Gujarat Pipavav Port IPO Review

Investors with a three-four-year perspective can subscribe to the initial public offerof Gujarat Pipavav Port (GPPL). The strong parentage of A.P Moller-Maersk group, strategic location and fast growth in volumes, albeit on a low base are positives for this private port. The port is located on the main maritime trade routes and provides a good alternative for ships seeking to anchor at Mumbai.



While GPPL is yet to turn in profits at the net level, it has been profitable at the operational level for a few years now. Higher borrowing costs and initial cost of ramping up operations have resulted in losses. As the funds from the IPO would significantly reduce debt, the company could well move into the profit zone in a couple of years.

Valuations

At the offer price of Rs 42-48, the price discounts the post-issue book value by 2.3-2.5 times. Valuation for Mundra Port and SEZ is nine times (March 2010). GPPL's Enterprise value/EBITDA at about 30-33 times appears a little expensive given that Mundra Port enjoys only a multiple of 35.

However, this ratio could improve significantly for GPPL, once the railway traffic guarantee shortfall payment reduces or vanishes with increase in volume.

Investors need to note that GPPL has a long way to go before it can scale up to Mundra Port's size. Mundra Port handled 21 million tonnes of bulk cargo in FY-10 as against 3.4 million tonnes by GPPL for the year ending December 2009. In terms of revenue, Mundra Port's Rs 1,280 crore (FY-10) is close to six times that of GPPL's.

Mundra's financial metrics therefore suggest that it is a superior play, with the advantage of scale. GPPL, given the backing of the promoter and a small base, may nevertheless grow at a faster pace, provided global trade does not witness another sharp slump.

Company and the offer

GPPL, a non-major, all-weather private port located in the Saurashtra region of Gujarat is promoted by the Netherlands-based APM Terminals, part of the A.P. Moller-Maersk Group, among the largest container terminal operators in the world. The offer consists of a fresh issue of Rs 500 crore and a Rs 50-crore offer for sale by institutional investors. The company's market capitalisation (at the offer price) would be about Rs 2,000 crore.

Demand for non-major ports: Most of the country's major ports have been operating at over 100 per cent capacity utilisation in FY-2010, thus providing ample opportunities for traffic spill-over into non-major ports. Not falling under the purview of the Tariff Authority that regulates major ports, the other ports also have the advantage of flexible pricing. The prospect for Western region ports is also supported by the fact that over 60 per cent of the total cargo (CRISIL Research 2010) is handled in the Western coast of India. Added to this, operator-friendly royalty rates and easier access to vast land has made Gujarat a lucrative region for port developers.

Key positives

The company's strong parentage helps it to develop business with international shipping lines such as Maersk Lines and Safmarine Container Lines, who have made GPPL their exclusive port of call in the state of Gujarat. As a result, GPPL's bulk cargo has more than doubled in the last two years to 3.37 million tonnes. Nevertheless, container cargo accounts for a higher proportion of the company's present cargo, with parent APM being among the leading container operators in the world.

Revenues from LPG cargo and higher volumes from coal bulk cargo may be some of the key accelerators for revenue in the coming years. The Pipavav region is set to see power capacity additions by Videocon Industries, Visa Power, Torrent Power in addition toGSPC's plant. With a good proportion of coal sourced from overseas mines, the port would see significant coal imports. Coal currently accounts for 45 per cent of the port's bulk cargo. GPPL provides LPG cargo services for Aegis Gas. As the company was relocating its LPG cargo jetty, it did not derive any revenue between July 2007 and March 2010 and was instead paying some compensation to the client. This segment may now see lower expenses besides revenue contributions. The relocation also makes the company better placed to take up clients and provide dedicated pipelines.

GPPL has connectivity to the National highways and has a 269 km dedicated railway link, with double stack container rake service, through a venture with the Railways. This link also completes services provided for customers.

Financials

Pipavav's operating profits grew 17 per cent compounded annually over the last three years to Rs 49 crore for the year ending December 2009; the growth has not been attractive for two reasons — one, the slowdown in 2008 and partly in 2009, hit revenues. Two, the company was paying/providing very high (Rs 144 crore so far) penalty as a result of not meeting the traffic volume obligation towards the Western Railways. This amount has now dwindled and may become nil as volumes begin to surpass the minimum guaranteed amount. Interest costs, which were an alarming 50 per cent of total revenues, may also decline by one-third. Debt-equity ratio too would reduce to less than 1.5 after the offer from over three (pre-IPO).

A key limitation for GPPL is that unlike Mundra Port, Pipavav does not have exclusive corporate agreements (barring UltraTech Cement) for usage of port although a number of big names transact with them. However, this may be key to having more sustainable revenue streams.

via BL