Gujarat Pipavav Port Limited (GPPL) is tapping the capital markets with a fresh issue of shares worth Rs 510 crs which includes an employee reservation of Rs 10 crs and an offer for sale by one of its private equity investors of 1.17 cr shares in a price band of Rs 42-48. The issue opens on Monday the 23rd of August and closes for QIB’s on Wednesday the 25th of August and all other bidders on Thursday the 26th of August.

History
GPPL was a project conceived by Mr Nikhil Gandhi better known as the promoter of Pipavav Shipyard Limited. This company was incorporated in 1992 and was a joint venture between GMB (Gujarat Maritime board) and Seaking Engineers Limited now known as SKIL Infrastructure Limited. In June 1998, GMB divested its stake to SKIL. In June 2001 SKIL sold 13.5% of the company to the APM group. In March 2005 the balance holding in the company was sold to AMP group along with some private equity investors.

Business
GPPL is the developer and operator of APM Terminals Pipavav, India’s first private sector port. The port has multi cargo and multi user operations. The company GPPL has the exclusive rights to develop and operate the port and related activities till September 2028 pursuant to the Concession agreement with GMB and the Government of Gujarat.

The promoter of the company is APM Terminals, one of the largest container terminal operators in the world with a network of 50 terminals in 34 countries spread across 5 continents. The parent has in the year ended December 2009 handled 31 million TEU’s (twenty foot equivalent unit) and had revenues of over 3 billion US$. The present ownership of APM in GPPL is 57.9%.

GPPL is an all weather port and is located in Saurashtra region of Gujarat. The presence of two islands in the vicinity acts as a natural break water, maximising port safety and also ensuring that the waters are calm. This makes the port an all weather port. Currently the port is able to handle vessels with a draught of 14.5 mts. The port has four berths which are used for handling bulk and containerised cargo and also has another LPG berth. The port has extensive support infrastructure such as conveyors, bagging facilities for fertilisers, railway sidings etc.

The company has a December ending and has handled bulk cargo of 1.66 million tons in December 2007, 2.07 million tons in December 2008 and 3.37 million tons in December 2009. It also handled 0.19 million TEU’s in 2007, 0.20 million TEU’s in 2008 and 0.32 million TEU’s in 2009. In the three months ended March 2010 the bulk cargo handled was 0.49 million tons and 0.10 million TEU’s indicating a consistent growth. The key imports in to the port in the bulk segment include coal and fertilisers, while on the exports include cement, steel scrap, agricultural products, iron fines and pellets, minerals, de-oiled cakes, salt and soda ash. The port also sees a lot of exports of fish and fish products or seafood through the ‘reefer’ service.

GPPL has a royalty agreement with GMB based on the tonnage of cargo handled at the leased land and waterfront. The royalty is Rs 10 per ton for solid cargo and Rs 20 per ton for liquid cargo. The company is currently paying half of the amount until the time the approved capital cost for the port is set off against the difference between the waterfront royalty and the concessional waterfront royalty. Royalties paid in the previous years have been Rs 2.32 crs in 2007, 2.66 crs in 2008, Rs 5.09 crs in 2009 and Rs 1.30 crs for the three months of 2010. These royalties have varied between 1.5 to 2.4% of the total revenue of GPPL.   

There is a dedicated railway link from Surendranagar to the port which has been set up by the company Pipavav Railways Corporation Limited which is a joint venture company between GPPL and the Indian railways. There was a minimum guarantee of three million tons of freight to be provided to this company in the third year of operation and compensation to be paid in case of failure to do so. The company GPPL has paid Rs 107.69 crs for the year ended March 2008 and Rs 18.72 crs for the period ended March 2009.  

Objects of Issue
The objects of the issue which is raising Rs 510 crs as a fresh issue is as follows: –

Financials
GPPL reported total income of Rs 164.96 crs in December 2007, Rs 198.45 crs in December 2008, Rs 198.45 crs in December 2009 and Rs 56.78 crs in three months ended March 2010. Its net loss before tax was Rs 41.88 crs in 2007, Rs 67.23 crs in 2008, Rs 112.07 crs in 2009 and Rs 27.76 crs in three months ended March 2010. Being a loss making company it doesn’t pay any tax other than some fringe benefit tax which was there in earlier years.

The port is picking up traffic and with further developments like the setting up of a large power project by Videocon in the vicinity and industrial growth in the area will add to revenues going forward. The object of the issue is to repay Rs 300 crs of debt which would reduce the interest burden and also allow the company restructure its current borrowings and reduce the interest costs which are in the region of 13 to 13.5%.

Valuations and comparisons
Being a loss making company means there is negative earnings and therefore the price earnings multiple is not there. One has to look at the potential which can be there in the next few years and also look at comparables. The nearest or closest comparable is Mundra Port and  SEZ which is trading at a price earnings multiple of 45.85 times its March 2010 earnings of Rs 17.49 and 38 times based on June quarter 2010 annualised of Rs 5.27. Its revenues for March 2010 were Rs 1392.52 crs and for three months were Rs 415.65 crs. Its net profit was Rs 700.98 crs for March 2010 and Rs 211.30 crs for three months ended June 2010. Its market capitalisation based on the closing price of Friday the 20th of August 2010 on the BSE of Rs 801.85 was Rs 32,128 crs.

GPPL is available at a market capitalisation post IPO at Rs 1,832 crs at the lower band and Rs 2021 at the upper band.

Growth Drivers
The   growth drivers for GPPL are many. The company has now been through the tough times and has been able to put its act together. Business has stabilised, everything is now in place and the exponential growth in traffic will help everything fall in place. The composition of fixed costs and variable cost is skewed in favour of fixed costs and as the cargo handled moves up this component of fixed cost effectively reducing means upside.

Location of Pipavav is about 10 hours by sea from Mumbai while Mundra is approximately 24 hours from Mumbai by sea. The recent oil spill in Mumbai has helped in diversion of cargo to Pipavav and the fact that the parent of GPPL is operating a container berth at JNPT does help GPPL.

New business and the rapid industrialisation in Saurashtra region will be a big growth driver for GPPL. Videocon group is setting up a power project of 1200 MW and is expanding the same by doubling the capacity to 2400 MW at Pipavav. This power project would use coal through conveyor belt and would require no transportation yet coal handling, berthing etc would give revenue to GPPL. The company is now using the capacity of the minimum freight guarantee to the railways and as such there is no penalty to be paid to them.

The well developed port infrastructure, the all weather port and the proximity to the land locked Northern and North western parts of India will drive growth. Pipavav is well connected by road and rail to all parts of the country. The strong promoters and their experience would help the company capitalise the strengths of the group and expertise in running a port. The extremely low royalty being paid by GPPL will be a big driver as cargo handled increases going forward compared to other revenue sharing agreements in public private partnerships.

Risks and risk mitigation
It’s been a long struggle for the company and of the 30 year concession agreement 12 years are over. It means that with 30% of the time period having expired, the company is yet to make money. The infrastructure is in place and even the advent of one of the largest container terminal operators in running and owning the company is yet to bring about a turn around. High cost of debt is a concern and the main  object of the issue is repay Rs 300 crs of debt which would at current interest rates mean a reduction of interest charges of Rs 40 crs every year.

There could be concerns that if with this capital infusion things don’t turn around what next? There is plenty of economic activity all around and one should see increased activity at this port. The large requirement of fertilisers and fertiliser inputs is one big growth area.

I believe the biggest factor in favour of GPPL is the huge land that is available to the company for the handling and processing of cargo. This land availability would allow the company to double its required jetties from the present 5 to 10 without concern for the land required for handling the cargo Reports available from a couple of the private ports indicate that the land availability with them is becoming a concern and is likely to hamper the growth going forward.

Conclusion
GPPL is offering shares at a price at which it invested when it acquired the company in 2005. The hard times and the teething problems with such an infrastructure company are more or less behind them. Revenues are now on the rise and have registered a compounded annual growth rate (cagr) of 47% over the last three years. In terms of volumes the same have grown at a CAGR of about 63%. The private equity investor who is offering shares for sale is selling half of his stake at a loss and this is without taking into account the fact that he was invested for five years. The company is offering an excellent opportunity to make money on listing and also a long term story considering the growth, opportunities and the Indian performance. I believe that investors must subscribe for listing gains and then take a call on the stock once broad markets consolidate. The fact that markets are trading at 30 months high does make the broad markets fairly valued if not a tad overvalued.

I believe there is an opportunity to make listing gains of between 20 and 25% and one should not be surprised if the retail portion is over subscribed about 7 times. Apply for decent listing gains.

SEBI disclaimer: – I intend to subscribe to the above issue.