Gujarat Pipavav Port: Extrapolation of growth story fraught with risks :: Kotak Sec,report

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Extrapolation of growth story fraught with risks. GPPV’s CMP implies strong
growth assumptions (14% decadal volume CAGR, concessional royalty through CY2048).
This extends current growth momentum beyond the key milestones of (1) JNPT’s northbound
traffic getting absorbed by Gujarat’s ports by CY2019 and (2) royalty reset in
CY2028. We revise our TP to `200 from `160 to build (1) extension of the concession
to CY2048 at 12.5% royalty (yields 17% IRR) and (2) roll-over to December 2016. We
note downside to our estimates (volumes, realization, margin, capex). We also highlight
near-term headwinds for GPPV from (1) weak manufacturing exports (have stagnated in
4QCY14) and (2) constrained terminal capacities in the north for ICD imports.

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Sectoral growth driven by imports; exports start to stagnate
Container volumes at major ports grew 12% yoy in 3QFY15, partly on a low base (JNPT strike in
October-November 2013). Data from the Department of Commerce (in US$ terms) clarifies that
the growth in container volumes is driven by containerizable imports (up 11% yoy), offsetting
weakness in containerzable exports (flat yoy). Weak exports are driven by declining cotton
exports, which are expected to remain sedate in the current season (starting from August
2014).
Limited opportunity available from JNPT can sustain outperformance for another five years
About 1.4 mn TEUs of JNPT’s container volumes are transported by rail (proxy for north-bound
traffic). Absorption of this opportunity can support outperformance for Gujarat’s ports (GPPV,
Mundra, Hazira) for the next five years. Beyond 2019, JNPT would have the capacity (handling,
evacuation) to contest more keenly, which may help it to reverse its prior business losses. GPPV
would by then be competing with a serious substitute in Hazira (rail connectivity, better
location). The CMP negates these developments and builds 15% decadal volume CAGR.
Unfavorable reset of royalty, capacity constraints and upside risks to capex cause concern
 Royalty reset. We build in extension of the concession until CY2048 at 10% higher royalty
beyond CY2028. At 12.5% royalty, GPPV would earn a fair ~17% IRR on its `10 bn equity
(spread over CY1995-2009). An increase in royalty by 5% takes 5% off our target price.
 Business. We expect GPPV’s capacity of about 90 mn tons to be hit by CY2040 (see Exhibit 6),
limiting upside from better-than-expected growth. This by itself requires GPPV to grow twice as
fast as Mundra. Our 5% realization growth assumption (through CY2048), will face headwinds
from (1) overcapacity in global container shipping and (2) foreign currency debt (assumed to
fund capex at 6% cost) eroding the benefit of US$ appreciation.
 Capex. We build capex of `10 bn per mn TEU based on GPPV’s current capex plan and some
buffer for dredging cost. A consolidated global dredging industry coming out of a phase of
overcapacity poses upside risks to our estimate.

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily15012015bc.pdf