Gujarat Pipavav Port: Good prospects, but expensive

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http://www.business-standard.com/india/news/good-prospectsexpensive/405695/

There is no doubt about the growth prospects of container traffic, which typically grows at double the rate of the country’s economic growth. Even as India’s foreign trade is still minuscule compared to the size of its economy, the prospects are bright for port logistics companies, especially those catering to north and north-western regions, which account for 65 per cent of India’s container traffic. The traffic in this region is expected to grow 11-12 per cent over the next three to four years.

Gujarat Pipavav Port Ltd (GPPL), promoted by the biggest terminal and port operator in the world, APM Terminals, is one of the first private sector port developers operating in Gujarat, providing port handling and marine services for container cargo, bulk cargo and LPG cargo. In light of the projected outlook for the sector, the company’s prospects look good. The key concern stems from the IPO’s expensive pricing.


Key advantages
Its terminal is about 10 hours from the Mumbai port (as against 24 hours in case of Mundra port), which is helping the company get higher business, aided by increasing congestion at Mumbai’s ports. About six power plants will be commissioned near its terminals and 11,164 Mw of capacity will be added by 2012. This offers huge opportunity for handling coal cargo in the region.

STILL IN THE WOODS
In Rs croreCY08CY09Q1CY10
Revenue167.3219.154.1
Expenditure154.6175.138.0
EBIDTA (%)7.620.029.6
Interest74.1115.736.3
PAT-67.6-117.7-27.8
ISSUE DETAILS
Price band (Rs)42-48
Opened on23-Aug
Closes on26-Aug
Crisil rating4/5

Also, its terminals provide relatively shorter time-transit for cargo moving to north India, as it is well connected with the main railway network through its own (38.8 per cent stake) 269-km rail lines. Additionally, the port’s long channel length and draught (depth) of 14.5 metres (compared to 12.5m at JNPT in Navi Mumbai and 12.5-17.5m at Mundra) are key advantages that can attract large ships.

Its association with APM not only brings it experience and technology but also helps it get large and valuable clients. For instance, the company has clients such as Maersk Line and Safmarine Container, which account for a large part of India’s trade.

High debt
While the company makes profits at the operating level, higher interest cost has led to net losses in the past. The company proposes to prepay Rs 300 crore of its loans of Rs 1,072 crore from the IPO proceeds. Its debt-equity ratio is expected to come down to one in CY12 as compared to 3.8 times at present. The loan repayment will save about Rs 35 crore in annual interest cost and bring down its net losses in future.

Improving operating leverage
Besides gains from lower debt, as the company’s capacity utilisation improves from current 30 per cent levels (capacity of 0.6 million, 20-ft equivalent units), it will be able to cover up for the fixed cost, thereby leading to higher operating profit margins. Margins, 21.3 per cent in CY09 (Mundra Port reported 70 per cent margins), are expected to rise to 45-50 per cent over the next two years, led by higher container volumes. On the whole, expect the company to make net profits only after CY11.

Valuations
On the back of its business advantages, underutilised operating asset, expected de-leveraging and growing industry, the business prospects of GPPL remains promising. This is also a reason that Crisil has assigned a grading of four out of five, which indicates the business fundamentals are above average. However, the grading does not cover the valuation, which is expensive and will cap gain in the medium term. The IPO is priced at 2.5 times its post-offer book value and 23 times its enterprise value, based on estimated earnings before interest, tax, depreciation and amortisation for CY10.

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