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Gujarat Pipavav Port Ltd IPO: Our view - Views on News from Equitymaster

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Gujarat Pipavav Port Ltd IPO: Our view

Aug 23, 2010

Gujarat Pipavav Port Ltd (GPPL) has come out with its IPO starting today. The company plans to raise Rs 5 bn through the IPO in order to repay debt and invest in infrastructure facilities.

Here is our brief analysis of the IPO. We will soon be uploading a detailed note.

Reasons to apply

Strategic location: GPPL is strategically located to serve the landlocked northern and northwestern regions of India which have experienced significant manufacturing and trade growth. GPPL is also closer to JNPT for traffic heading to or coming from northern and northwestern India. These regions currently generate 66.0% of the total container throughput in India propelling significant container volume growth at the ports located on the west coast. GPPL is also strategically located near the entrance of the Gulf of Khambhat on the main maritime trade routes serving imports from and exports to the Middle East, Asia, Africa and other international destinations. Strong economic growth in the northern regions as well as the growth in demand for cargo services provides a strong market for GPPL.

Operating leverage play: Port management is predominantly a fixed cost business model. Once the capacity utilization increases, the fixed cost gets spread over the high revenue base boosting margins. This is evident from the income statement where margins have multiplied three fold over the last few years. Moreover, ports generally require high capex in the initial phase to put the basic infrastructure in place. However, GPPL's basic infrastructure is in place and thus capital investment required to further expand will be low and requisite time to scale up the business will be less. Further, GPPL also plans to repay certain portion of the debt (effective interest rate was 13%-13.5% p.a.) via IPO proceeds bringing down overall interest cost and boosting the bottom-line which has been in the red over the past 5 years.

Reason not to apply

Bottom-line in the red: GPPL has incurred losses over the last 5 years. Although the company has managed to improve the efficiency at the operating level, bottom line continues to bleed due to higher depreciation and interest cost. Since now the company has the basic infrastructure in place capex intensity is likely to reduce bringing down the depreciation expenses. However, if the capacity utilization does not show an improvement, bottom line will continue to bleed.

Withdrawal of flexible tariff regime: In the port business, GPPL competes with both domestic and international companies, including ports located on the northwest coastline of India and non-major ports located in Gujarat. Presently, GPPL is not covered within the regulatory purview of Tariff Authority of major ports (TAMP), which provides considerable flexibility in determining the tariff rates at the port. If GPPL is unable to determine the tariff rates at the port or is required to levy rates specified by any regulatory authorities it can have material impact on the financial position of the company


Although GPPL does offer an operating leverage play it has a stretched balance sheet, with bottom line in the red. At the IPO price band of Rs 42-48 per share, the issue is priced at a significant premium to the other listed entities in this space. The stock is thus richly valued and hence does not make an attractive investment proposition. Hence, we recommend you to "AVOID" the IPO.

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