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Gujrat Pipavav Port Ltd IPO review and analysis by Nirmal Bang

Contributed by Nirmal Bang

By Nirmal Bang

Background

Gujarat Pipavav Port Ltd (GPPL) is the developer and operator of “APM Terminals Pipavav” port. It was incorporated in 1992 by Gujarat Maritime Board (GMB) & SKIL Infrastructure Limited (SKIL). APM Terminals, one of the world’s largest terminal operators with a global network of 50 terminals in 34 countries, acquired 13.5% equity in the company in 2001. In 2005 APM terminals acquired management control by purchasing shares from SKIL group. Currently APM Terminals own 57.9% of the company’s stake. Though the port is a non-major port and was operational since 1996, post acquisition of management control by APM, it upgraded its facilities at par with international standards and enhanced the facilities to handle 0.60 million TEU of container cargo and about 5 mn tonnes of bulk of cargo per year. The company has leased land of 1561 acres, out of which only 485 acres has been developed and balance land can be utilized for further expansion of the port.

APM Terminals Pipavav is India’s first private sector port, and is one of the principal gateways on the west coast of India. It is an all weather port with 4550 metere channel length, allows it to carry day and night marine operations throughout the year. It is primarily engaged in port handling & marine services for Container Cargo, Bulk cargo and LPG Cargo and has created adequate support infrastructure facilities with 4 berths for handling bulk & containerized cargo and a single LPG berth to carry the operations affectively.

The port is gifted with two islands, which act as a natural  breakwater maximizing port safety. It holds 38.8% interest in Pipavav Rail Corporation Ltd (PRCL), a joint venture company with Indian Railways, which was formed to provide rail connectivity to the port.

Business Segments

Container Cargo Services

APM Terminal Pipavav has capacity to accommodate container vessels of 6200 TEU’s capacity and provides allied services like loading, unloading and storage of containers to number of major container shipping lines. The optimum utilization of container terminal is determined on allied services, through better operational efficiency it can have an optimum utilization rate. Company’s reported revenue from container cargo was Rs. 89.1 Crs, Rs. 102.5 Crs and Rs.32.5 Crs in 2008, 2009 and Q1 FY10 respectively.

It also provides Reefer Container Handling (refrigerated cargo) and Container Freight Stations Operations (packaging, repackaging & cargo warehousing services). Company’s volumes in refrigerated cargo have increased sharply over last 2 years. It handled approximately 31,557 & 39,108 TEU’s in 2008 and 2009 respectively. This number is expected to be much higher as company has handled 18,919 TEUs of refrigerated cargo in Q1 FY10 itself.

Bulk Cargo Services

The majority of bulk cargo business comes from international trade. In terms of volume, the business has grown at CAGR of 42.5% from 2007 to 2009. Coal, Fertilisers and Minerals are the major bulk cargo handled by the company. Going ahead import of coal is expected to increase given addition of power generation capacity, apart from these minerals, fertilizers would also provide promising business. The company has strong equipment base and storage facilities for berthing & deberthing bulk cargo facilities. In terms of volumes, coal is the largest bulk commodity handled at APM Terminals Pipavav. Given the demand-supply mismatch in the Indian power sector and potential for growth in thermal power generation activities in India, import of thermal coal is expected to remain a key growth area for APM Terminals Pipavav.

LPG Cargo Services

In LPG Cargo services it provides hose pipe connections to the vessels and intra port transportation through pipelines from the jetty to the storage tank area. From July 2007 to March 2010 the services were abandoned due to relocation of LPG Jetty. LPG terminal has been restarted from April 2010. At present Aegis Gas (erstwhile Shell gas business) is the sole customer for the company.

Marine Services from Ultratech Cement

This segment includes the revenues generated from Ultratech Cement jetty by providing pilot age services to vessels calling on the captive jetty built by Ultratech Cement within the company’s port.

Land related revenues

This segment contains the revenues generated on account of rental income from sub-leasing of land to various port users and forms an insignificant part of the company’s total revenues.

Objects of the Issue

The GPPL IPO intends to raise Rs. 500 Crs through the sale of shares. The price band is kept at Rs. 42-48. At the lower end of the price band the company will sell 11.94 Crs shares while at the upper end it will sell 10.42 Crs shares. Apartfrom this, 1.17 Crs will be sold by an existing investor. Company, has strong shareholder base with various institutions holding significant proportion of the share capital. Some major institutions associated with the issue are IDBI Trusteeship, IDFC Infrastructure Fund – India Development Fund, IDBI Bank Limited and New York Life International India Fund (Mauritius) LLC.

Proceeds of the issue will be used for:

- GPPL will use Rs. 300.0 Crs towards repayment of loan.

- Rs.82.5 Crs will be spent for investment in capital expenditure to improve and enhance the infrastructure facilities at APM Terminals Pipavav

- Rs. 31.1 Crs investments in capital equipment which is needed on a recurring basis to augment its cargo handling capacity

Investment Thesis

Capacity addition and industry dynamics to provide strong growth opportunities

GPPL has witnessed robust growth over last couple years with significant increase in volumes. At the same time company has expanded its capacity with an increase in capacity utilization. Currently the company’s capacity utilization for container cargo is at 38%. Going forward we expect that utilization rate will  increase with the increase global trade owing to economic recovery in major economies. According to the CRISIL, total container capacity in India in fiscal 2010 was around 11.7 million TEUs, out of which 74% (i.e. 8.6 million TEUs) w as in Maharashtra and Gujarat. In terms of throughput, CRISIL expects non-Major Ports container throughput in India to grow at a CAGR of 27.0% in the next five years. Moreover, CRISIL expects dry bulk handling capacity in Gujarat and Maharashtra to grow at a CAGR of 15% over the next five years, from 71 million tons in fiscal 2010 to 167 million tons in fiscal 2015. This will provide GPPL with tremendous growth opportunities.

Further, the resumption of services at the LPG Cargo facilities will boost the company’s top-line. The company commenced the remodelling and relocation of the LPG jetty in July 2007 and has therefore not recorded any income from LPG cargo in 2008, 2009 and 1Q FY10. Relocation of the LPG cargo jetty was completed in April 2010 and will start contributing to the company’s income in 2Q FY10.

Improving margins to make company profitable sooner than later

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. Company’s EBITDA margin has increased from 7.6% in 2008 to 20.1% in 2009 and further to 29.6% in Q1 FY10. With strong rebound in demand and higher utilization rates we expect the margins to improve further in coming quarters.

Moreover, the company will utilize Rs.300 Crs from the proceeds to repay a portion of the outstanding debt which will reduce the interest costs. Currently company is paying interest at very high rates as the interest rates were very high when the loan was borrowed and the interest costs stands at more than 50% of the company’s revenues. Therefore, we believe that the growth in topline, better efficiency and lower interest costs will have a significant positive impact on the company’s PAT margin.

Strong promoter background and experienced Management

Company’s promoter, APM Terminals, is one of the largest container terminal operators in the world with a global terminal network of 50 terminals in 34 countries and five continents. In the year ended December 31, 2009, APM Terminals handled 31.0 million TEUs and had revenues of more than US$3.00 billion. APM Terminals is part of APMM Group, which had revenues of US$48.5 billion for the year ended December 31, 2009. Owing to its relationship with APM Terminals company gets access to modern technology, operational knowhow, best industry practices, increased bargaining power and competitive rates for purchase of port equipment, and access to experienced personnel resources from APM Terminals. This is likely to benefit the company in the long term. In addition to this shipping major “Maersk Line” is also a group company, which has fleet of more than 500 vessels and presence across the globe, being a group company it would help the company to have business as the Maersk line may prefer its group company’s port. Currently around 25% of total revenue for the company is contributed by the Maersk Line.

Strategically well located port to boost company’s growth prospects

Port is strategically located near the entrance of the Gulf of Khambhat on the main maritime trade routes, which helps the company to serve imports from and exports to the Middle East, Asia, Africa and other international destinations. APM Terminals Pipavav provides significant logistic and cost advantages to shipping lines that service both the Mumbai area and the developing northern and north western regions of India. Due to its proximity to Mumbai, shipping lines have the flexibility to make an additional call to Pipavav and cater to cargo coming from the north western belt.

Further, the existing road and rail network from APM Terminals Pipavav to inland regions of northern and northwestern India, including Delhi, and the available land for future transportation initiatives provides the company with a competitive advantage for attracting larger volumes of cargo. APM Terminals Pipavav is connected to the Indian Railways network through an approximately 269 km-long dedicated broad gauge railway link maintained by PRCL, which is 38.8% owned by the company.

Access to land provides significant future expansion capabilities

GPPL has the right to develop approximately 1,561 acres of land at APM Terminals Pipavav of which it has developed approximately 485 acres. While the remaining undeveloped land can be used for further expansion of port operations, including for additional berthing and cargo handling facilities both at the waterfront and in the back-up areas. The Port has extensive shore-based area to allow development of backup infrastructure and allied industries. This available land will help GPPL to expand the market for its port services and provide sufficient resources for future expansion.

Key Risks

Non extension of concession agreement

Company is operating the port under BOOT model and has signed concession agreement for 30 years which comes to end by Sept 30, 2028. The Gujarat Maritime Board may take control or choose to extend the concession period and increase the royalty charges in lieu of extension. Currently the company has only one port, any decision by the GMB in future against the interest of the company may hamper the revenues.

Revenue concentrated from few customers

Company’s 5 top clients contribute around 50% of revenue and its one of the group company Maersk line accounts for around 25% of total business. Any loss of major customer may reduce the business and impact the profitability.

We cannot directly compare GPPL with Mundra Port and SEZ Ltd (Mundra) as the company is much smaller and provides limited services as compared to Mundra which has SEZ and other assets. GPPL has a lower margin as compared to Mundra as the company’s utilization rate was lower and it was incurring costs to expand capacity and relocate its LPG cargo ports. Going forward, with the operational efficiency, startup of LPG cargo services and lower debt burden we expect the company’s margin to improve substantially. Looking at the long term growth prospects of the company and scope to expand the margin we recommend to SUBSCRIBE to this IPO.