GPPL 1-9-2015 Recommendation BUY ( + ) Target Price Rs. 260 :: Kotak Securities

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We maintain BUY on Gujarat Pipavav (GPPL) despite its sharp rerating in the
past 12 months on the back of: 1) Healthy container volumes; 2)
Opportunistic dollar tariff leading to earnings CAGR of 50% over CY13-CY15
and 3) Diversification into liquid cargo and vehicle segment. Our price target
assumes that GPPL's concession agreement would extend beyond 2028 on
existing terms (valued at 240 at 24.4x CY15 EV/Ebidta). We ascribe a value of
Rs 20/share to its holdings in Pipavav Railway Corporation, which runs
dedicated trains from the port to hinterland. Recommend BUY with an
increased target price of Rs 260 (earlier Rs 188) on (1) strong growth (2)
healthy operations, (3) regular client addition, (4) improved rail operations
(5) potential liquid cargo 6) Venture into car segment.
Container volumes to remain strong for GPPL - regular client addition
Company reported strong container volume of ~584,000 TEUs (+25% YoY) in
9MCY14. We could attribute the strong increase in volumes to 1) Addition of new
lines (2) scale-up in volumes of existing lines (added over the past few quarters).It is
important to note that GPPL has been able to continually add new clients for its
container business. We estimate container volumes for the port to grow by ~17% to
0.77 mn TEUs in CY14E and by ~18% to 0.91 mn TEUs in CY15E.
Quarterly Volumes for GPPL
Segment Q3CY13 Q4CY13 Q1CY14 Q2CY14 Q3CY14
Container ( No of TEUs) 163,000 193,729 187,000 203,000 194,000
Bulk (mn tonnes) 0.99 0.54 0.69 0.82 1.01
Rail volumes (mn tonnes) 2.1 1.9 2.1 2.2 2.6
ICD volumes (TEUs) 116,320 119,001 123,361 132,797 140,486
No of rakes 715 642 665 673 665
Source: Company
Strategic location on the west coast and ability to provide seamless railway connectivity
to hinterland helps GPPL attract container volumes from the capacity constrained
congested JNPT port in Mumbai. Consequently, we estimate container volumes
for the port to grow by ~17% to 0.77 mn TEUs in CY14E and by ~18% to
0.91 mn TEUs in CY15E
Bulk volumes to remain sedate
Bulk volumes (Coal, Fertilizer & Wheat) in 9MCY14 have remained flat YOY at 2.52
lakh tonnes for GPPL. Bulk volumes continue to be weak and we are not very optimistic
(even management of GPPL) on bulk cargo in near term for GPPL.
High Margin liquid cargo to improve bottom line for GPPL
In September 2014, GPPL commissioned a jetty to handle liquid cargos with capacity
of 2 mtpa. It has tied up with three companies - Aegis Logistics, Gulf Petrochemicals,
and IMC for importing LPG, propane, and butane into India.
GPPL is expected to earn revenue in the form of lease rentals from land and charges
for the usage of sea side facilities from these contracts. Margins from these contracts
are expected to be close to 80% as they are based on lease-rental model. Revenue
contribution from the liquid cargo is expected to be low for next 2-3 years but could
increase as and when expansion happens post CY17E. We estimate the company to
handle 2.5 lakh tonnes in CY14 and 6 lakh tonnes of liquid cargo in CY15E.

LINK
http://www.kotaksecurities.com/jsp/account/recomm-report.jsp?file=FUNDGPPL09012015094727.pdf