Gujarat Pipavav Ports

I searched all day today to be able to find a good analyst report on this IPO. As per the SEBI the IPO price band is Rs 41-48/- and should be open from 23rd to 28th of August ’10.

So I took the hardest route. Download the Red Herring Prospectus (a 500 page document) and did some assessment.

Here are the red flags:

  1. Indian banks and financial institutions have invested in this company at as high as 80/- per share. So practically the company has eroded its value over the past 2 years.
  2. For the past 3 years, the company is not able to meet the minimum freight agreement that it promised to railways and other infrastructure. This is an indication that the port is facing several operational difficulties.
  3. Its board members are quite new to the company.
  4. For the past 3-4 years the company has been incurring losses. The IPO of the company is in Aug and yet the company has not prepared its financials for Apr-Jul ’10. For Jan-Mar ’10 the company incurred a loss of 277.7million INR on revenue of 540 million INR. In 2009 the figure was 1176 million INR on revenue of 2191 million INR. For a capital intensive industry with a large fixed cost component, the company is probably not able to achieve economics of operations.
  5. Without taking dilution into account, the company’s book value was Rs 8.9/- per share in March ’10. Another 350 million of losses in the subsequent 5 months and dilution due to fresh equity would bring it down further.

So basically you are paying 6 times the Book value of a loss making company which will continue to make losses in the next 3-4 years.

Generally I am biased towards port and other infrastructure investments (electricity, toll roads etc.). The reason being that

  1. The major ports in the country are clogged and operate at 90-95% capacity.
  2. It takes hell lot of time for a ship to get berth and offload its cargo. Time being money and the logistic company have to pay for ship’s rent while it is waiting gives a huge opportunity for private sector.
  3. The condition of infrastructure and industrial peace and harmony in Gujarat is better than what is faced in Eastern India (West Bengal/Orissa) or in Maharashtra. So private ports in Gujarat are best poised to exploit the growing cargo needs of Northern India.

However if your analysis can prove that the company’s revenue/cargo handling is going to increase 4 folds in the new couple of years, I won’t recommend investing in this company.