Gujarat Pipavav Port IPO Analysis, Updates, Company Profile, Risk and Concern Outlook

| August 25, 2010 | 1 Comment

Gujarat Pipavav Port

Gujarat Pipavav Port Limited is coming out with a 100% book building; initial public offering (IPO) of 117.07 lakh equity shares of Rs 10 each in a price band Rs 42-48 per equity share.

At least 60% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 10% would be available for the non-institutional bidders and the remaining 30% for the retail investors.

The issue will open on August 23, 2010 and will close on August 26, 2010. The shares will be listed on BSE as well as NSE. The face value of the share is Rs 10 and is priced 4.2 times of its face value on the lower side and 4.8 times on the higher side.

Book running lead managers to the issue are Kotak Mahindra Capital, IDFC Capital and IDBI Capital Market Services. Compliance Officer for the issue is Manish Agnihotri.

Profile of Gujarat Pipavav Port

Gujarat Pipavav Port was incorporated on August 5, 1992 to build, construct, operate and maintain the port at Pipavav, District Amreli, in the state of Gujarat, India. The company was initially promoted as a joint venture between GMB and Seaking Engineers (now SKIL Infrastructure). In June 1998, Gujarat Maritime Board (GMB) divested its stake in favour of SKIL Infrastructure. The APMM Group acquired a 13.5% equity interest in the company in June 2001. Pursuant to the share sale and purchase agreement dated March 30, 2005, SKIL Infrastructure, Nikhil Gandhi, Montana Valves and Compressors and Grevek Investment and Finance divested their shareholding in the company in favour of APM Terminals, the Industrialization Fund for Developing Countries and IDFC Infrastructure Fund.

The company is the developer and operator of APM Terminals Pipavav, India’s first private sector port, which has multi-cargo and multi-user operations. It has the exclusive right to develop and operate APM Terminals Pipavav and related facilities until September 2028 pursuant to the Concession Agreement with GMB and the Government of Gujarat (GoG). It is promoted by APM Terminals, one of the largest container terminal operators in the world with a global network of 49 terminals in 32 countries and five continents.

In the year ended December 31, 2008, APM Terminals handled 34 million TEUs and had revenues of over $3 billion. Since acquisition of management control by APM Terminals in March 2005, the company has its expanded facilities to handle up to 0.60 million TEUs of container cargo as well as approximately five million tonnes of bulk cargo per year, which varies depending on the type of cargo handled.

At present, APM Terminals owns a 57.9% equity interest in the company. APM Terminals Pipavav is one of the principal gateways on the west coast of India and is located in the Saurashtra region of the state of Gujarat. APM Terminals Pipavav is an all-weather port and is protected by two islands, which act as a natural breakwater maximizing port safety.

APM Terminals Pipavav is strategically located near the entrance of the Gulf of Khambhat (formerly known as the Gulf of Cambay) on the main maritime trade routes, which helps it to serve imports from and exports to the Middle East, Asia, Africa, the United States, Europe and other international destinations. A wide range of customers use its port facilities. The key customers in container cargo include shipping lines such as Maersk Line, Mitsui O.S.K Lines, Safmarine Container Lines, Samudera Shipping Line Limited, Shreyas Shipping and Logistics Limited, Hyundai Merchant Marine India Private Limited, etc.

Gujarat Pipavav Port IPO Grading

CRISIL has assigned an “IPO Grade 4” to the proposed Initial Public Offering of the company indicating above average fundamentals, to the initial public issue of the company.

Proceeds are being used for:

  • Prepayment of loans of our Company;
  • Investment in Capital Expenditure;
  • Investment in Capital Equipment; and
  • General corporate purposes.

Port Industry Overview

India’s share of world trade, which has gone up from 1.1% in 2004 to 1.5% in 2006, is poised to reach a level of 5% per cent by 2020. Hence, the traffic at ports in India is expected to increase from a current level of 720 million tonne to 877 million tonne per year by fiscal 2012 and 962 million tonne per year by fiscal 2014, according to the National Maritime Development Programme.

India has an extensive coastline of 7,517 kilometres (excluding the Andaman and Nicobar Islands). The ports and shipping industry in India have been in greater demand due to the growth in imports and exports on account of India’s economic expansion. According to the Department of Shipping (Ministry of Shipping, Road Transport and Highways), Government of India, (“Department of Shipping”) Indian ports handle around 95% of the total volume of the country’s trade and about 70% in terms of value.

Indian ports are divided primarily into major ports and non-major ports. The classification of a Major Port compared to a Non-Major Port is not based on the capacity or cargo traffic but on control and governance. According to Department of Shipping, there are 12 Major Ports and 200 Non-Major Ports (state ports or minor and intermediate ports) spread across nine coastal states. Only 66 Non-Major Ports are currently operational. Major Port trusts are regulated by the Central Government, which currently manages 11 out of the 12 Major Ports. The Major Port at Ennore is a corporate entity incorporated under the Companies Act, 1956, and was commissioned in February 2001. The Non-Major Ports are regulated by the respective state governments and many of these ports are private ports or captive ports. Major Ports are principally large ports having a combination of dedicated bulk terminals, specialized container terminals and general cargo berths.

The significant increase in India’s international trade during the recent years has resulted in traffic handled at Major Indian ports increasing at a CAGR of 10.3% to 519 million tonne in the fiscal year 2008. The traffic at ports in India is expected to increase to 877 million tonne per year by fiscal 2012 and 962 million tonne per year by fiscal 2014. The pressure on the major ports is an opportunity for the non major ports along the West Coast of India, for the container traffic bound for or originating from the hinterland of India.

Gujarat Pipavav Port IPO Pros and strengths

Strategic location- Port Pipavav is one of the principal gateways on the west coast of India. It is strategically located near the entrance of the Gulf of Khambhat on the main maritime trade routes, which helps to serve imports from and exports to the Middle East, Asia, Africa and other international destinations. Further, favorable oceanographic conditions enable day and night navigation of ships throughout the year. Port Pipavav currently has a vessel acceptance draught of 12.5 metres, with outer channel depth of 12.5 metres and turning basin depth of 11.5 metres at chart datum. It has handled bulk vessels carrying approximately 78,000 MTs of bulk cargo and container vessels of 6,200 TEUs capacity. Upon completion of proposed dredging, all jetty basins at the Port are expected to have a depth of 16.0 metres at chart datum.

Well-developed port infrastructure and good rail and road connectivity – Port Pipavav has a well-developed port infrastructure. The 4,550 metre channel length at the Port enables day and night marine operations throughout the year due to favorable oceanographic conditions. It has four dry cargo berths with a total length of 1,075 metres. These berths are utilized for handling containers, bulk, break bulk, general and project cargo. It has deployed one mobile-harbour Mannesmann Gottwald harbour crane and two-rail mounted ELL cranes for the efficient handling of bulk and break bulk cargo. It has also installed weighbridges to support the bulk cargo operations, including an in-motion weighbridge on rails. Further, its container yard is equipped with 18 RTGs, including 10 eco-friendly RTGs, which are expected to achieve fuel savings of up to 45.0% as compared to regular RTGs. It has also developed infrastructure for reefer services which include supply of electricity and monitoring of reefer containers. Going further, its existing rail and road network from Port Pipavav to inland regions of northern and northwest India, including Delhi and the available land for future transportation initiatives provides them with a competitive advantage for attracting larger volumes of cargo.

Benefit from its promoter, APM Terminals – The company is backed by a strong promoter group – APM Terminals, is one of the largest container terminal operators in the world. They receive several benefits from its relationship with APM Terminals such as access to modern technology, operational know-how, best industry practices, increased bargaining power and competitive rates for purchase of port equipment, and access to experienced personnel resources from APM Terminals. They are also part of the APMM Group, which had revenues of $51.2 billion for the year ended December 31, 2007. They receive benefits such as developing business with shipping lines and assistance in developing relationships with third parties in the shipping industry from APMM Group. Maersk Line and Safmarine Container Lines, part of the APMM Group, are also among the company’s largest customers and operate regular cargo shipping service from its Port to international destinations, including the Middle East, Europe and the United States.

Owns the right to determine its tariffs – The company is not covered within the regulatory purview of the Tariff Authority of Major Ports, and hence, is entitled to determine the tariffs at the Port, subject to the provisions of the Indian Ports Act, 1908, as amended. Their ability to determine tariff rates helps them to compete effectively and gives them operational flexibility.

Gujarat Pipavav Port IPO Risks and concerns

Too much reliance on small number of customers and partners for its revenues- The company derives significant portion of its revenue from a few major carrier customers. The revenue from these customers may vary from year to year. Any loss of any of its major customers or any significant decreases in spending by some or all of its top five customers on its services may reduce the demand for its Port and the services they offer and may adversely affect their revenue, profitability and results of operations. In addition, their income may be affected by competition, increase in fuel prices, the cyclical nature of the shipping industry and decreasing tariffs in the port and related services industry and a number of factors, other than performance, that could cause the loss of a customer. Further, the company does not have long-term contracts with companies that use the port for the import and export of bulk cargo.

Profitability mainly dependent on various tax benefits and other incentives- Being an infrastructure company, it benefits from certain tax incentives. These tax incentives might not continue in the future or that such tax credits shall be available for the durations of 10-15 years only as per amended clause. The non-availability of these tax incentives could adversely affect results of operations and financial condition. Apart from this the EPCG scheme in India facilitates import of capital goods at a concessional rate of duty with an obligation to export an amount equal to eight times the duty saved and maintain export obligations based on the average turnover of the last three years. Importing secondhand capital goods without any restriction on age is also allowed under the Foreign Trade Policy. The company has imported certain equipments under license pursuant to the EPCG scheme. Under this scheme, they are required to refund an amount to the Government of India equivalent to the duty benefit enjoyed under the said scheme, plus interest, if they fail to make the required exports within the required time period.

Risky nature of business- Although most of the operations of the company are in India, they service customers from around the world, including Asia, Europe and North America. As a result, they are exposed to risks typically associated with conducting business internationally, many of which are beyond their control. Further, the company is also subject to various environmental risks such as oil spills and disposal of hazardous waste and chemicals. They, like other port operators and manufacturers in India, are subject to various central, state and local environmental, health and safety laws and regulations concerning issues such as accidents, damage caused by air emissions, wastewater discharges, solid and hazardous waste handling and disposal. Their business and facilities may be adversely affected by severe weather conditions or natural disasters in Gujarat or elsewhere. Prolonged disruption of operations as a result of natural disasters would also entitle their customers to terminate their contracts with them.

Dependency on promoter company- APM Terminals- APM Terminals, its promoter company, is one of the largest container terminal operators in the world with a global network of 50 terminals in 34 countries and five continents and currently owns a 57.9% equity interest in it. APM Terminals is part of the APMM Group, for the years ended December 31, 2007, 2008 and 2009 and the three month period ended March 31, 2010, APMM Group accounted for approximately 34.2%, 22.5%, 26.2% and 28.6% of its operating revenues, respectively. In addition, they receive benefits such as access to modern technology, operational know-how, best industry practices, increased bargaining power and competitive rates for purchase of port equipment, and access to experienced personnel resources from APM Terminals and benefits such as developing business with shipping lines and assistance in developing relationships with third parties in the shipping industry from APMM Group. Any reduction in its business with APMM Group companies, or decrease in the direct or indirect benefit they receive from such companies could adversely affect their financial condition and results of operations.

Gujarat Pipavav Port IPO Outlook

Gujarat Pipavav Port (GPPL), incorporated in 1992, is the developer and operator of APM Terminals Pipavav – India’s first private sector port. APM Terminals Pipavav is an all-weather port and is protected by two islands, which act as a natural breakwater maximizing port safety. The company is promoted by APM Terminals, one of the world’s leading terminal and port operators. GPPL is principally engaged in providing port handling and marine services for container cargo, bulk cargo and LPG cargo. In addition, GPPL operates a container freight station for stuffing and destuffing of container cargo to and from ships. It also generates revenue from land-related and infrastructure activities. The other advantage for the company is that its Port Pipavav has a well-developed port infrastructure and is one of the principal gateways on the west coast of India. The company also has the advantage of determining its own tariff rates as it is not covered within the regulatory purview of the Tariff Authority of Major Ports which gives them operational flexibility.

One of the main concerns of the company is that, it relies too much on its promoter company- APM Terminals. Any reduction in its business with APMM Group companies, or decrease in the direct or indirect benefit they receive from such companies could adversely affect its financial condition and results of operations. Further, the company does not have long-term contracts with companies that use the port for the import and export of bulk cargo which may also impact the revenues of the company. Also it enjoys various tax benefits and other advantages which if gets terminated might affect the profitability of the company. Apart from this, its business and operating facilities may be adversely affected by severe weather conditions.

The shares of the company are being offered in a price band of Rs 42-48. At the lower end of the price band the company will sell 11.94 crore shares while at the upper end it will sell 10.42 crore shares. Apart from this, 1.17 crore will be sold by an existing investor. It holds 38.8% interest in Pipavav Rail Corporation (PRCL), a joint venture company with Indian Railways, which was formed to provide rail connectivity to the port. Company’s reported revenue from container cargo was Rs 89.1 crore, Rs 102.5 crore and Rs 32.5 crore in 2008, 2009 and Q1 FY10 respectively. Though, over last few years’ company has been reporting losses at PAT level reflecting lower EBITDA margin and higher debt burden. However, with improved demand scenario and better pricing EBITDA margins has displayed a sharp improvement in 2009 and Q1 FY10. But the company is having a strong plus point, its Strong promoter background. The issue sounds competitively priced, though it has been reporting losses for the past couple of years and which widened in the last year its prospects are good with a long term view, keeping in mind the growing trade of the country. It is comparatively smaller than its industry peers and don’t have such kind of diversification so it won’t be worth comparing with Mundra Port and SEZ.

Popularity: 8% [?]

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Category: IPO

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