The IPOs of some companies start with a sizzle but soon fizzle; a few launch on a sober note and pick up steam over the next few quarters. The listing of logistics service provider Navkar Corporation (Navkar) falls in the second category. It gained a mere 7 per cent when listing in September 2015 and dipped below the listing price of ₹155 after six months.

The stock price however recovered sharply since March 2016. It raced 30 per cent higher, thanks to the company’s new expansions becoming partly operational earlier than targeted. Even in a challenging market of falling export import (exim) volume, Navkar managed to grow its profit by 39 per cent Y-o-Y in 2015-16.

The stock trades at a trailing 12-months earnings multiple of 27 times, compared with about 30 times at the time of listing. This is cheaper than the price-to-earnings multiple of 33 times of larger peers such as Container Corporation and Gateway Distriparks. The improving macro outlook and port capacity expansion and infrastructure development at ports such as Jawaharlal Nehru Port (JNPT), where Navkar has three container freight stations, bode well. The company intends to capitalise on these by tripling its capacity in the next one to two years; these plans are well underway and its existing facilities are operating at 100 per cent utilisation.

Navkar has the unique advantage of having a private railway freight terminal (PFT). This allows it to transport cargo from the JNPT port to inland destinations. Additionally, any pick up in the country’s export-import trade, which has remained subdued, should help the company’s long-term prospects. Investors can therefore buy the stock.

Revenue growth

Navkar’s plans to increase capacity — from 0.3 million 20-foot truck equivalent units (TEU) to 1 million TEU — should give a leg up to its revenue growth. It is building a new logistics park and inland container depot at Vapi, Gujarat. This region is expected to witness sizeable cargo growth, aided by the Delhi Mumbai Industrial Corridor development. Operations in the logistics park started in the first quarter of 2016-17 (ahead of the estimated start in September 2016) and the management expects about 0.1 million TEU volume in 2016-17.

Also in 2015-16, the company’s existing capacity was nearly fully utilised. Navkar plans to shift some of the Gujarat-based volumes from the Panvel facility and warehousing from Bhiwandi to the new facility at Vapi to handle the demand. Rail operations in the new facility are expected to start by early 2017 and the logistics park is likely to be completed by 2017. Its existing container freight station (CFS) capacity in Navi Mumbai is also being enhanced.

Cargo volume increased 15 per cent Y-o-Y in 2015-16, higher than the three-year average of 11 per cent annually. Revenue however increased only 5 per cent Y-o-Y in 2015-16 to ₹347 crore, lower than the three-year average of 18 per cent. This was due to fall in realisations as the country’s exim volume slipped and the company had to offer discounts to attract customers. The expected pick up in trade volume should aid revenue growth in the long term.

Improving margin

Even as revenue growth was slow, operating profit increased 12 per cent Y-o-Y in 2015-16 helped by higher utilisation. The company had higher other income that helped net profit. Operating and net profit margin improved 2.5 and 6.5 percentage points to 43.7 and 27.4 per cent respectively. In 2015-16, the company’s profit increased 39 per cent to ₹95 crore.

Navkar has managed its debt well; its total debt as of March 2016 is ₹4,500 crore and its debt-to-equity ratio a comfortable 0.34 times. Debt may increase marginally in the near term due to planned capital expenditure, but would ramp down in one to two years.

The company took on foreign currency denominated debt (about ₹400 crore) to reduce interest outgo. While the company has hedged for currency risk, there was forex loss of ₹16.5 crore in 2015-16. This is a sizeable portion of its operating profit (EBITDA) of ₹133 crore. Rupee volatility is a risk to consider as it may reduce net profit.

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