Gujarat Pipavav IPO Analysis – Good Asset but Lack of Current Earnings Power makes it Avoidable

Gujarat Pipavav Port which has been promoted by AP Moller Maersk one of the biggest container terminal and ports operators has a long colourful history.The Port which is strategically located with good rail and road connectivity in one of the most industrialized and fastest growing states in India looks a great stock to buy inititally.However its lack  of progess in improving financials and growing volumes currently makes it Avoidable.The company has a lot going for it but currently lacks earnings power having made losses in the last 3 year as well as the current quarter.Valuation also seems on the higher side on both P/B and EV/Sales basis.Thus an investor would best avoid the issue currently and wait for the cargo volumes to pick up for this port before buying it.Here are the pros and cons of this issue

Advantages

1) Good Management and Promoters – Unlike a lot of IPO issues,this company has a solid management with a good track record with its promoters APM being one of the biggest operators of ports in the world.The promoters also owns a number of shipping lines which  would benefit the port in the long term.APM will continue to hold  44% stake in the port after the issue from its currently shareholding of 58%.Note APM also owns equity in another port in India in a JV with government owned Container Corporation of India

2) Revenues and Operating Marging Improving – The Port has  invested around  $500 million to make it one of best run private non major port in India.Its Reves and Margins have been slowing been improving though Net Profits are still Negative

3) Strategic Location in Fast Growing Geography – While the prospectus talks a lot about the strategic location in Gujarat and  most of the cargo volume emanating from the catchment area of the port,the volumes have to still prove this fact.

Disadvantages

a) High Debt Burden –  The company has a sizable debt burden of Rs 1000 crore (~$220 million) which eats away most of the profits.60% of the proceeds from issue of Rs 500 crore will be used to repay the debt which will still remain quite high

b) High Penalty in  case of Volume Shortfalls – The company has a huge liability in the form of an agreement with a Railways company which provides rail connectivity to the port.If the volumes don’t meet a required volume,a big penaly has to be paid.The company paid almost  Rs 100 crore (~$22 million) in the last 2 years and is still paying a small amount this year.This makes the company a double leveraged bet on the downside.

c) Volumes and Revenues not growing as fast as competitors – The only listed other Port in  India – Mundhra Port outclasses  Pipavav Port on all counts of volume growth,margins,customer contracts etc.While Mundhra Port is also expensive they have a good track record and profits to harp about which Pipavav does not.

Summary

This Port Stock  maybe a good buy for all the India Infrastructural Growth Faithful but not for a value investor.This company still have to prove it can generate earnings on a sustainable basis.While a number of PE players have paid more than the issue price in this company,this still does not justify a buy in my opinion.This company might be a good stock to own in 2-3 years but currently you can avoid this issue.