Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank facilities of Gujarat Pipavav Port Limited (GPPL).

 

The operating performance remained resilient in fiscal 2021 with GPPL achieving similar levels of revenue compared to the previous year, supported by a 35% increase in dry bulk volume and 3-4% tariff hike. Operations were impacted in the first quarter of the current fiscal due to landfall of cyclone Tauktae on Gujarat coast in May 2021, however they were up and running a couple of weeks later. Despite a weak first quarter, operating performance for fiscal 2022 will see revenue growth with stable operating margin supported by volumes in container cargo (addition of two new services) and dry bulk and 3-4% tariff hike. The company’s credit risk profile is backed by nil debt obligation and strong liquidity, with cash balance of more than Rs 650 crore as on June 30, 2021.

 

The ratings continue to reflect GPPL’s healthy business risk profile, driven by healthy traffic volumes from the container and dry bulk cargo and strong operating profitability, and a robust financial risk profile, driven by healthy cash accrual, nil debt, and above-average networth. The ratings also factor in strong business linkages with the parent, Netherlands-based APM Terminals BV (APM Terminals; part of the AP Moller-Maersk group). These strengths are partially offset by the moderate scale of operations and susceptibility to competition from neighbouring ports.

Analytical Approach

CRISIL Ratings has considered the financial and business risk profiles of the company on a standalone basis.

Key Rating Drivers & Detailed Description

Strengths

Healthy business risk profile 

GPPL’s business risk profile is driven by healthy traffic volume handled by its container (capacity of 1.35 million twenty-foot equivalent unit [MTEU]) and dry bulk (4 million tonne per annum) capacities. Traffic volumes from these capacities account for more than 92% of the annual operating income, and were utilised at 55% and 79%, respectively, in fiscal 2021. Scale of operations grew by a moderate 2% over the past 5 fiscals, and operating income stood at Rs 734 crore in fiscal 2021.

 

Operating performance remained stable in fiscal 2021, as reflected in flat revenue growth (vis-à-vis 5% in fiscal 2020). Revenue was supported by substantial growth in dry bulk (around 35%) cargo handled (with increase in import of fertilisers and coal). Container cargo declined by 14% because of almost nil transhipment and increase in freight rates by shipping lines and congestion leading to container shortages; liquid bulk cargo fell 15% due to lower LPG import and RoRo cargo dropped 75% on declining automobile exports. Operating performance for fiscal 2022 is expected to improve with growth in revenue supported by volumes in container cargo with the addition of two new services and dry bulk backed by higher fertiliser and coal imports coupled with 3-4% tariff hike from May 2021. Further, growth is supported by the port’s inherent potential to generate healthy trade volume, backed by its location, connectivity to industrial hubs in Gujarat and northern hinterlands, and efficient operational metrics. The operating margin is strong at over 55% supporting profitability.  

 

Robust financial risk profile

The financial risk profile is driven by strong profitability—reflected  in stable operating margin of more than 55% per fiscal, leading to operating profit above Rs 350 crore year-on-year—and minimal dependence on debt. 

 

Operating margin remained strong but dropped to 58% in fiscal 2021 from 61% in fiscal 2020. The decline is attributed to cargo mix and maintenance dredging expenses. Despite strong profitability, net cash accrual is low because of distribution of most of the profit as dividend to shareholders in the absence of large capital expenditure (capex) requirement since fiscal 2017. Net cash accrual was Rs 75-190 crore in the three fiscals through 2021. Networth was Rs 2,030 crore as on March 31, 2021. Debt continues to be nil on the company’s books, and unencumbered cash balance was above Rs 650 crore as on June 30, 2021.

 

GPPL has only annual maintenance capex requirement over the medium term, which is likely to be met through internal accrual and cash balance. Dividend outgo will continue from most of the profit generated, given the moderate capex plans. Substantial dividend outgo over net profit, if any, will result in the depletion of cash generated, and will be a key monitorable.

 

Strong business linkages with the parent

The company leverages the expertise, resources, and network of its parent in developing business with shipping lines. Maersk Line remains one of the largest customers (accounted for 28% of revenue in fiscal 2021). Benefits are also derived from access to modern technology, operational know-how, and best industry practices because of an association with APM Terminals and the ultimate parent, AP Moller-Maersk A/S Maersk Line (part of the A P Moller-Maersk group; ‘BBB/Positive’ by S&P Global Ratings).

 

The rating outlook on the ultimate parent was revised to ‘Positive’ from ‘Negative’ in October 2020 given the less severe impact on global trade than previously anticipated. CRISIL Ratings believes that a change in the rating on the ultimate parent would not directly impact GPPL as the company continues to derive support from APM Terminals, which is expected to remain un-affected by the rating action on the ultimate parent. That's because the performance of APM Terminals has been relatively stable compared with other business segments of the group. However, any material change in the credit risk profile of APM Terminals will continue to be a key monitor able.

 

Weakness

Moderate scale of operations and susceptibility to competition from neighbouring ports

Despite enhancement of container capacity to 1.35 MTEU in fiscal 2017 from 0.85 MTEU earlier, scale of operations remained moderate as reflected in revenue growth of 2% in the five fiscals through 2021. Revenue was at Rs 650-750 crore during the period. Although capacity utilisation of dry bulk cargo improved gradually (46% in fiscal 2018 and improved to 79% in fiscal 2021), fluctuation in traffic volume and realisation of other cargo segment curtailed any significant growth in revenue. GPPL faces competition from neighbouring ports, including Jawaharlal Nehru Port Trust (7.7 MTEU) and Adani Port & SEZ Ltd (domestic capacity of over 498 million tonne), which have larger scale of operations and attract healthy traffic volume from surrounding industrial hubs and export-import activities. The company’s ability to offer competitive tariff and ensure healthy operating efficiency will support growth over the medium term.

Liquidity: Strong

Cash accrual is expected to be over Rs 125 crore per fiscal against nil debt repayment over the medium term. Cash balance was ample at more than Rs 650 crore as on June 30, 2021, and is expected to largely remain at this level, given the moderate capex requirement. The bank guarantee facility was utilised at around 75% on average during the 12 months through July 2021.

Outlook: Stable

CRISIL Ratings believes GPPL will maintain its business and financial risk profiles over the medium term, backed by moderate traffic growth and a healthy operating margin.

Rating Sensitivity Factors

Upward Factors:

• Sustained revenue growth of more than 15% while maintaining a stable financial risk profile
• Stabilisation of traffic across all cargo types handled

 

Downward Factors:

• Fall in revenue by more than 15% because of lower traffic
• Large debt-funded capex or substantial dividend payout over and above the profit generated, depletes the cash position and results in weakening of financial risk profile

About the Company

Incorporated in 1992, GPPL has been operating the Pipavav port in Saurashtra, Gujarat, since 1998. It has exclusive rights to develop and operate facilities of APM Terminals in Pipavav until September 2028, according to a concession agreement with Gujarat Maritime Board and the government of Gujarat. The company handles four cargo types: container, dry bulk, liquid bulk, and RoRo.

 

The promoter, APM Terminals, is among the world’s largest port and terminal operators; it operates and manages over 75 port facilities in 40 countries, and has inland services operations at over 100 locations in more than 50 countries. It provides ports, terminals, inland services management, and operational services to more than 60 container shipping lines.

 

Profit after tax was around Rs 32 crore on operating income of Rs 160 core during the first 3 months of fiscal 2022 against around Rs 46 crore and Rs 159 crore, respectively, for the corresponding period of the previous fiscal. The Q1FY22 figures are not comparable with last year figures as performance in Q1FY22 was impacted due to cyclone.

Any other information: Not applicable