GUJARAT PIPAVAV PORT LTD 14 SEP 2021

IN THE WORLD -
CHEAPEST PORT OPERATOR NOT
RATED
RE-RATING TRIGGER AWAITED

CMP INR 101.60

Gujarat Pipavav Port Ltd (GPPL) is India's first private sector port located on
the south west coast of Gujarat near Bhavnagar with an MNC promoter (APM NIFTY50 17,380
CNXSERVICE 24,396
Terminals – Maersk Group). The port is strategically placed on the International
CNXSMALLCAP 10,776
Maritime Trade route which connects India with US, Europe, Africa, Middle East
on one side and Far East on the other side. It is a South-West Gujarat based port Bloomberg Code GPPV:IN
NSE Code GPPL
with an MNC promoter (APM Terminals – Maersk Group). The port container
BSE Code 533248
capacity is at 1.35 million TeUs, bulk capacity at 4-5 million MT and liquid capacity
Sector Logistics
at 2 million MT · Container segment comprises ~70% of revenues.

No. of Shares (mn) 483.44

Investment Rationale - Strong parent linkages, Geographical Moats MCap (INR bn) 48.37
Strategically well placed - Nearest port for key cargo generating regions of Credit Rating ICRA AA- (Stable)
Gujarat, Rajasthan, Delhi/NCR, Punjab and Madhya Pradesh, Thematic growth 30 Day Avg Volume 7,36,857
emanating from China+1 and ‘Make in India’, Overall government thrust to revive 52 Week L/H 79.5/124.3
infrastructure growth in general and multimodal infrastructure in particular is an
opportunity for GPPL, Rising volumes from non-major ports, Catering to multi
SHAREHOLDING PATTERN (%)
cargo services.
MAR-21 JUN-21
Promoters 44.01 44.01
Risks and Concerns - Uncertainty regarding concession agreement, Prolonged FPI & DII 45.49 44.36
slowdown and delayed recovery due to Covid-19 restrictions, Over capacity at Public & Others 10.50 11.63
regional levels, Policy decisions, prone to natural calamities Pledged Shares 0.00 0.00
Source: BSE

Outlook: Recent shift of sentiment, and the success of the PLI scheme has
ensured that India has emerged as a favored destination for global STOCK PERFORMANCE (%)
manufacturing. GPPL with its strategic location is best placed to leverage this
accelerating trend. GPPL’s stock price has significantly underperformed the 1YR YTD
Indian stock market and also its global peers, making it one of the cheapest GPPL +20 +14
NIFTY50 +51 +42
valued port operators in the world. Looming uncertainty over the renewal of its
CNXSERVICE +64 +40
port license (expiring in September 2028) had suppressed the valuation. Upon
CXNSMALLCAP +78 +83
renewal of its license GPPL may become one of the most attractive value

propositions in the vast logistics sector given that it enjoys one of the best RoCE
PRICE PERFORNMANCE (1YR)
in the industry, strong growth potential, and is available at discounted valuations.

Sumangal Pugalia
9831112255
pugaliasumangal@gmail.com

PAGE 1
INVESTMENT RATIONALE

Strong parent linkages - GPPL is backed by the AP Moller Maersk (APMM) group. It is the world’s largest port and
terminal operator with 75 ports and terminal facilities in 42 countries. GPPL’s parent company lends its network,
expertise, and resources to help establish strong business relations, and well founded shipping lines. Maersk Line is
one of the company's largest customers - accounting for 30% of the revenues in FY20. The APMM group has decades
of experience, and has developed many technological and logistical synergies which GPPL immensely benefits from.
APMM plas an expansion with substantial Capex, in the range of 100mn USD at the Pipavav Port. However, this
expansion depends on the renewal of the concession agreement with Gujarat Maritime Board (GMB), which is
expiring in September 2028. APMM has complied with all the required parameters and guidelines (as per
international standards) to renew the concession and requested GMB to confirm the status of renewal in the current
year of 2021. The renewal is expected to be for the minimum period of 20 year which may turn out to be the trigger
for the re-rating of this company.

Geographical Moats Strategically well placed - Nearest port for key cargo generating regions of Gujarat,
Rajasthan, Delhi/NCR, Punjab and Madhya Pradesh - Pipavav port is strategically at the entrance of the Gulf of
Khambat in Saurashtra (Gujarat), services imports from and exports to MENA and handles cargos from Gujarat,
Rajasthan, Delhi/NCR, Punjab and Madhya Pradesh, which collectively contributes ~60% of India’s cargo. The
ambitious Western DFC (WDFC) railway project that connects Punjab to Gujarat is on the verge of completion (June
2022). In addition, Indian Railways is procuring new wagons for DFC which will have a capacity of 32 tonnes
(compared to the current capacity of 23 tonnes) and will also run double stack trains on heavy haul locomotives. This
will substantially improve the wagon capacity per train. Higher capacity means more container volumes for ports.

Thematic growth emanating from China+1 and ‘Make in India’ - India has emerged as a preferred trading
partner, after China, for global MNCs, and is expected to accelerate maritime trade in the coming years. China+1
policy would directly benefit India due to several factors like favorable government policies, location advantage, cost
competitive economics, underpenetrated market given its demographics and rapidly improving per capita income. In
addition, India’s thrust on domestic manufacturing (‘Make in India’ as well as ‘Make for India’), PLI, RoDTEP and the
significant tax breaks awarded to new enterprises setting up businesses in India (up to 2023) are potential game
changers for India’s industrial activities and export trade. This substantially adds to the high volume growth outlook in
the long term.

Overall government thrust to revive infrastructure growth in general and multimodal infrastructure in
particular is an opportunity for GPPL - India’s logistics and transportation infrastructure has been facing capacity
constraints. The government aims to significantly boost the manufacturing sector to contribute an all-time high of
about 25% of GDP by FY25, from below 16% currently, but that will require significant investments on rail, roads and
ports. Port activity is highly correlated to core sector growth and industrial activity as shown in the charts below. With
the government focused on reviving the core sector and industrial activity, port volumes are also expected to gain
strong traction. Further, Sagarmala in combination with DFCs and other infrastructure initiatives has the potential to
lower logistics costs substantially thereby improving cost competitiveness (it is pertinent to note that sea transport
costs INR 0.75 per Km compared to INR 1.50 per Km for rail transport and INR 2.30 per Km for road transport).

Rising volumes from non-major ports - In the last few years, the growth in cargo volumes at non-major ports has
been faster compared to major ports due to the pick-up in local manufacturing & industrial volumes and an
improvement in logistics infrastructure. This provides opportunity to serve the incremental demand and increase
their capacities in time India has 12 major and 205 non-major ports. During FY15-20, cargo volumes at major ports
grew at a CAGR of 3.1% to 673 mn MT, while at non major ports, the volumes clocked a CAGR of 5.7% to 579 mn MT.

Catering to multi cargo services - Pipavav port currently has a capacity to handle up to 1.35 million TEUs of
containers, 4.0 mn MT of dry bulk cargo, 2.0 mn MT of liquid cargo and about 250,000 cars per year. Additional
marine side and landside areas are available at the port for future development The port is positioned opposite two
islands, which act as a natural breakwater, the port is safe in all weather conditions, even during the monsoon
season. In May 2021, cyclone Tauktae hit the western coast of India, and this was the first time Pipavav Port was hit
by a cyclone. A draft availability of 14.5 m ensures that even large vessels can be serviced, improving GPPL
attractiveness as a port.

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RISKS AND CONCERNS

Uncertainty regarding concession agreement - In case the concession is not renewed then there would
arise a material uncertainty regarding the ability to continue as a going concern since the GPPL would have to
transfer the port along with all its facilities to either the government or the future port operator on the basis of
an independent valuation. However, this is a very low probability outcome and the management is fairly
confident that the concession would get renewed.

Prolonged slowdown and delayed recovery due to Covid-19 restrictions - GPPL's growth is reliant on
industrial manufacturing activity. If the manufacturing activity remains weak for a prolonged period of time, it
may continue to impact the company’s growth prospects.

Over capacity at regional levels - is one of the key concerns in the port industry especially in Gujarat which
has been a key industrial and manufacturing state. This has resulted in high competitive intensity leading to
subdued realisations.

Policy decisions: Government has plans to reduce its dependency on fossil fuels, which could reduce the
import of crude oil, LPG and other petroleum products

Natural Calamities - GPPL faces risks due to natural calamities. Recently, Taute cyclone disrupted Pipavav port
operations for a couple of weeks during Apr 2021

OUTLOOK

GPPL is a debt free company and has cash & cash equivalents of INR 725 cr, which accounts for 30% of its total
assets. The company generates more than INR 250 cr of free cash flows every year, which should entail
sufficient contribution for future capex requirements without depleting cash reserves. GPPL, along with
Evergreen Marine (Taiwan), are the only two listed port companies with a negative net debt status

Further, there is substantial scope for operating leverage to play out given that its capacity utilization still hovers
at 55-60% of its current capacity. The proposed capex will be funded exclusively by internal resource
generation. This, along with the operating leverage, should be RoIC accretive. Already its RoIC is among the top
percentile for all listed ports globally. As a result, a case can be made that GPPL should command a premium
valuation compared to its peers. However, at the CMP of INR 101, the stock is trading at 6.0X consensus FY23
EV/EBITDA, which is significantly lower than peers – 11.0X of Adani Ports SEZ and 7X of Gateway Distriparks.

Moreover, GPPL has maintained an average dividend payout of over 90% in the past several years. A debt free
balance sheet and annual FCF run rate of over INR 250 cr ensures similar dividend payouts and buyback
opportunities in the coming years.

Parentage of AP Moller Maersk (global leader in container shipping), a strong growth outlook for India’s EXIM
trade, leverage of the dedicated freight corridor (DFC), DMIC and Make in India (Aatmanirbhar Bharat),
significant cash pile of INR 725 cr and commitment of ~INR 730 cr to enhance port capacities (by 18.5% to 1.6
mn TEU) make GPPL an attractive proposition for a long-term decadal growth story with a significant margin of
safety.

Thus, given its healthy balance sheet and strong business potential deserves re-rating contingent on
renewal of its concession agreement. Once the renewal is confirmed and the terms of the same are
clear, a comprehensive valuation model is warranted for this company.

PAGE 3