IPO Analysis

                                   Gujarat Pipavav Port Ltd.
                                                               Advise: Avoid

  

Gujarat Pipavav Port is principally engaged in providing port handling and marine services for: (i) container cargo, (ii) bulk cargo,and (iii) LPG cargo. In addition, it operates a CFS and also generates revenue from land-related and infrastructure activities. It currently accepts vessels with up to 14.5 metre draught at chart datum and deploys three tugs for providing pilotage and towage services. It has four berths with a total length of 1,075 metres used for handling bulk and containerised cargo and an LPG berth with a service deck of 65 metres and a length between extreme mooring dolphins of 308 metres. The 4,550 metre channel length at the Port allows day and night marine operations throughout the year. It has created extensive support infrastructure to handle container, bulk and LPG cargo, such as container yards, yard handling equipment, quay cranes, rubber-tyred gantry cranes, paved rail sidings, warehouses,open stackyards and a port users‟ building to accommodate the offices of custom house agents, stevedores‟ agents and shipping lines. 

Objects of the Issue:
The Net Proceeds are proposed to be utilised for the following objects:

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

Investment Highlights:

• World seaborne trade has grown almost continuously since the 1970s with over 80% of world merchandise trade. During the past three decades, the annual average growth rate of world seaborne trade is estimated at 3.1%. At this rate, it would be expected to increase by 44% in 2020 and double by 2031,potentially reaching 11.5 billion tones and 16.04 billion tones, respectively.

•  India's share in total world trade, which includes trade in the merchandise and services sector has gone up from 1.1% in 2004 (the initial year of the five-year Foreign Trade Policy (2004-09) to 1.45% in 2008.

• The traffic at ports in India is expected to increase to 877 million tones per year by fiscal 2012 and 962 million tones per year by fiscal 2014. In the next five years, Industry Research expects non-Major Ports to continue gaining market share in containers and bulk cargo handling as throughput growth is expected to be over 25% CAGR, against below 10% CAGR for Major Ports.

• APM Terminals Pipavav is one of a small number of deep draught gateways on the west coast of India and is located in the Saurashtra region of the state of Gujarat. It is approximately 140 kilometres southwest of Bhavnagar and approximately 150 nautical miles from ports in and around Mumbai. It is approximately 90 kilometres away from the Diu airport, which is the nearest airport.

• It 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 them serve imports from and exports to the Middle East, Asia, Africa, the United States,Europe and other international destinations.

• 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, The Shipping Corporation of India Limited, Emirates Shipping Line, Malaysia International Shipping Corporation, Orient Overseas Container Line Limited and United Arab Shipping Company.

• Strategically located to serve the landlocked northern and northwestern regions of India, which are expecting significant manufacturing and trade growth. It is closer than JNPT for traffic heading to or coming from northern and northwestern India.

•  It is connected to the Indian Railways network through an approximately 269 kilometre-long dedicated broad gauge railway link maintained by PRCL, which is 38.8% owned by them. It also has a four lane road link of approximately 10 km to National Highway-8E for transporting cargo to and from the Port. The road distances from the Port to key tradings hubs such as Ahmedabad, Jaipur and Delhi are 302 km, 873 km, and 1,115 km, respectively.

•  APM Terminals is one of the largest container terminal operators in the world with a global terminal network of 49 terminals in 32 countries and five continents. Maersk Line and Safmarine Container Lines, each part of APMM Group are both strategic customers & largest  customers of GPPL and operate regular cargo shipping services from Port to international destinations, including the Middle East, Europe and the United States.

Key Concerns: 

• Small number of customers and partners account for a large proportion of its revenue. Any loss of its major customers or any significant decreases in spending by some or all of its top five customers on our services may reduce the demand for Port and the services that are offered and may adversely affect the revenue, profitability and results of operations.

• Failure to meet traffic volume obligations under the Traffic Guarantee Agreement could materially affect its business, cash flows and results of operation.

• Reduction in business with APMM Group companies, or decrease in the direct or indirect benefit from such companies could adversely affect its financial condition and results of operations.

• Inability to effectively manage growth or successfully implement business plan and growth strategy could have an adverse effect on its business, results of operations and financial condition.

Valuation & Advise:

At the lower and upper end of the price band, the issue is quoting at P/BV of 4.3-4.9x its Dec FY09 Book Value of Rs 9.78. Its peer in this space is Mundra Port trading at P/BV of 9x and PE of 46x FY10 EPS of Rs. 17.5 per share. The traffic at ports in India is expected to increase to 954 million tons per year by 2012 & 1167 million tons by 2014. Traffic at the ports is expected to surge at a CAGR of 9.7% from 2008-2014 due to buoyant Indian economic growth. But we do believe that GPPL as compared to Mundra Port is comparatively smaller and it will take time for the company to deliver a positive PAT. One can definitely look for better avenues to park their money for better returns. Since not much peers are available we suggest going long on Mundra Port to enjoy higher comparative valuation. We give an AVOID for the issue.