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 2022 with GPPL achieving similar levels of revenue compared to the previous fiscal, supported by a 33% increase in dry bulk volume and 5-6% of tariff hike. Despite a weak first quarter (due to the impact of Tauktae), coupled with global economic slowdown and supply chain issues, operating performance for fiscal 2022 remained resilient. The operating performance of H1FY22 has shown improvement due to improvement in global supply chain and availability of container vessels. And revenues for fiscal 2023 will grow by 5-6% supported by pickup in container cargo (addition of new services), stable dry bulk volume and moderation in tariffs from this fiscal onwards.

 

While operating margin declined to 55.5% in fiscal 2022 from 57.6% in the previous fiscal given lower share of revenue from the high margin container business, it has shown improvement in first half of fiscal 2023 and expected to improve going further. The company’s financial risk profile continues to remain strong backed by nil debt obligation and strong liquidity, with cash balance of more than Rs 870 crore as on September 30, 2022.

 

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 net worth. 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 90% of the annual operating income, and were utilised at 46% and 105%, respectively, in fiscal 2022. Scale of operations grew by a moderate 3% over the past 5 fiscals, and operating income stood at Rs 744 crore in fiscal 2022.

 

Operating performance remained stable in fiscal 2022, as reflected in flat revenue growth for last 2 fiscals. Revenue was supported by substantial growth in the company’s – a) dry bulk cargo handled (around 33%) supported by increase in import of fertilisers and coal), b) liquid bulk cargo (around 17%) due to high Liquified petroleum gas (LPG) import and c) RoRo (Roll-on/roll-off) cargo (around 111%) on improvement in automobile exports. However, container cargo (accounting for 60% of total revenue) witnessed a decline of 16% as a consequence of Russia-Ukraine war and covid-19 leading to congestion at ports, increase in skip calls by shipping lines which resulted in container shortages and increase in freight rates by shipping lines. Nevertheless, operating performance for fiscal 2023 is expected to improve with revival in volumes in container cargo with the addition of three new services and continued strong performance of the dry bulk business backed by higher fertiliser and coal imports; moderation in tariff should also support revenue growth.

 

Inherent potential of the port to generate healthy trade volume, backed by its location, connectivity to industrial hubs in Gujarat and northern hinterlands, and efficient operational metrics, should continue to support revenue growth. Additionally, strong operating margin at over 55% supports profitability.  

 

Robust financial risk profile

The financial risk profile is driven by strong net worth of Rs 2,044 crore as on Sept 30, 2022 and nil debt. This is aided by strong profitability reflected in stable operating margin of more than 55%;  operating profit was above Rs 400 crore for fiscal 2022 and expected to remain above this level over the medium term. 

 

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 2022. Nevertheless, unencumbered cash balance was above Rs 870 crore as on September 30, 2022.

 

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 moderate capex plans. Substantial dividend outgo over net profit, if any, resulting in depletion of cash balance will remain 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 23% of revenue in fiscal 2022). 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+/Stable’ by S&P Global Ratings). Any material change in the credit risk profile of APM Terminals will continue to be a key rating sensitivity factor.

 

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 3% in the five fiscals through 2022. 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 105% in fiscal 2022), fluctuation in traffic volume and realisation of other cargoes curtailed any significant growth in revenue. GPPL faces competition from neighbouring ports, including Jawaharlal Nehru Port Trust (7.7 MTEU; rated CRISIL AAA/Stable) 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 remain critical to support growth over the medium term.

Liquidity: Strong

Cash accrual is expected to be over Rs 115 crore per fiscal against nil debt repayment over the medium term. Cash balance was ample at more than Rs 870 crore as on September 30, 2022, 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 September 2022.

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 pay-out over and above the profit generated, depleting cash position and weakening of financial risk profile

 

Environment, social and governance (ESG) profile

CRISIL Ratings believes GPPL’s ESG profile supports its already strong credit risk profile. The sector can have a moderate environmental and social impact, primarily driven by its plastic waste generation, intensive water usage and direct impact of its product on the health and wellbeing of its customers.

 

Key ESG highlights:

• The port has installed 1000 kWp (Kilowatt peak) DC capacity solar power plant. It will replace around 10% of total energy consumption at the port and reduce greenhouse gases by 1100 tons per year. There is 100% utilisation of treated domestic wastewater for development of green belt and watering of 250,000 trees, resulting in ZERO discharge and reducing freshwater demand for development of green belt. 
• The company is very committed in ensuring safety and security of its employees. There were no fatalities during the year and the LTIFR (Lost Time Injury Frequency Rate) ratio stood at 0.
• The company is committed to the local communities around the port and actively driving social initiatives in Education, Sanitation and Health, Women Empowerment, Skill Development, and Infrastructure Development.
• The governance structure is characterized by effectiveness in board functioning, grievance redressal mechanism and extensive disclosures.

 

ESG is gaining importance among investors and lenders. Gujarat Pipavav’s commitment to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

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.

Any other information: Not applicable