Buy Gujarat Pipavav Port, target Rs 100: Nomura, India

Nomura, India has a buy call on Gujarat Pipavav Port with a target price of Rs 100.

The current market price of Gujarat Pipavav Port is Rs 90.30.

Time period given by the brokerage is one year when Gujarat Pipavav Port price can reach the defined target.


Investment rationale by the brokerage:
Pipavav port connection to WDFC in 3QFY20 could lead to volume growth in FY21: Based on progress on the Western Dedicated Freight Corridor (WDFC) on the Rewari to Vadodara stretch, we expect Pipavav Port to be connected to the WDFC network around Sep-19. This should lead to volume growth as incremental export-import (EXIM) traffic is diverted to ports along Gujarat’s coast.

Port concession renewal not factored into current valuations: Our DCF valuation suggests Rs 72 as fair value without considering either an extension or any DRV (depreciated replacement value). This is not significantly lower than current prices. We note that the Gujarat Maritime Board (GMB) has circulated draft concession renewal papers; hence, renewal of the concession could happen soon.

Expect EBITDA margins to recover by FY21 on volume growth: We expect port utilisation levels to exceed 70 per cent in FY20. Beyond this level, we estimate operational leverage to kick in and bolster port EBITDA margins.

Trading at nearly 8x FY20F EV/EBITDA; upgrade to Buy, but target price cut to Rs 100: We cut our EPS estimates for FY19-20F by 34-35 per cent to account for the near-term weakness, and introduce FY21F estimates. We continue to value GPPV on DCF (Ke of 11.0 per cent) to arrive at our target price of Rs 100, which implies nearly 18 per cent upside; hence, we upgrade to Buy. Key risks are delay in connection to WDFC and any further loss in market share on the West Coast.