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Gujarat Pipavav Port IPO review and analysis by Angel Broking

Contributed by Angel Broking

By Angel Broking

Gujarat Pipavav Port Limited (GPPL) is a private port in proximity to the north-western region which handles around 65% of the container cargo in India. We believe that GPPL is well-positioned to attract incremental container traffic given high capacity utilisation and port congestion at JNPT. We recommend Subscribe to the IPO at the lower price band with a long-term perspective.

No regulatory hurdles to set tariffs: GPPL is not a major port and hence is not covered under the purview of the Tariff Authority for Major Ports (TAMP). Thus, GPPL is free to set its own tariffs making it nimble to respond to changes in market dynamics. In order to attract volumes and combat with global recession, GPPL had reduced tariff in CY2009. However, management has indicated to hike its container tariff by ~25% from CY2010 following improvement in the economy.

Margins to improve with increase in utilisation rates: During CY2009 company experienced OPM expansion of 13% due to better capacity utilization. Going ahead, we estimate 25% margin expansion to 45%,(Mundra clocks OPM of 70% and GPPL management has guided OPM at ~60-70%) over next three years with improvng capacity utilisation. Further, we expect penalty charges to PRCL to fade away with growing traffic and reduction in interest cost which will further enhance margins.

Expensive valuations but underpinned with substantial growth potential: At the lower band of Rs42, GPPL trades at a premium to its global peers at 2.5x CY2011E P/BV v/s 2.0x respectively. We believe that GPPL comes off a low base compared to some established ports and to that extent the growth should command a premium. On the domestic front, the company is trading at a substantial discount to the Mundra port, which trades at 5.9x FY2012E P/BV. We believe that GPPL's discount to Mundra port is justified given the latter's larger scale of operations, revenue from its SEZ and higher profitability growth. However, given GPPL's high growth potential we believe that the 57% discount is unwarranted. Hence, we recommend Subscribe to the IPO at the lower price band with a long-term perspective.

Company Background

GPPL, incorporated in 1992, is the exclusive developer and operator of APM Terminals Pipavav - India's first private sector port. The company entered into a concession agreement with GMB in September 1998, to develop, construct, operate and maintain the port along with the foreshore land and waterfront for 30 years. It is promoted by APM Terminals (holding 57.9% pre-issue), one of the largest container terminal operators in the world with a global network of 49 terminals in 32 countries. The port is primarily engaged in multi-cargo and multi-user operations for container, bulk and LPG cargo. Moreover, it undertakes CFS operations, infrastructure and land related activities in the vicinity of the port. Currently, the container and bulk cargo handling capacity at the port stands at 0.6mn TEU and 5mn tonnes pa, respectively.

Strategic location, robust infrastructure and strong connectivity

APM Terminals Pipavav is strategically located at the mouth of the Gulf of Khambhat (formerly Gulf of Cambay) on the main maritime trade routes in the Arabian Sea. It offers shorter transit time vis-avis JNPT port for cargo to/from the industrialised hinterland in north India (generating ~65% of the total container throughput). We believe that given the high capacity utilisation and port congestion at JNPT, there is tremendous scope for diversion of volumes to the ports on the north-west coast providing significant cost and logistic advantages. The port offers favourable oceanographic conditions of 4,550 channel length and vessel acceptance draught of 14.5 meters (vis-?-vis 12.5 meters at JNPT and 12.5-17.5 meters at Mundra), which enable day and night navigation of ships through the year. There are four berths for handling bulk and containerised cargo and a dedicated LPG berth with strong ancillary infrastructure in place. The port boasts of robust infrastructure by way of two CFS's, eight panamax quay cranes (PQC), 18 rubber-tyre gantry (RTG) cranes, five re-stackers, paved rail sidings and port users' buildings.

The company owns 38.8% in a joint venture (JV) with Indian Railways (IR), viz. Pipavav Railways Corporation (PRCL), which maintains the 269km broad gauge railway link connecting the port to the commercial hub of Surendranagar in Gujarat. India's first double stack container rake service, with a capacity of 180 TEUs, was provided by PRCL between the port and Kanakpura ICD (Jaipur) in March 2006. Presently, five to six trains (maximum capacity of 22 trains) per day are being operated in each direction. The port is also connected with NH-8E by a four-lane road link of 10km thereby servicing vital commercial hubs between Mumbai and Delhi.

Revenues driven by bulk and container cargo

GPPL's revenue is evenly contributed by container and dry bulk cargo. The company derives its bulk cargo business mainly from the coal and fertilisers trade. While fertiliser demand is usually robust between June-September owing to the sowing season, coal imports are relatively less cyclical and sustain on demand from the power plants and cement companies in the region. Although the container volumes have consistently improved for GPPL (CAGR of 33.5% during CY2006-09), realisations have dropped due to economic slowdown and trade discounts offered to the liners for calling on the port. The company also provides marine services to Ultratech, which includes pilotage services to vessels as well as port dues from these vessels.

IPO details

GPPL is coming out with its IPO for Rs500cr through fresh issue of 10.4-11.9cr shares in the price band of Rs42-48 per share. Around Rs10cr has been earmarked for employee applications. The issue proceeds would be utilised for prepayment of loans, capital expenditure, purchase of capital equipment and general corporate purpose. Besides, The Infrastructure Fund of India, LLC and The India Infrastructure Fund have offered to partially sell their stakes to the tune of 7,601,248 and 4,106,121 shares respectively, through the IPO.

Investment Rationale

Location advantages

GPPL's location on the west coast is strategic to service the landlocked north and north-western region of India, which contribute ~65% of the cargo handled at the Indian ports. Over the last five years, cargo traffic has registered 11.3% CAGR for west coast ports v/s 5.2% for the east coast. It provides a convenient international trade gateway to Europe, Africa, America and the Middle East. Further, JNPT which handles around 60% of the container traffic may lose market share to ports like Mundra and Pipavav who have larger draft to accommodate, faster evacuation and competitive rates.

Better connectivity to road and rail network

GPPL owns 38.8% stake in PRCL, which runs double stack container trains unlike other ports that helps lower freight costs and ensures faster evacuation of containers from the port. Further, the port has a four-lane road link of ~10km to the national highway for transporting cargo to and fro the port. The distance via road from the port to the key trading hubs such as Ahmedabad, Jaipur and Delhi is 302km, 873km, and 1,115km, respectively.

No regulatory hurdles to set tariffs coupled with lower royalty charges

GPPL is not a major port and hence is not covered under the purview of the Tariff Authority for Major Ports (TAMP). Thus, GPPL is free to set its own tariffs making it nimble to respond to changes in market dynamics. In order to attract volumes and combat with global recession, GPPL had reduced tariff in CY2009. However, management has indicated to hike its container tariff by ~20-25% from CY2010 following improvement in the economy. On the other hand, as per the concession agreement, GPPL is likely to pay waterfront royalty of Rs10/tonne for solid cargo and Rs20/tonne for liquid cargo with 20% hike every three years. This works out to 1.5- 2.5% of revenues as royalty to the Gujarat Maritime Board (GMB), which is quite low compared to the other private ports like Mundra.

Diverse cargo mix

GPPL can handle a diverse mix of cargo such as coal, fertilizer, steel, minerals and container. Thus, the port caters to a diverse set of end users. Further, re-location of the LPG cargo jetty has resulted in zero revenues since the last two years as it was converted into a multi-purpose cargo berth. However, we believe that the LPG cargo jetty will start generating revenues from CY2011.

Leveraging on promoter's global presence

APM Terminals is one of largest container terminal operators in the world with a global network of 50 terminals spread across 34 countries and five continents. In CY2009, globally APM terminals handled 31mn TEUs with revenues of US $3bn. GPPL derived ~26.2% of revenues in CY2009 from the APMM group and has exclusive rights for Maserk vessels to be called at the Pipavav port, which will provide visibility.

Margins to improve with increase in utilisation rates and reduction in penalty

During CY2009 company experienced OPM expansion of 13% due to better capacity utilization. Going ahead, we believe with favorable industry dynamics (15% container and 8% cargo traffic CAGR over FY2010-15E) and economy back on track, this trend to continue and company to enjoy operating leverage leading to enhancement in margins. We have penciled in ~25% margin expansion to 45%,(Mundra clocks EBITDA margins of 70% and GPPL management has guided margins at ~60-70%) over next three years.

GPPL is bound to transport minimum guaranteed traffic of 3mn tonnes through Pipavav Rail Corporation Ltd (PRCL). GPPL paid around Rs 108cr and 30cr in CY2008 and CY2009 respectively as penalty charges due to non-fulfillment of the Minimum Guaranteed Quantity. PRCL currently provides railway transportation for ~ 35.0% of the cargo going through the Port. We expect penalty charges to PRCL to fade away with growing traffic which will further enhance margins.

Concerns

Slowdown in economy to impact global trade

As per the International Monetary Fund (IMF), the global economic growth rate has declined from 5% in 2007 to 2.2% in 2009. As a result, sea-borne trade registered subdued growth in 2009. Pertinently, GPPL's growth in container and bulk cargo is largely dependent on the growth in sea-borne trade. However, unlike the developed economies, the Asian countries, which are witnessing a surge in traffic following improving economic conditions, contribute ~ 70% of overall sea-borne trade. Thus, we expect GPPL to witness 25% CAGR in container traffic and 10% in bulk cargo over the next three years on a low base and growing sea borne trade.

Competition risk

Competition may increase on the back of development of new ports in India as GMB has invited bids for the development of additional ports in Gujarat, which may force GPPL to reduce tariffs.

Dependence on small number of customers

The company's top five customers contributed ~46% of revenues with the promoter group, APMM contributing 26% of overall revenues in CY2009. Hence, loss or significant decrease in spend by any of its major customers may impact the company's profitability.

Outlook and Valuation

At the lower band of Rs42, GPPL trades at a premium to its global peers at 2.5x CY2011E P/BV v/s 2.0x respectively. We believe that GPPL comes off a low base compared to some established ports and to that extent the growth should command a premium. On the domestic front, the company is trading at a substantial discount to the Mundra port, which trades at 5.9x FY2012E P/BV. We believe that GPPL's discount to Mundra port is justified given the latter's large scale of operations, revenue contribution from its SEZ and higher profitability growth. However, given GPPL's high growth potential we believe that the 57% discount is unwarranted. Consider, over the last couple of years, GPPL has exhibited strong growth rates at the operating level following an improvement in utilisation levels and growing traffic. GPPL also expects to retire high-cost debt utilising Rs300cr from the issue proceeds resulting in reduction in interest expenses from Rs115cr in CY2009 to Rs92cr in CY2011E. Further, management has indicated to hike container tariffs in line with market dynamics with re-negotiation of contracts from CY2010. Consequently, we expect GPPL to report profit from CY2011E. We recommend Subscribe to the IPO at the lower price band with a long-term perspecive.

Industry Overview

Non-major Indian ports to play a big role

As per data from the Department of Shipping, there are 12 major ports and ~190 minor ports handling 95% volumes and 70% in value terms of India's cargo. The classification of a port as major/non-major is based on the control and governance rather than its capacity or cargo traffic handled, with major ports falling under purview of the Port Trusts regulated by the Central government and the non-major ports being regulated by the State governments or run by private entities. Currently, just 60 nonmajor ports handle traffic.

India's international trade recorded a CAGR of 19.0% during FY2005-10 with its share in total world trade (including services) increasing from 1.1% in 2004 to 1.5% in 2008. It is interesting to note that while the traffic at major ports has risen at a CAGR of 7.5% during FY2000-10 to 561mn tonnes, the non-major ports have witnessed a CAGR of 15.6% to 266mn tonnes during the mentioned period. Consequently, the share of non-major ports in total volume has increased from 18.7% in FY2000 to 32.0% in FY2010. While India's GDP grew at an average 8.0% between FY2006-10, the port traffic increased at a CAGR of 9.8% during the period. As per CRISIL estimates, the port traffic is expected to surge at a CAGR of 9.0% to 1,163mn tonnes between FY2010-14 on the back of strong growth in the economy. Notably, traffic at nonmajor ports is expected to grow at a faster CAGR of 19.5% (to 493mn tonnes) compared to the major ports, which are expected to post a CAGR of 4.9% (674mn tonnes) over the period. The share of non-major ports is thus likely to increase to 42.2% in FY2014.

Container cargo to outpace general cargo

It is estimated that 75% of the cargo, primarily capital and engineering goods, textiles and food items can be transported in containers. It is estimated that globally containerisation levels stand at ~80%, while in India it has stabilsed at around 50% in the past few years. Moreover, while there is a direct relation between growth in the economy and international trade for a country, it is also observed that demand for containers changes in tandem with the GDP growth. In India, container traffic logged a CAGR of 16% between FY2005-10 from 4.0mn TEU to 8.4mn TEU on the back of strong growth in international trade. The share of non-major ports has seen a phenomenal increase from less than one per cent in FY2005 to 14.0% in FY2010, led by ports like Mundra and Pipavav. This was because of the strategic location of the ports in Gujarat, which combined with Maharashtra handles 60% of the total container  traffic. Given a 2.0x sensitivity of the container growth to the GDP growth, containerisation levels are expected to remain robust going forward.

Dry Bulk Cargo

The bulk cargo trade in India is driven mainly by export of iron ore and import of coal and fertlisers. Dry bulk cargo volumes at Indian ports have registered a CAGR of 8.4% during FY2005-10 to 406mn tonnes of which 70% was handled by the major ports. While the bulk cargo traffic at major ports has registered a CAGR of 7.0% between FY2005-10, the non-major ports have witnessed a CAGR of 12.1% over the period. As per CRISIL estimates, going ahead dry bulk cargo traffic at the Indian ports is set to increase at a CAGR of 11.2% between FY2010-15. The key drivers for such growth include phenomenal demand for coal (expected CAGR of 19.6% over FY2010-15) by the cement and coal-based power plants, iron ore exports (expected CAGR of 6.9% over the mentioned period) to countries like China and Japan.