GUJARAT PIPAVAV PORT LTD (GPPL)

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1 COMPANY UPDATE Amit Agarwal Summary table (Rs mn) FY17 FY18E FY19E Sales 6,838 7,391 7,894 Growth (%) EBITDA 4, ,798 EBITDA margin (%) PBT 3,455 3,761 4,119 Net profit 2,484 2,746 3,007 EPS (Rs) Growth (%) CEPS (Rs) Book value (Rs/share) Dividend per share (Rs) ROE (%) ROCE (%) Net cash (debt) 3,142 3,696 4,480 NW Capital (Days) (19.5) (18.5) (19.0) EV/EBITDA (x) P/E (x) P/Cash Earnings P/BV (x) Source: Company, Kotak Securities - Private Client Research GUJARAT PIPAVAV PORT LTD (GPPL) PRICE: RS.150 RECOMMENDATION: BUY TARGET PRICE: RS.180 FY19E PE: 24.1X Weak container shipping market, realignment of services by container majors which lead to market share loss for GPPL and appreciating rupee impacted the performance of the company in FY17. However, improving container volumes on the west coast, potential from the project cargo division, diversification to crude and car segment should yield results for the company over FY17 to FY19E. With the high operating leveraging nature of the business and with an expected container volume CAGR of 7.5 % over FY17-19E for GPPL, we expect EBITDA margins to remain at healthy levels of 60% resulting in improvement in return ratios. We also expect the company to benefit from the upcoming Dedicated Freight Corridor (DFC) with Pipavav Rail Corporation preparing to connect the port with the DFC. We expect the next few years to be the turn-around years for the company. Maintain BUY with an unchanged TP of Rs 180 Positives emerging for GPPL GPPL lost business to peers in the last 2 years witnessing change in alliances. Even the rail volumes dipped significantly in the last quarter. We understand the role played by exim imbalance and scope of it normalizing, but remain wary of competition from other key non-major ports, which are taking away business even after taking price increases. However we reckon the following as positive for GPPL: Addition of a port call at Pipavav by Maersk s ME1 service The West-coast container ports (both JNPT and Mundra) having witnessed a robust growth in April and May 2017 (7 % YoY growth for JNPT in April and May 2017 at 801,000 TEUs) and we expect GPPL to benefit with a lag if not sooner. Quarterly volumes for GPPL Segment Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Container ( No of TEUs) 177, , , , ,000 Bulk (mn tonnes) Liquid (mn tonnes) Rail volumes (mn tonnes) ICD volumes (TEUs) 119, , , , ,000 No of rakes Cars handled 8,700 11,000 21,570 27,000 24,000 No of calls for cars Source; Company Facilities expanded and made more efficient GPPL has invested Rs 4.5bn to increase its container handling capacity to 1.4mn TEU p.a (from 0.85 mn TEUs), expand its container storage yard, add modern equipment s and strengthen handling capacity of the berths. The company has replaced its old cranes with more efficient cranes, lowering the turnaround time of ships which can lead to the shifting of some shipping vessels from other ports in Gujarat and Maharashtra to GPPL. No investment would be made in expanding capacities of handling other commodities. GPPL would take a call on further capacity addition once capacity utilization reaches the 80% mark. Till then, we do not expect any major capex for GPPL, except for maintenance capex of Rs 500 mn per annum over FY17 to FY19E.. Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 2

2 Current capacities at GPPL Segment Container Bulk Liquid RoRo Source: Company Capacity 1.4 mn TEUs 5 mn MT 50 lakh MT 2.5 lakh cars Healthy RoRo business The company attributed a part of the revenues growth in the quarter (despite overall volume decline) to the ramp-up of RoRo volumes (handled ~83,000 units in FY17). Apart from the one major customer currently operating at Pipavav, the company has had port visits from other OEMs and has received positive feedback. The management considers RoRo as a key focus area to grow volumes. Volume assumption over FY17 to FY19E Parentage of Maersk, improved services, relations with shipping lines, strategic location on the west coast and ability to provide seamless railway connectivity to hinterland would continue to help GPPL attract container volumes. We expect container volumes to grow at a CAGR of 7.5% over FY17 to FY19E With Gujarat developing as an Auto hub, we expect the share of high margin RoRo to increase in future, which should aid margins for GPPL. With increasing demand for chemicals, petroleum products, Lubricants and petrochemicals serving industries like oil and gas, Chemicals, Pharma, Textiles, and Paints and so on, we expect the clients of GPPL to increase throughput at the port on a continuous basis. We estimate the company to handle 7 mn tonnes in FY18E and 8 mn tonnes of liquid cargo in FY19E. Overall, bulk volumes continue to be a very small portion of the overall cargo and we are not very optimistic (even management of GPPL) on bulk cargo in near term for GPPL. Volume Estimates for GPPL Segment CY12 CY13 15MFY15 FY16 FY17 FY18E FY19E Containers (mn TEUs) Bulk (mn tonnes) Liquid (mn tonnes) Source; Company, Kotak Upside in earnings likely We continue to like the potential for container volume growth at Pipavav (likely to benefit the most due to systemic growth in container volumes); volumes grew by 8% CAGR for FY10-FY17 and we estimate container volumes to grow at a CAGR of 7.5% over FY17 to FY19E with an upward bias. We also continue to like the potential in EBITDA margin improvement due to cost saving measures, better cargo mix (higher liquid cargo) and operating leverage GPPL is estimated to report earnings CAGR of 10% over FY17 to FY19E with an upward bias. Due to the above mentioned reasons we continue to remain positive on the company in the long term. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 3

3 APM may exit GPPL completely As per news reports, APM Terminals, the controlling shareholder (43.1%) and operator of Gujarat Pipavav Ports Ltd (GPPL) is looking to exit the company and has mandated HSBC to run a formal sale process and find a new buyer. As per the same news report, APM has approached JSW Group, Adani Ports and Dubai s DP World for a complete buyout. Last time, when similar news emerged (3 months back), GPPL had categorically denied the report through a BSE notification. If the deal goes through, we expect it to happen at a premium to current market price, which would benefit the minority shareholders as there would be an open offer for another 25%. Also, in any M&A deal, the share price of the Target Company (here GPPL) typically moves up during the bidding process. GPPL is a very small business for APM and the only subsidiary for APM in the listed space. Hence, the focus of APM was very limited on GPPL in terms of expansion of the port, hinterland connectivity, cargo diversification and client acquisition. A new and more focused strategic owner can significantly change the operations and financial performance of the port. We do not have more details on the impending deal as the same news report suggest that the deal is in nascent stages with initial due-diligence going on. The following asset would be for sale if APM exits Parameter Remark Superior Rail connectivity 269km broad gauge rail built by PRCL (38% subsidiary) to connect to Surendranagar which connects to the national grid Road connectivity 11km four-lane expressway connects to the National Highway 8E. Double stacking from the port Saves cost for shipping lines/train operators Four container berths With modern cranes Draft of 14.5 mts Can handle ships upto 12,000 TEUS Other facilities Liquid/ Bulk/RoRo handling Parentage of Maersk Strong relations with all shipping lines 600 acres of unutilized land Can expand 5x from here Source: Company Concerns: Focused only on container business Weak global container trade Competition from other ports in Maharashtra and Gujarat Inadequate strategy relative to competition from Mundra and JNPT Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 4

4 Valuation and Recommendation For GPPL, we have not made changes to our earnings estimate and expect the container segment to report mid-single digit growth in volumes in the long run. Liquid and RoRo would remain strong for GPPL with improvement in share in the overall cargo portfolio. We expect the next few years to be the turn-around years for the company. We are assuming GPPL to be a going concern, which would reinvest all its cash flows to increase container handling capacity through subsequent expansions (it has around 600 acres of unutilized land at the port and can expand 5x from here). Valuation Table Particulars Value of Share of FCFE base equity GPPL case (%) Port 80, ,356 Gujarat Pipavav Rail Corporation (at 1.5 x Book value) 17, ,596 Total Value 86,952 No of shares (mn) Value per share Source: Kotak Our FCFE for the port comes at ~ Rs166 and Pipavav Rail Corporation contributes ~ Rs 14 per share to the value of GPPL, valuing the company at Rs 180 per share. Maintain BUY with an unchanged TP of Rs 180. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 5

5 MANAGEMENT MEET UPDATE Jatin Damania Summary table (Rs mn) FY15 FY16 FY17 Sales 6,011 5,309 6,261 EBITDA EBITDA margin (%) 4.2% 7.1% 10.0% PBT Net profit Adj EPS (Rs) Growth (%) CEPS (Rs) BV (Rs/share) Dividend / share (Rs) ROE (%) ROCE (%) Net cash (debt) EV/EBITDA (x) EV/Sales (x) P/E (x) P/CEPS (x) P/BV (x) Source: Company, Kotak Securities - Private Client Research BHANSALI ENGINEERING POLYMERS LTD (BEPL) PRICE: RS.68 RECOMMENDATION: NOT RATED We met the management of BEPL to understand the company's business and industry insight. The company is a vertically integrated petrochemical company in the field of Acrylonitrile Butadiene Styrene (ABS) manufacturing in India. The current installed capacity stands at 80,000 tonnes, spread across two manufacturing facilities in Abu Road, Rajasthan and Satnoor, Madhya Pradesh. ABS acts as a raw material for companies dealing in automobiles, home appliances, telecommunications, luggage, bus body and various other industries. Given the growth in the end user industry, management is confident in execution of the expansion plan through internal accruals and strong balance sheets supports this thesis. 50% market share As per the management, the industry size is around 300 KTPA and is growing at 15% annually. Domestic demand is catered by 2 players' i.e BEPL (80KT) and Ineos Styrolution and the remaining is met through imports from Korea, Taiwan, etc. Imports are largely of natural grade ABS. The company currently has 50% market share and expect it to increase further, with increasing capacity in the next 2-3 years. Capacity expansion to fulfill customer needs The company recently completed its expansion plan from 51,000 tonnes to 80,000 tonnes and has earmarked next phase of growth plan to ramp up its production capacity from 80 KTPA to 137 KTPA in FY19E. We believe that, the company would take time to ramp-up the new facility to its optimum level, but foresee incremental 20,000 tonnes of sales volume every year till the time plant gets stabilized. Besides this, the company is also setting up a greenfield plant in Gujarat with a capacity of 200 KTPA (port based) and is expected to come on stream by FY22. The new plant of 200 KTPA will be based on state of the art technology provided by Nippon A&L, Japan with whom the company has a long standing relationship. The company is also planning to have its in-house captive power plant as an integral part of the expansion programme. Variety of products to cater the end customers The company caters to a wide range of industries starting from automobiles, home appliances, telecommunications, luggage, bus body, to name a few. The demand for ABS in India is largely dependent on two sectors, namely Appliance and Automobile which account for nearly 85% of consumption. The company manufactures over 1500 colors and grades (including natural grade) of engineering plastics to cater to end user needs. Margin varies across grades and also depends on the size of the order. JV with Nippon helped the company to increase market share in automobile segment The company entered in 50:50 JV with Nippon for marketing. JV helps the company to manufacture niche ABS grade and also to foray into automobile sector. The company is an approved supplier of ABS to Yamaha, HMSI and Maruti Suzuki. All the manufacturing is being done by BEPL, while Nippon receives royalty payment. The company is also an approved vendor for Videocon, Samsung, LG, Montex, to name a few on appliances side. Management expects both, automobiles and appliance industry to grow by 15% in the coming years. By concentrating on the two wheeler and refrigerator liner market the company does not have to produce large quantity of general purpose grades in natural shade where competition is with cheap imports. This is helping the company to improve its realization per unit. Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Kotak Group Securities of Kotak Securities Private Client Limited. Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 6

6 Forex volatility Risks & concerns The company is exposed to risk of forex volatility, as the key raw materials, i.e. Acrylonitrile and Styrene are import dependent, since there is no indigenous producer. The only raw material which is indigenously available is Butadiene which contributes ~15% of the total raw material composition. The company maintains the raw material inventory of days. Huge opportunity, makes BEPL a better play ABS market during FY15/FY16/FY17 was 205/235/260KT and is expected to grow by 15% in FY18E to 300KT. We believe that, there is a enough demand supply gap for ABS in the domestic market. Since, setting up of any new facility takes a lot of time, we believe there is a opportunity for BEPL to tap the untapped market. With zero debt on the book and improving cash flow, the management has maintained that it will fund its capex plan from internal accruals and has no plans to dilute equity as well. However, for funding its greenfield projects, it would have to rely on debt, in our view. Financial overview and outlook The company reported ~18% YoY growth in net sales to Rs6.26 bn, driven by higher volume in FY17. EBITDA during the year stood at Rs627 mn, with an EBITDA margin of ~10%. Going ahead, management believes that with the increasing ABS volume, backed by expansion, overall overheads (as % to net sales) should come down, which can improve margins and profitability. Management expects FY18 performance would be driven by higher utilization on the back of FY17 expansion in capacity. It expects 72KT (90% capacity utilisation) of sales in FY18. At Rs /kg of realisation, net sales is likely to be in the range of Rs bn. We find the Balance Sheet very clean with zero long term debt and very efficient working capital. The Creditors at end of FY17 amounted to Rs.2,352 mn as compared to Debtors and inventories of Rs.1,367 mn & 1,392, respectively. Based on net FY17 profit of Rs.347 mn the RoE stands at 24% as compared to 12.4% of its competitor Ineos Styrolution. In FY17 the promoters have increased their stake in the company from 51.6% (Mar 16) to 55.7% (Mar 17). The stock price has moved up recently and at CMP, the stock is trading at 32.3x FY17 earnings. We do not have a rating on the stock. Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 7

7 Bulk deals Gainers & Losers Trade details of bulk deals Date Scrip Name Name of Client Buy/ Quantity Avg Sell of shares Price 05-Jul ACKNIT PRIYA CHANDRAKANT JALGAONKAR S 14, Jul ACKNIT PRIYA CHANDRAKANT JALGAONKAR B 14, Jul ACKNIT KAMLA DIYA S 28, Jul ACKNIT KAMLA DIYA B 28, Jul ACKNIT ASHOK KUMAR BILGAIYAN S 15, Jul ACKNIT ASHOK KUMAR BILGAIYAN B 8, Jul ASHIKACR RAHUL S 37, Jul ASHIKACR RAHUL B 28, Jul GANESHBE PURITY TRADEMAX LLP S 460, Jul GANESHBE PURITY TRADEMAX LLP B 460, Jul HKT TANAJI NAMDEV KAMBLE S 16, Jul INOXLEISUR LOCAL GOVERMENT SUPERANNUATIO S 2,452, Jul JTLINFRA BABULAL SERMAL HUF B 65, Jul JTLINFRA BHIKAMCHAND RAJESH B 100, Jul KALYANIFRG AMRIT STEELS PRIVATE LIMITED S 20, Jul MEERA RETSINA MARKETING PRIVATE LIMITED S 36, Jul NPRFIN WATERLOO EXPORTS P.LTD S 30, Jul OPTIFIN SAJANKUMAR RAMESHWARLAL BAJAJ S 37, Jul PFLINFOTC PRASAD VITTHAL DIGHE S 128, Jul PFLINFOTC LOVELY WILLIAMS B 37, Jul RADAAN MOTI LAL DAGA S 227, Jul RADAAN MANAK DAGA(HUF) B 322, RIDDHICORP J G SECURITIES PVT LTD B 17, SFLINTER SHAKTIYOG CONSULTING SERVICES S 49, SFLINTER VINOD VRAJLAL NIRMAL S 29, SFLINTER VINOD VRAJLAL NIRMAL B 16, SPICY VEDANTA RESOURCES PRIVATE LIMITED B 200, WIMPLAST KOTAK FUNDS - INDIA MIDCAP FUND B 303,359 1, WIMPLAST MOTILAL MULCHAND SHAH S 100,000 1, WIMPLAST PRADEEP G RATHOD S 100,000 1, WIMPLAST PANKAJ GHISULAL RATHOD S 100,000 1,565.0 Source: Bloomberg Nifty Gainers & Losers Price (Rs) chg (%) Index points Volume (mn) Gainers Lupin Ltd 1, NA 5.2 Vedanta Ltd NA 12.2 Mahindra & Mahindra 1, NA 1.2 (Rs) Losers ITC Ltd 331 (1.8) NA 12.0 Infosys 951 (1.2) NA 2.1 Wipro 258 (0.9) NA 1.9 Source: Bloomberg Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 8

8 RATING SCALE Definitions of ratings BUY We expect the stock to deliver more than 12% returns over the next 9 months ACCUMULATE We expect the stock to deliver 5% - 12% returns over the next 9 months REDUCE We expect the stock to deliver 0% - 5% returns over the next 9 months SELL We expect the stock to deliver negative returns over the next 9 months NR Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. RS Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA Not Available or Not Applicable. The information is not available for display or is not applicable NM Not Meaningful. The information is not meaningful and is therefore excluded. NOTE Our target prices are with a 9-month perspective. Returns stated in the rating scale are our internal benchmark. Fundamental Research Team Fundamental Research Team Sanjeev Zarbade Ruchir Khare Amit Agarwal Nipun Gupta Capital Goods, Engineering Capital Goods, Engineering Logistics, Paints, Transportation Information Technology sanjeev.zarbade@kotak.com ruchir.khare@kotak.com agarwal.amit@kotak.com nipun.gupta@kotak.com Teena Virmani Ritwik Rai Jatin Damania Jayesh Kumar Construction, Cement FMCG, Media Metals & Mining Economy teena.virmani@kotak.com ritwik.rai@kotak.com jatin.damania@kotak.com kumar.jayesh@kotak.com Arun Agarwal Sumit Pokharna Pankaj Kumar K. Kathirvelu Auto & Auto Ancillary Oil and Gas Midcap Production arun.agarwal@kotak.com sumit.pokharna@kotak.com pankajr.kumar@kotak.com k.kathirvelu@kotak.com Technical Research Team Shrikant Chouhan Amol Athawale shrikant.chouhan@kotak.com amol.athawale@kotak.com Derivatives Research Team Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas sahaj.agrawal@kotak.com malay.gandhi@kotak.com prashanth.lalu@kotak.com prasenjit.biswas@kotak.com Kotak Securities Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 9

9 Disclosure/Disclaimer Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house. Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSEI). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management. Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). 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