Primary Offer: Navkar Corporation - Too costly for comfort

What should an investor do when shares of a company — in a promising industry, backed by strong fundamentals and on an expansion path — are offered at a high premium?

This is the dilemma of the IPO of Navkar Corporation (Navkar), which operates three container freight stations near Jawaharlal Nehru Port (JN Port) near Mumbai.

While the company’s business appears sound, investors can take a cautious view and avoid the IPO in the light of its rich valuation and lack of near-term triggers. Its small market capitalisation also makes it vulnerable in a broader market decline.

The company’s offer price band of ₹147-155 is expensive and discounts its 2014-15 earnings per share of ₹5.2 by 28-30 times. This is at a premium to peers, which are themselves trading at historically high valuations.

For instance, Gateway Distriparks is priced at 20 times its 2014-15 earnings — twice its three-year average valuation. Allcargo trades at 16 times 2014-15 earnings.

Navkar’s valuation is comparable to its much larger peer, Container Corporation of India, that has market capitalisation of over ₹30,000 crore.

But the State-owned company enjoys unique advantages, such as access to strategic land assets, a large cash balance and pricing power that justify this premium.

In contrast, Navkar’s market capitalisation, post-listing, is likely to be around ₹2,200 crore at the high-end, making it a risky bet. Also, the company’s planned expansions to increase capacity three-fold — from 0.3 million 20-foot truck equivalent units (TEU) to one million — would only contribute to earnings after 2016-17. So, while the long-term revenue prospects are bright, there are no near-term triggers.

Navkar plans to raise ₹510 crore from the new issue and ₹90 crore through offer for sale; it plans to use nearly half the funds raised to set up a new logistics park and inland container depot at Valsad, Gujarat (near the Delhi Mumbai Industrial Corridor development).

The company’s new warehousing and cold storage facilities will benefit from freight traffic growth in that area.

The company also plans to enhance its existing container freight station (CFS) capacity in Navi Mumbai. Navkar has a private railway freight terminal (PFT) for handling cargo carried by train, connecting inland destinations with the JN Port.

Having the railway link is a key positive as more cargo can be handled affordably by rail compared to road transport. Also, JN Port handles nearly half of all port container freight traffic in India and is expected to increase its cargo capacity by 20 per cent to 0.8 million TEU in 2015 and additional capacities are also planned for the future.

These bode well for revenue growth from Navkar’s Navi Mumbai CFS expansions.

Revenue from its core cargo services increased at a brisk 18 per cent yearly in the last three years. In 2014-15, the company discontinued its agro trading business, and overall revenues dipped 6 per cent to ₹329 crore.

Profit growth averaged 16 per cent as utilisation improved in the last three years. In 2014-15, Navkar’s operating margin was a healthy 36 per cent, up from 35 per cent the year ago.

Interest costs fell, boosting profits, as Navkar switched to foreign currency loans.

Management indicates that the currency risk has been mostly hedged, but sustained rupee depreciation or higher foreign currency interest rates may negate savings.

The company’s business is capital intensive, but it has managed its debt well. As of March 2015, the company’s total debt was ₹483 crore. At a debt to post-issue equity ratio of 0.6 times, this is healthy.

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