Gujarat Pipavav Port IPO Analysis

Good growth prospects burdened by huge equity

IPO shareholders will be buying the shares around or below the price at which promoters/selling shareholders bought the shares



Gujarat Pipavav Port (GPPL) is the developer and operator of the country's first private sector port at Pipavav in Gujarat. The company has exclusive right to develop and operate the Pipavav Port (otherwise called i.e. APM Terminals Pipavav) and related facilities until 2028 pursuant to the Concession Agreement with Gujarat Maritime Board (GMB) and the Government of Gujarat (GoG).

GPPL is promoted by APM Terminals, which in turn is part of AP Moller-Maersk Group (APMM), a global marine service provider with integrated operation from shipping lines to terminal operation to container freight stations. APM Terminal is the terminal operation arm of the APMM group, and is one of the largest container terminal operators in the world with a global network of 50 terminals in the 34 countries and five continents. And it currently holds about 57.9% equity interest in GPPL. Post IPO the stake of APM Terminal will come down to 43.47%.

APM Terminals Pipavav is strategically located in Gulf of Cambay/ Khambhat, which is one of the principal gateways on the west coast of India and is located in the Saurashtra region of the state of Gujarat. It is an all weather port and is protected by two islands, which act as a natural breakwater maximizing port safety. APM Terminals Pipavav, which is a multi-cargo and multi-user operation port currently has a capacity to handle 0.60 million TEUs of container cargo per year and 5 million tones of bulk cargo per year approximately, which varies depending on the type of cargo handled.

GPPL commenced comprehensive commercial port operations in April 2002. It is principal services comprise of providing port handling and marine services for (i) container cargo, (ii) bulk cargo, and (iii) LPG cargo. In addition, the company operates a Container Freight Station (CFS) and also generates revenue from land-related and infrastructure activities.

The revenue stream of the company can be broadly divided into income from Port Services and rental income from premises which are sub-leased by the company. Port services include services for container cargo, dry bulk cargo and LPG cargo and value-added port services, including container freight services. The principal component of the company's operating revenue is derived from container cargo and dry bulk cargo. Revenue from container cargo consists of container handling charges, berth services, marine services and storage. The revenue from bulk cargo consists of handling and storage of bulk cargo, marine services, berth hire charges, wharfage charges, stevedoring charges and port operation charges. And the revenue from LPG cargo consists of marine services and related ancillary facilities, including providing hose pipe connections to the vessels.

Presently, Aegis Gas is the sole customer in LPG cargo operations. Some of key customers in dry bulk and break bulk cargo are Indian Potash, Bhatia International, GHCL and Ultratech Cement with the cargo handled ranging from coal, cement/clinker, fertilizer to salt & Soda-ash. On containers front the client list is long comprising reputed shipping lines of the world.

Under the concession agreement between GPPL and GMB/GoG the company has to pay a royalty calculated based on the cargo handled at the leased land and waterfront with the royalty fees to increase by 20% every three years. .

GPPL owns about 38.8% of equity interest in Pipavav Railway Corporation (PRCL), which developed, operates and maintains the railway network between Pipavav and Surendranagar.

The fresh issue to raise Rs 500 crore, apart from offer for sale of upto 11707369 shares, is to fund prepayment of loans to the tune of Rs 300 crore as well as to meet expenses towards capital expenditure amounting Rs 82.54 crore and investment in capital equipment amounting Rs 28.69 crore. The balance will be used for general corporate purposes.

Strengths

Being part of APMM Group, an integrated global maritime major with presence from shipping lines to CFS, will benefit the company in business development and growth. Since calling of vessels is essential for container cargo, being part of APMM Group assures good connectivity with major shipping lines including the Group container shipping lines. Being part of APMM Group also brings in the best technology and practice to the company. APMM Group accounted for 26.2% of the operating revenue of the company for the year ended Dec 2009. Similarly for the first quarter ended March 2010 the group accounts for 28.6% of the operating revenue. In years ending Dec 2007 and Dec 2008 it accounted for 34.2% and 22.5% of the operating revenue.

The port, being a non major private port is not covered by the regulatory purview of the Tariff Authority of Major Ports, and is therefore entitled to determine the tariffs at the Port, subject to the provisions of the Indian Ports Act, 1908, as amended. Freedom to fix tariff rate helps the company to compete with other major ports in the region. In addition, the company also has flexibility in providing, and pricing, additional value-added services.

Overburden on the Major Ports, specifically JNPT/Mumbai ports, poses an opportunity for the non-Major Ports along the west coast of India and more especially APM Terminal Pipavav, which is situated just 150 nautical miles from Mumbai Port. Proximity to Mumbai allows shipping lines to have the flexibility to make an additional call to Pipavav and cater to cargo coming from the north western hinterland

Good Rail and Road connectivity to major Inland Clearance Deports (ICDs) in the north and northwestern hinternland is a big positive. The port is linked to Indian Railway's Surendranagar-Ahmedabad network by a dedicated 269 KM rail network. Similarly a 10 KM 4 lane road connects port to the national highway 8E. The port is also well connected to the Dedicated Freight Corridor (DFC) which is under development with Mehesana serving as an exchange junction between the DFC and Pipapav port.

The port has enough waterfront available for further development and has rights to develop approximately 1561 acres of land. Of the total land of 1561 acres, only about 485 acres has been developed and balance land available for development. This huge land at hand will give scope for additional cargo handling facilities, back-up infrastructure and port services.

APM Terminals Pipavav enjoys strong locational advantage among the small west coast ports. The port currently has vessel acceptance draught of 14.5 metres, with outer channel depth of 14.5 metres and turning basin depth of 13.5 metres at chart datum. In addition the wave height in the harbour does not exceed 0.5 metres at the berth and the water currents are between two and half and three knots during peak tidal condition. These favourable oceanographic conditions enable day and night navigation of ships throughout the year. The bulk and multi-purpose jetties have a depth of 13.5 metres at chart datum and liquid and container jetties have a depth of 15.5 metres at chart datum along with good port infrastructure. This allows the port to handle large vessels.

On dry bulk front the company will benefit from strong coal trade. According to the Government of Gujarat, six power plants are being commissioned close to APM Terminals Pipavav and 11,164 MW of power generation capacity will be added in the state by 2012. This will translate into a coal requirement of around 45 mtpa (million metric tonnes per annum). The increase in demand for coal will help boost the coal traffic at APM Terminals Pipavav.

Weaknesses

The port is not operating to its full capacity yet. For instance the average berth occupancy at the container terminal of the port was 29.5%, 35.7% and 38.6% for the years ended December 31, 2008 and 2009 and for the three month period ended March 31, 2010, respectively. While this give more room for growth, the ability of the company to ramp up the volume has to be seen given the fact of increased competition form other major and minor ports in West Coast. GMB is expected to privatize more number of minor ports. This along with expansion of capacity by existing major ports in the west coast such as JNPT/Mumbai, Kandla and Mundra, will intensify the competition.

While the company has given a traffic guarantee to PRCL, the PRCL does not have pricing flexibility as far as freight rates are concerned which might drive away the cargo movement to road. The Indian Railways is the one that determines the freight rates and haulage charges. If the cargo moves by road instead of railways due to un-favorable tariff rates, GPPL has to compensate PRCL if the traffic falls below the guaranteed level. As of March 31, 2008, 2009 and 2010, the company was unable to meet the Minimum Guaranteed Quantity as per the terms of the Traffic Guarantee Agreement and has compensated PRCL in the last two years ended Dec 2009 and Dec 2008 with an amount of Rs 30.64 crore and Rs 107.69 crore. In quarter ended March 2010 it paid a compensation of Rs 5.4 crore to PRCL.

The Promoter of the company i.e. APM Terminals, also operates Gateway Terminals India, a container terminal at Mumbai, a competing port on the west coast itself and engaged in a line of business similar to the company. Moreover there is no binding agreement that APM Terminal would not invest in other ports in India. Since significant part of the revenue come from APMM Group entities any diversion of cargo to other APM Terminal or preference of other terminal over APM Terminal Pipavav might affect the performance of the company.

The company has turned in negative operating cash flow for the fiscal ended Dec 2009 and Dec 2008.

Even after eight years of commencement of operations the company has yet to report profit at the net level.

Pre-issue, debt-equity ratio is almost 4:1. Total debt stands at Rs 1100 crore.

Valuation

GPPL clocked a revenue growth of 31% to Rs 219.12 crore for the fiscal ended Dec 2009 and an operating profit growth of 246% to Rs 44.06 crore as OPM improved from 7.6% to 20.1%. The company seems to have benefited by improved utilization levels and consequent lower compensation to PRCL under guarantee traffic agreement with the latter. However strained by higher interest cost and depreciation the net loss was Rs 117.67 crore compared to a net loss of Rs 67.60 crore in the corresponding previous fiscal.

The company's pre-IPO book value is Rs 8.9 as the entire share premium given by the promoters and other pre-IPO allottees has been wiped out due to continuous losses. The company's revenues at Rs 219.12 crore in FY 2010 is less than half of its post-IPO equity of Rs 419- Rs 433 crore.

In view of current low capacity utilization, there is good scope for revenue and earnings growth in future especially due to improvement in economic environment and reduced interest costs on repayment of loans. So turnaround in profit looks likely but EPS will remain small due to the high equity base.

The average cost of shares for promoter: APM Terminals Mauritius is Rs 44.3. The average cost of shares for selling shareholders: The Infrastructure Fund of India LLC is Rs 42.85 and The India Infrastructure Fund LLC is Rs 66.45. Against this, the current IPO and offer for sale is at Rs 42-48. So IPO shareholders will be buying the shares around or below the price at which promoters/selling shareholders bought the shares over the last few years.