested Rs830m till March 31, 2010. Currently,
the net worth of PRCL stands below the cost.
Upside possibilities from Aegis expansion
GPPV has entered into an MOU with Aegis Logistics to lease 75 acres of land to Aegis
for developing a tankage facility. Aegis Gas already holds about 25 acres of land at
the port where it plans to develop 70k kl to 100k kl tankage facility. Liquid volumes
at the port currently don’t contribute materially to the revenues. However, if the
Aegis expansion materializes, revenues from liquid cargo could contribute ~10-15%
of revenues for the port over a period of time.
Financials & Valuation
Volumes to drive strong revenue growth
With the increase in container and bulk volumes, we expect strong revenue growth
of 18.1% CAGR in the CY09-13 period. Revenues which stood at Rs2.19bn in CY09 are
expected to almost triple in four years to Rs5.9bn
Margin expansion on back of increasing volumes, absence of
penalties
On account of a high proportion of fixed costs in the port business, we expect
operating leverage to kick in with increase in volumes. Besides, with the company
meeting the minimum traffic requirement of its agreement with PRCL, there shall be
no penalties which were earlier causing a strain on margins. Margins are likely to
grow from 20.1% in CY09 to 55.4% in CY13. For 9MCY10, margins have already
started witnessing an expansion to 37.8% for the period.
Margins for Mundra Port & SEZ also stand at ~70%, which adjusting for the SEZ sales,
would be to the tune of ~65%. Hence, we believe our margin estimates do not have
a significant downside risk.
Translating to strong PAT growth
Strong growth in revenues on account of increase in volumes, coupled with margin
expansion, is likely to result in the company turning profitable from CY11 onwards.
GPPVs profits are expected to grow at 75.8% CAGR in the CY11-13 period.
Interest burden to reduce, healthy balance sheet position
Post the raising of Rs5bn through an IPO, GPPV used Rs3.1bn for repaying its debt
which stood at Rs11.04bn on March 31, 2010. The DER, which stood at 3.9:1 pre-IPO,
came down to 1.07:1. The balance sheet being healthy, gives the company flexibility
to invest in further capex. Besides, debt repayment for GPPV starts at the end of
CY12, panning over 12 years and ballooning gradually.
Further, the debt has been refinanced from the earlier 14% to 11% which
substantially reduces the interest burden.
Minuscule capex required to double container capacities
The first phase of expansion, which involves doubling of container capacities,
requires an extremely small amount of capex of Rs0.7bn which shall be funded from
IPO proceeds. This phase involves only increase in land-side container capacity to
1.2m TEUs as the quay-side capacity is already in place.
Valuing GPPV’s 30 year concession on DCF basis
Port valued at Rs54: We have valued the port up to 2028, the end of its concession
period on DCF basis. The PV of the FCF, using a WACC of 13.5%, stands at Rs28bn,
while the equity value, post deducting the debt, stands at Rs22.8bn, translating to
Rs54/share.
Key Assumptions for DCF Analysis
13% CAGR growth in bulk volumes between CY09-CY13, 8% CAGR growth till
2020, 5% growth post that till end of the concession
28.8% CAGR growth in container volumes between CY09-13, 16% growth up to
CY16, 5% CAGR growth till the end of the concession in 2028
3% annual increase in average realizations
Capex of Rs15.6bn for additional container and bulk capacities
Maintenance capex of Rs0.5bn from CY15 onwards, increasing by 2% annually
WACC at 13.5%
Possible extension of concession by 20 years: There is a possibility of the concession
being extended by 20 years as several concessions signed by the government, post
signing of GPPV’s agreement, contains an option of a 20-year extension. Besides, the
company will be the best placed to continue operating post 2028.
We have valued the extension of the agreement at Rs22/share and assign a 50%
probability to the same.
Target price of Rs65; ‘Accumulate’: Our target price is based on the value of the 30
year concession agreement valued at Rs54 as well as 50% of the value of the
concession extension, i.e. Rs11, which translated to Rs65/share. We rate the stock
‘Accumulate’.
Comparison to Mundra: GPPV trades at a discount to MPSEZ on most valuation
parameters, other than on the basis of PER, after adjusting for the value of the SEZ
and other assets for MPSEZ.
Although on the basis of P/B, GPPV looks far more attractive, RoE’s for MPSEZ more
attractive on account of a) 100% Tax Holiday enjoyed as it located within an SEZ as
compared to MAT paid by GPPV, b) Higher margins enjoyed by MPSEZ being an
established port and due to its scale and c) lower interest expense for MPSEZ.
Comparison with global peers
Scarcity value: GPPV is a listed company in India which provides the investor with an
opportunity to invest in a pure port asset. One would, thereby, ascribe a certain
scarcity premium to the stock on account of the same.
About the company
First Indian private sector port
GPPV is the operator of APM Terminals, Pipavav in Gujarat and strategically located
near the entrance of the Gulf of Khambhat. It is a multi-user and multi-cargo facility,
with four berths to handle the bulk and containerized cargo and one LPG berth. The
main focus is currently on the container and bulk side, where the capacity stands at
0.6m TEUs on the land-side and 1.3m TEUs on the quay-side for container cargo and
5m tonnes for bulk cargo.
GPPV has the exclusive right to develop and operate APM Terminals, Pipavav under a
30-year Concession Agreement on September 30, 1998 and started its commercial
port operations in April 2002.
Strong locational advantages
Strategically located on maritime route
APM Terminals, Pipavav is an all-weather port and is protected by two islands, which
acts as a natural breakwater maximizing port safety. Strategically located near the
entrance of the Gulf of Khambhat, APM terminals, Pipavav, is on the main maritime
trade route catering to exim cargo to the Middle East, Asia, Africa, United States,
Europe and other international destinations.
Deep draft
The port has a well-developed port infrastructure, with a channel length of 4550
metres and draft of 14.5 metres, which implies that the port is capable of handling
80,000DWT vessels.
Well connected by road and rail
APM Terminals, Pipavav is well-connected via road and rail to Northern and Northwestern
India. A 269km dedicated broad gauge railway link maintained by PRCL,
which is 38.8% owned by the company, connects APM Terminals, Pipavav to the
Indian Railways network. India’s first double stack container rake service was
provided by PRCL and started operations between APM Terminals, Pipavav and
Inland Container Depot at Kanakpura (Jaipur) which has reduced costs and
evacuation time.
Further, it is connected to the National Highway 8E through a 10km long four-lane
road link.
Caters to a large hinterland
GPPV caters to the Northern and North-western hinterland which generates nearly
2/3rds of India’s containerized cargo. With the strong growth being experienced in
these areas, coupled with capacity constraints of ports on the West coast, the
company is likely to be a strong beneficiary. Another advantage would be shorter
transit times as compared to Mumbai for north-bound cargo.
Extensive support infrastructure
To facilitate smooth handling of different types of cargo, the port has extensive
support infrastructure which includes container yards, yard handling equipment,
quay cranes, rubber-tyred gantry cranes, paved rail sidings, warehouses and others.
Distance advantage compared to JNPT
GPPV has a distance advantage of 170-300km from various northern ICDs as
compared to JNPT, thereby, resulting in reduced transportation costs and time for
importers and exporters. Savings in transportation cost from GPPV v/s JNPT for
exporters and importers would be to the tune of ~10-15%.
Strong benefits from experienced promoters
GPPV is promoted by APM Terminals, the second largest container terminal operator
in the world. APM Terminals handled 57m TEUs in 2009 at the 50 terminals it
operates across the world. In addition to benefiting from the parent’s experience,
GPPV also gains from increased bargaining power with suppliers in getting
competitive rates for purchase of port equipment.
GPPV’s largest customers, Maersk and Safmarine, are part of the APMM group. The
company benefits immensely from this relationship with its customer, as Maersk is
the largest shipping line in the world. GPPV derived 26% of revenues from the
APMM group in 2009 and more than 50% of its cargo volumes from the group.
Key management personnel
GPPV benefits from the parent APMM group’s global presence, whereby, the
management team has had an international experience on various assignments of
the APMM group.
Mr. Prakash Tulsiani, Managing Director: Mr. Tulsiani has a vast experience in the
business. In his last assignment, he was heading Gateway Terminals as the COO from
2005-09. He has been with the APMM group since 1993.
Mr. Hariharan Iyer, CFO: He has held various positions in finance in the APMM group
with his last assignment as the CFO of Maersk Line- India and South Asia. He has over
25 years of experience in finance.
Mr. Ravi Gaitonde, Chief Operating Officer: Mr. Gaitonde has worked in several
assignments with the APMM group after he joined Maersk India in 1990. He has over
28 years of experience in the shipping industry.
Concerns
Risks of an economic slowdown
Port volumes are dependent on trade growth which is fuelled by a growth in the
economy. A slowdown in economic activity will affect India’s trade and
consequently, port volumes, as seen in the economic crisis of 2009, where we saw a
decline in world trade and a sharp slowdown in volume growth at India’s shores.
With the strong recovery in trade in 2010, GPPV has been witnessing a strong
growth in volumes. However, a slowdown in economic growth remains a risk to the
expected growth at the port.
Concentration of volumes from the APMM group
APMM group accounts for >50% of volumes at the port. Although, Maersk is the
largest shipping line in the world, dependence on the group is fairly high. However,
the company on the other hand, has added five new shipping lines in the last one
year which would help diversify its customer base and mitigate this risk.
Competition from nearby ports
Mundra is direct competition for Pipavav as it has large capacities for container and
bulk cargo. Both ports attract spill over traffic from JNPT. However, the growing pie
of container traffic from the North-western hinterland presents an opportunity to
both ports to continue to grow at a rapid pace.
Mundra has also signed a sub-concession agreement with Hazira, where it is setting
up non-LNG facilities, including bulk, liquid and container handling. However, this is
likely to take 2-3 years.
Besides these, on the container side in the west coast, no Greenfield ports are
planned. Hence, no Greenfield capacity is expected to come up in the near future.
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Robust volume growth: Post enhancement and alignment of Port infrastructure,
bulk volumes have doubled between CY09-07, while container volumes have
been witnessing strong growth since CY09 at Gujarat Pipavav Port (GPPV). With
total and container volumes at Indian ports projected to grow at 10% and 14%
CAGR, respectively during FY12-20 and with capex at major ports delayed, GPPV
sits on a large opportunity. Container and bulk volumes at the company are
expected to grow at 24.2% and 11.3% CAGR, respectively, in the CY09-15 period.
Strong capacity build-up: GPPV plans to use its 2km waterfront for further
expansion. In the first phase, land-side container capacity will be increased to
match quay-side capacity of 1.2m TEUs from the existing 0.6m TEUs, post which,
further capex will be undertaken for bulk and container cargo.
Operating leverage to kick in: Due to high proportion of fixed costs, increase in
volumes will lead to operating leverage kicking in. Besides, with GPPV meeting
the minimum traffic requirement of its agreement with Pipavav Rail Corporation
(PRCL), there shall be no penalties. Margins are likely to grow from 20.1% in
CY09 to 55.4% in CY13.
Interest costs to reduce: GPPV has repaid Rs3.1bn of debt from its IPO funds,
leading to debt reducing to Rs7.9bn, translating to DER of 1.07 as against 3.9
(pre-IPO). Further, debt has been refinanced from the earlier 14% to 11%,
reducing interest burden.
Valuations: We have valued the port for its 30-year concession on a DCF basis.
The PV of FCF, using a WACC of 13.5%, stands at Rs28bn, while equity value,
post debt, stands at Rs22.8bn, translating to Rs54/share. Further, we have
valued the possibility of a 20-year extension, assigning a 50% probability to the
same which translates to Rs11/share. SOTP of both gives us a value of
Rs65/share. We rate the stock ‘Accumulate’.
Investment Highlights
Port has been witnessing strong growth in volumes
GPPV has witnessed a strong growth in bulk and container volumes over the last few
years. Between CY07–09, bulk volumes have doubled from 1.66m tonnes to 3.37m
tonnes and during 9MCY10, volumes stood at 2.6m tonnes as against 2.4m tonnes in
9MCY09.
Container volumes have witnessed a strong growth. However, a major spurt in
volumes within this segment has been during CY08-09, where volumes grew by 64%
to 321,400 TEUs. The YoY growth in 9MCY10 volumes has been 53% to 323,858
TEUs.
Port capacities to steadily expand
In the first phase, GPPV is in the process of expanding its land-side container
capacity, which currently stands at 0.6m TEUs, to match the quay-side capacity
which is 1.2-1.3m TEUs. The company is likely to entail expenditure of Rs0.7bn for
this which shall be funded through the IPO proceeds. Currently, there are four
operational berths catering to container and bulk cargo (Berth 1 & 2 are exclusive
bulk berths, Berth 3 is a multipurpose berth, while Berth 4 is a container berth) and
one LPG berth.
In the second phase of expansion, GPPV is looking at utilizing its 2km of remaining
waterfront. The plan is to add another container Berth (Berth 5) next to Berth 4 and
shift the LPG berth on the other side of Berth 5. By doing this, the company shall free
up the multipurpose berth which is currently being used for container and bulk cargo
exclusively for bulk cargo (Coal and Fertilizers). This shall take the capacity of bulk
cargo up to 8-10m tonnes and gradually up to 12m tonnes. Further, the company
also plans to add another small (100m) bulk berth ahead of Berth 1. This will result in
a total of four bulk berths with a total length of ~800m. Gradually, the capacity is
likely to extend to 20m tonnes for bulk cargo handling.
Addition of the Berth 5 is likely to increase container capacities. However, the
conversion of the multipurpose berth to an exclusive bulk terminal will conversely
reduce container capacities as well. Overall, we expect net capacities to stand at
~1.7m TEUs by CY15. Addition in container berths, post this, is likely to take place by
the side of Berth 5, with the LPG berth being shifted on the other side of the last
container berth.
We expect the company to entail a capex of ~Rs15bn on the second phase of
expansion which shall result in 20m tonnes of bulk capacity and 2.5m TEUs of
container capacity.
Strong volume growth expected led by container cargo in India
Strong growth in container volumes in India is likely to drive volumes at the Pipavav
port. With container volumes expected to grow at a CAGR of 15% on the West coast
of India and with Jawaharlal Nehru Port Trust (JNPT) being choked, Pipavav and
Mundra are likely to witness a spill over. With the expansion in capacities at Pipavav,
we expect container volumes to grow at 24.4% CAGR over CY09-15 from 0.32m TEUs
to 1.91m TEUs.
Bulk volumes are also expected to grow; however, at a slower pace of 11.3% CAGR
between CY09-FY15. Bulk volumes in CY09 and 9MCY10 stood at 3.37m and 2.6m
tonnes, respectively and are expected to grow to 6.41m tonnes by CY15.
Coal requirements are likely to increase with upcoming power plants in the region.
Videocon is setting up a 1200MW thermal coal-based power plant in the region. This
is planned over two phases, whereby, the first phase is likely to commence
operations over the next three years. Total coal requirement for the 1200MW power
plant is estimated at ~6m tonnes p.a.
GPPV - a beneficiary of increasing market share of non-major ports
India‘s port volumes have grown at a CAGR of 9% in the last decade. However, nonmajor
ports have gained significant market share in this period, accounting for 34%
of the total port volumes in 2010 compared to 24% in 2001. The primary reason for
this has been the inordinate delay in capacity expansion at major ports. Capacity
utilizations at major ports have remained at levels of >90% in the last few years.
Optimum level of capacity utilization, as can be seen the world over, is ~70%. Any
level higher than this leads to deterioration of operating performance parameters.
For instance, average turnaround time is 1.77 days for containerships at major ports
compared to 0.5 days for Port of Singapore. On the contrary, non-major ports have
invested in creating infrastructure at par with international standards and are
operating at ~70% capacity utilization.
This has resulted in cargo traffic growing at a CAGR of 13% at non-major ports
compared to 7% for major ports in the last decade.
Non-major ports are expected to continue to benefit, going forward, from the
problems plaguing major ports and as a result, non-major ports are expected to
grow at a significantly faster pace than the growth in port traffic on India’s shores.
As per the Maritime vision document 2020, volumes at non-major ports are
expected to grow at a CAGR of 14% in FY12-20 compared to CAGR of 8% for major
ports. This would be on the back of rapid capacity expansion at non-major ports over
the next decade, resulting in non-major ports accounting for 53% of the total port
capacity in the country by FY20 from ~40% now.
Currently, JNPT, Mundra and Pipavav cater to container trade originating from the
North-western hinterland. JNPT has seen little growth in container volumes owing to
capacity constraints at the port, leading to traffic diverting to Mundra and Pipavav.
Both Mundra and Pipavav have grown at a rapid pace over the last three years, with
H1FY11 growth of 34% and 31%, respectively, compared to a 6% growth in volumes
at JNPT.
The trend of traffic overflow from JNPT is expected to continue as the planned
fourth container terminal (capacity of 4m TEUs) at the port is yet to be bid out and is
expected to come on stream only in H2FY14.
Rapid growth in container volumes in the country to drive volume
growth at GPPV
According to the Maritime Agenda 2020, container volumes at India’s ports are
expected to grow at a CAGR of 14% in the period FY12-20.
Growth in container volumes at non-major ports (i.e. Mundra and Pipavav) in
Gujarat is expected to be at a CAGR of 16% in the period FY12-20. GPPV is well
positioned to benefit from the growing container volumes at India’s ports.
Additional shipping lines contributing to revenues
Additional shipping lines have been calling at the port which gives us surety that
volumes are likely to expand, going forward. Currently, 20 lines have been calling at
the port, of which five lines have started operations over the last 12 months.
Besides, shipping lines are also increasing the number of services from Pipavav.
Increase in shipping lines gives surety to volumes, especially in container trade, since
container vessels follow a set route. Hence, if a particular port falls on that route,
volumes will also follow.
Currently A.P. Moller - Maersk (APMM) contributes to ~50% in volume terms and
~29-30% in value terms, thus, providing certainty to the port’s volumes. Maersk and
Safmarine have signed a MOU to use the GPPV as the exclusive port of call in Gujarat
up to March 31, 2012.
Shipping lines operating at the port for more than a year
Maersk Line Mitsui OSK Lines
Safmarine Container Lines Samudera Shipping line
Shreyas Shipping & Logistics Hyundai Merchant Marine India
SCI Emirates Shipping Line
Malaysia International Shipping Corp Orient Overseas Container Line
United Arab Shipping Co Jindal
Evergreen Regional Container lines
STX Pan Ocean
Shipping lines added in the last 12 months
CMA CGM Agencies Mediterranean Shipping Company
Hamburg Wan Hai Shipping
Yang Ming Line
Removal of infrastructure hurdles to boost volumes
In the 2006-09 period, GPPV has enhanced port infrastructure significantly to aid
volume growth. The company has undertaken capital dredging at the port and has,
thereby, increased the port draft from 12m to 14.5m. Besides, it has also installed 18
rubber gantry cranes and five post-panamax quay cranes to facilitate port
operations. Additional railway sidings have been commissioned with the addition of
2km of internal railway tracks. Jetty no 4 has been commissioned and the
modification of Bulk Liquid jetty has been completed.
All these factors have resulted in strong growth of container and bulk traffic in the
2008-10 period contrary to the 2006-08 period where volumes remained subdued.
Key Events/ Milestones
Month Year Key Event/ Milestone
Sept 1998 Concession agreement entered into with GMB and GoG
May 2000 Incorporation of PRCL for dedicated line from Surendranagar to Pipavav
June 2001 Concession agreement entered into between PRCL and Indian Railways
June 2001 APMM group acquires 13.5% stake in the company as a strategic investment
April 2002 Commercial operations commenced
May 2003 Broad gauge rail connectivity from Surendranagar to Pipavav commissioned
Aug 2004 Three panamax quay cranes commissioned
April 2005 APM Terminal along with financial investors acquire SKIL's stake in the company
March 2006 First port to receive Double stack container from ICD Kanakpura (Jaipur)
May 2006 Phase 1 capital dredging completed enabling 12.5m vessel acceptance draft
May 2006 Mainline container vessel services commenced
Nov 2006 Eight rubber-tyred gantry cranes commissioned
Dec 2007 Environmental friendly coal yard commissioned
Jan 2008 Three post panamax quay cranes commissioned
Jan 2008 Ten eco friendly rubber-tyred gantry cranes commissioned
April 2009 Two post panamax quay cranes commissioned
May 2009 Construction of Jetty no 4, modification of bulk liquid jetty completed
May 2009 Phase II capital dredging completed enabling vessel acceptance draft of 14m.
July 2009 Development of 2.6 hectare of paved container yards completed
Oct 2009 Three railway sidings completed adding about 2km of internal tracks
Feb 2010 Development of 2.4 hectare of paved bulk storage yard completed
Source: Company RHP
The port is blessed with natural breakwater from two islands which enables it to
operate in all weather conditions (incl. monsoon) throughout the year. Currently,
four cargo berths with a total length of 1075m are operational, two bulk cargo
berths, one multipurpose berth (bulk + container) and one container berth. In
addition, there is liquid berth of 65m length to handle LPG cargo.
Bulk cargo at the port primarily consists of coal and fertilizers, with adequate
infrastructure support
In aggregate, the infrastructure facilities ensure strong operating performance for
the port. For instance, the vessel turnaround time for the container berth is 10.5
hours and crane productivity is 30.85 moves per hour, which is comparable to
international standards.
Savings from PRCL penalty to boost profitability
PRCL operates a 269km broad-gauge railway line between GPPV and Surendranagar,
carrying almost 35% of the container volumes out of the port. GPPV had entered
into a traffic guarantee agreement with PRCL in January 2003, whereby, the
guaranteed traffic was 1mt in the first year, 2mt in the second year and 3mt from
the third year onwards up to 2034. On account of GPPV’s inability to match the
guaranteed volumes, the company has been paying penalties till Q1CY10. Till date,
the company has provided Rs1,437m as penalties for the shortfall in traffic as per the
agreement and has paid Rs1,202m towards the same.
Going forward, we are quite confident of the company achieving its traffic
obligation, which shall result in substantial savings for the company and hence,
boost EBITDA margins. PRCL penalty, as a percentage of revenues, stood at 21% in
CY06 and declined to 16% and 5% in CY08 and CY09, respectively.
GPPV owns 38.8% in PRCL and has invested Rs830m till March 31, 2010. Currently,
the net worth of PRCL stands below the cost.
Upside possibilities from Aegis expansion
GPPV has entered into an MOU with Aegis Logistics to lease 75 acres of land to Aegis
for developing a tankage facility. Aegis Gas already holds about 25 acres of land at
the port where it plans to develop 70k kl to 100k kl tankage facility. Liquid volumes
at the port currently don’t contribute materially to the revenues. However, if the
Aegis expansion materializes, revenues from liquid cargo could contribute ~10-15%
of revenues for the port over a period of time.
Financials & Valuation
Volumes to drive strong revenue growth
With the increase in container and bulk volumes, we expect strong revenue growth
of 18.1% CAGR in the CY09-13 period. Revenues which stood at Rs2.19bn in CY09 are
expected to almost triple in four years to Rs5.9bn
Margin expansion on back of increasing volumes, absence of
penalties
On account of a high proportion of fixed costs in the port business, we expect
operating leverage to kick in with increase in volumes. Besides, with the company
meeting the minimum traffic requirement of its agreement with PRCL, there shall be
no penalties which were earlier causing a strain on margins. Margins are likely to
grow from 20.1% in CY09 to 55.4% in CY13. For 9MCY10, margins have already
started witnessing an expansion to 37.8% for the period.
Margins for Mundra Port & SEZ also stand at ~70%, which adjusting for the SEZ sales,
would be to the tune of ~65%. Hence, we believe our margin estimates do not have
a significant downside risk.
Translating to strong PAT growth
Strong growth in revenues on account of increase in volumes, coupled with margin
expansion, is likely to result in the company turning profitable from CY11 onwards.
GPPVs profits are expected to grow at 75.8% CAGR in the CY11-13 period.
Interest burden to reduce, healthy balance sheet position
Post the raising of Rs5bn through an IPO, GPPV used Rs3.1bn for repaying its debt
which stood at Rs11.04bn on March 31, 2010. The DER, which stood at 3.9:1 pre-IPO,
came down to 1.07:1. The balance sheet being healthy, gives the company flexibility
to invest in further capex. Besides, debt repayment for GPPV starts at the end of
CY12, panning over 12 years and ballooning gradually.
Further, the debt has been refinanced from the earlier 14% to 11% which
substantially reduces the interest burden.
Minuscule capex required to double container capacities
The first phase of expansion, which involves doubling of container capacities,
requires an extremely small amount of capex of Rs0.7bn which shall be funded from
IPO proceeds. This phase involves only increase in land-side container capacity to
1.2m TEUs as the quay-side capacity is already in place.
Valuing GPPV’s 30 year concession on DCF basis
Port valued at Rs54: We have valued the port up to 2028, the end of its concession
period on DCF basis. The PV of the FCF, using a WACC of 13.5%, stands at Rs28bn,
while the equity value, post deducting the debt, stands at Rs22.8bn, translating to
Rs54/share.
Key Assumptions for DCF Analysis
13% CAGR growth in bulk volumes between CY09-CY13, 8% CAGR growth till
2020, 5% growth post that till end of the concession
28.8% CAGR growth in container volumes between CY09-13, 16% growth up to
CY16, 5% CAGR growth till the end of the concession in 2028
3% annual increase in average realizations
Capex of Rs15.6bn for additional container and bulk capacities
Maintenance capex of Rs0.5bn from CY15 onwards, increasing by 2% annually
WACC at 13.5%
Possible extension of concession by 20 years: There is a possibility of the concession
being extended by 20 years as several concessions signed by the government, post
signing of GPPV’s agreement, contains an option of a 20-year extension. Besides, the
company will be the best placed to continue operating post 2028.
We have valued the extension of the agreement at Rs22/share and assign a 50%
probability to the same.
Target price of Rs65; ‘Accumulate’: Our target price is based on the value of the 30
year concession agreement valued at Rs54 as well as 50% of the value of the
concession extension, i.e. Rs11, which translated to Rs65/share. We rate the stock
‘Accumulate’.
Comparison to Mundra: GPPV trades at a discount to MPSEZ on most valuation
parameters, other than on the basis of PER, after adjusting for the value of the SEZ
and other assets for MPSEZ.
Although on the basis of P/B, GPPV looks far more attractive, RoE’s for MPSEZ more
attractive on account of a) 100% Tax Holiday enjoyed as it located within an SEZ as
compared to MAT paid by GPPV, b) Higher margins enjoyed by MPSEZ being an
established port and due to its scale and c) lower interest expense for MPSEZ.
Comparison with global peers
Scarcity value: GPPV is a listed company in India which provides the investor with an
opportunity to invest in a pure port asset. One would, thereby, ascribe a certain
scarcity premium to the stock on account of the same.
About the company
First Indian private sector port
GPPV is the operator of APM Terminals, Pipavav in Gujarat and strategically located
near the entrance of the Gulf of Khambhat. It is a multi-user and multi-cargo facility,
with four berths to handle the bulk and containerized cargo and one LPG berth. The
main focus is currently on the container and bulk side, where the capacity stands at
0.6m TEUs on the land-side and 1.3m TEUs on the quay-side for container cargo and
5m tonnes for bulk cargo.
GPPV has the exclusive right to develop and operate APM Terminals, Pipavav under a
30-year Concession Agreement on September 30, 1998 and started its commercial
port operations in April 2002.
Strong locational advantages
Strategically located on maritime route
APM Terminals, Pipavav is an all-weather port and is protected by two islands, which
acts as a natural breakwater maximizing port safety. Strategically located near the
entrance of the Gulf of Khambhat, APM terminals, Pipavav, is on the main maritime
trade route catering to exim cargo to the Middle East, Asia, Africa, United States,
Europe and other international destinations.
Deep draft
The port has a well-developed port infrastructure, with a channel length of 4550
metres and draft of 14.5 metres, which implies that the port is capable of handling
80,000DWT vessels.
Well connected by road and rail
APM Terminals, Pipavav is well-connected via road and rail to Northern and Northwestern
India. A 269km dedicated broad gauge railway link maintained by PRCL,
which is 38.8% owned by the company, connects APM Terminals, Pipavav to the
Indian Railways network. India’s first double stack container rake service was
provided by PRCL and started operations between APM Terminals, Pipavav and
Inland Container Depot at Kanakpura (Jaipur) which has reduced costs and
evacuation time.
Further, it is connected to the National Highway 8E through a 10km long four-lane
road link.
Caters to a large hinterland
GPPV caters to the Northern and North-western hinterland which generates nearly
2/3rds of India’s containerized cargo. With the strong growth being experienced in
these areas, coupled with capacity constraints of ports on the West coast, the
company is likely to be a strong beneficiary. Another advantage would be shorter
transit times as compared to Mumbai for north-bound cargo.
Extensive support infrastructure
To facilitate smooth handling of different types of cargo, the port has extensive
support infrastructure which includes container yards, yard handling equipment,
quay cranes, rubber-tyred gantry cranes, paved rail sidings, warehouses and others.
Distance advantage compared to JNPT
GPPV has a distance advantage of 170-300km from various northern ICDs as
compared to JNPT, thereby, resulting in reduced transportation costs and time for
importers and exporters. Savings in transportation cost from GPPV v/s JNPT for
exporters and importers would be to the tune of ~10-15%.
Strong benefits from experienced promoters
GPPV is promoted by APM Terminals, the second largest container terminal operator
in the world. APM Terminals handled 57m TEUs in 2009 at the 50 terminals it
operates across the world. In addition to benefiting from the parent’s experience,
GPPV also gains from increased bargaining power with suppliers in getting
competitive rates for purchase of port equipment.
GPPV’s largest customers, Maersk and Safmarine, are part of the APMM group. The
company benefits immensely from this relationship with its customer, as Maersk is
the largest shipping line in the world. GPPV derived 26% of revenues from the
APMM group in 2009 and more than 50% of its cargo volumes from the group.
Key management personnel
GPPV benefits from the parent APMM group’s global presence, whereby, the
management team has had an international experience on various assignments of
the APMM group.
Mr. Prakash Tulsiani, Managing Director: Mr. Tulsiani has a vast experience in the
business. In his last assignment, he was heading Gateway Terminals as the COO from
2005-09. He has been with the APMM group since 1993.
Mr. Hariharan Iyer, CFO: He has held various positions in finance in the APMM group
with his last assignment as the CFO of Maersk Line- India and South Asia. He has over
25 years of experience in finance.
Mr. Ravi Gaitonde, Chief Operating Officer: Mr. Gaitonde has worked in several
assignments with the APMM group after he joined Maersk India in 1990. He has over
28 years of experience in the shipping industry.
Concerns
Risks of an economic slowdown
Port volumes are dependent on trade growth which is fuelled by a growth in the
economy. A slowdown in economic activity will affect India’s trade and
consequently, port volumes, as seen in the economic crisis of 2009, where we saw a
decline in world trade and a sharp slowdown in volume growth at India’s shores.
With the strong recovery in trade in 2010, GPPV has been witnessing a strong
growth in volumes. However, a slowdown in economic growth remains a risk to the
expected growth at the port.
Concentration of volumes from the APMM group
APMM group accounts for >50% of volumes at the port. Although, Maersk is the
largest shipping line in the world, dependence on the group is fairly high. However,
the company on the other hand, has added five new shipping lines in the last one
year which would help diversify its customer base and mitigate this risk.
Competition from nearby ports
Mundra is direct competition for Pipavav as it has large capacities for container and
bulk cargo. Both ports attract spill over traffic from JNPT. However, the growing pie
of container traffic from the North-western hinterland presents an opportunity to
both ports to continue to grow at a rapid pace.
Mundra has also signed a sub-concession agreement with Hazira, where it is setting
up non-LNG facilities, including bulk, liquid and container handling. However, this is
likely to take 2-3 years.
Besides these, on the container side in the west coast, no Greenfield ports are
planned. Hence, no Greenfield capacity is expected to come up in the near future.
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