Gujarat Pipavav Ports rating – Buy: Decline in container volumes took its toll

GPPV’s Q2FY21 EBITDA was Rs 1,029 m, down 13% y-o-y, and Ebitda margin contracted 5.7ppt y-o-y to 56.3%. The decline in Ebitda was driven by a 25% y-o-y decline in container volumes, worse than the 16% y-o-y decline in Q1FY21. The liquid bulk volume decline worsened to -37% in Q2FY21 vs +6% in Q1FY21. These were offset to some extent by a 35% y-o-y increase in bulk volumes (doubling q-o-q) on higher fertiliser volumes, though margins were relatively lower compared to container EXIM cargoes. Recurring profits were down 27% y-o-y to Rs 497 m. The company announced an interim dividend of Rs 2.10 per share, implying annualised yield of 4.7%.

Q3FY21 looking better: Management said that container volumes sequentially improved in July and August, but suffered a setback in September. However, GPPV said that things improved in October and volumes look set to improve further in November and December. Indeed, GPPV has implemented tariff increases for container cargoes of about 5-6%, effective from 1 October 2020.

We raise FY21-23e Ebitda by 8-14% and recurring profit by 8-18%: We now forecast container port throughput to decline by 10% in FY21e (from -7.5% previously) to reflect the weaker Q2, but implying sequential recovery in H2FY21e. However, we reflect the tariff increase of about 5- 6% for containers, which more than offsets the lower container estimates. We also raise our bulk throughput forecasts. We now expect bulk throughput to grow 18.5% in FY21 (vs -10% previously).

Reiterate Buy; raise DCF-based TP to Rs 110 (from Rs 90): While the COVID-19 headwinds will likely depress container trade and profits in FY21e, we argue that GPPV is better positioned vs past down cycles and its peers, with minimal capex requirements, a net cash position, parent group support (40-45% of container throughput), and attractive forecast dividend yield (5.3% in FY21e).