By Geetanjali Kedia
Navkar Corporation is entering the primary market on Monday 24th August 2015, to raise Rs. 600 crore (Rs. 510 crore via fresh issue and Rs. 90 crore via offer for sale by the promoters) in the price band of Rs. 147 to Rs. 155 per share. The issue comprises fresh issue of 3.29 crore to 3.47 crore equity shares of Rs. 10 each, at upper and lower end of the price band and an offer for sale of 58 lakh to 61 lakh equity shares respectively, depending on the price discovered. The issue, representing 27.14% of the post-issue paid up capital at the upper end, closes on Wednesday 26th August.
Navkar Corporation operates 3 CFSs (container freight stations) near Panvel in Maharashtra, with total capacity of 3.1 lakh TEUs (twenty-foot equivalent units), along with a private railway freight terminal. Its wholly owned subsidiary, Navkar Terminals Limited, is setting-up a 4.74 lakh TEUs capacity ICD (inland container depot) near Vapi in Gujarat, to be operational by June 2016. To meet other expansion plans, company is undertaking the IPO to fund (i) capacity augmentation at existing CFS by 2.53 lakh TEUs, with capex of Rs. 115 crore, (ii) development of non-notified area at existing CFSs for Rs. 54 crore and (iii) establishment of an integrated logistics park near Vapi (adjacent to the new ICD being developed) for Rs. 315 crore. All this expansion is expected to go on stream by October 2016.
For FY15, with a capacity utilization of 87%, company reported revenue from operations, of Rs. 329 crore, up 14% YoY, although total revenue growth was lower at 7%, as agri trading business, which reported sales of Rs. 61 crore in FY14, was discontinued in FY15 on account of slim margins. Enjoying income tax benefits under section 80-IA for all 3 CFS, company’s tax rates are in single digits, which strengthens its net margins, being 22% for FY15.Thanks to Rs. 17 crore forex gain in FY14, coupled with forex loss of Rs. 14 crore in FY15, net profit for FY15 de-grew 19% YoY, to Rs. 73 crore, from Rs. 90 crore in FY14.
Thus, EPS of Rs. 6.67 was clocked for FY15, on an equity of Rs. 109.71 crore, as of 31-3-15. Bonus issue in the ratio of 5 shares for every 1 share held, has augmented equity by Rs. 91.42 crore during FY15. With 100% equity owned by the promoters, company’s consolidated net worth, as of 31-3-15, stood at Rs. 744 crore, up by Rs. 310 crore in FY15. Besides bonus issue of equity shares, Rs. 216 crore of the net worth accounts for securities premium of the wholly owned subsidiary Navkar Terminals, which is essentially the revaluated worth of 60 acres of land, on which ICD is being developed.
Navkar Terminals, its wholly owned subsidiary has paid-up share capital of Rs. 1,04,79,000, divided into (i) 50,000 equity shares of Rs. 10 each, 100% owned by Navkar Corporation and (ii) 99,790 6% redeemable preference shares of Rs. 100 each, all owned by the promoters of Navkar Corporation in their personal capacity. These preference shares worth about Rs. 1 crore were earlier issued by Navkar Terminals, to acquire 60 acres of land from the promoters. One wonders why have the promoters been so generous, to exchange land revalued in the books at Rs. 245 crore, for a meagre sum of Rs. 1 crore? While the RHP states that the tenure of preference shares are over 10 years, but it is silent on redemption amount. Is there more to this than meets the eye?
Couple of other aspects involving the promoters, which needs to be highlighted:
- One of the promoter, formerly promoted Jayavant Industries, which raised Rs. 2.85 crore via an IPO in Dec 1995 and in 1999-2000, this company was declared sick. Subsequently, it was re-christened as present day BSE listed Jayavant Products (ruling at a 52 week low price of Rs. 24.05 with current market cap of less than Rs. 20 crore), from which, the promoters have only a few months ago (in May 2015) disassociated from. Going by ‘once bitten twice shy’, investors read caution here!
- The lease rentals which company pays to its promoters, are much below market rates, which result in lower expenses and thus higher profits. Pg 410 of RHP indicates that rent for registered office taken from promoter, as per agreement dated 1-12-14 resulted in rent expense of less than Rs. 5,000 for FY15, being for a period of 4 months. Also, rent for 1.5 months for 28 acres non-agricultural land at Valsad (near Vapi) is just around Rs. 10,000. Commercially, this seems unjustified. Again, why this generosity on the part of the promoters?
- Pg 171 of the RHP mentions that agricultural land belonging to the promoter, is currently being used by the company for commercial purposes (warehousing and parking facilities), for which a formal MoU has also been entered into. Is this in conformity to the land laws?
- Charitable trust of promoters, receives funding in crores each year from the company (over Rs. 4 crore in FY14).
Thus, background and dealings with promoters are not quite transparent and very confidence boosting. Now, coming on to the valuations, at the lower and upper end of the price band, shares are being offered at PE multiples of 22.0x and 23.3x respectively, based on FY15 EPS of Rs. 6.67. Taking an optimistic FY16 EPS estimate of Rs. 8 on expanded equity of Rs. 143 crore (which in itself is high), the PE multiple works out to 18.4x and 19.4x respectively, which is quite aggressive, given that any primary offering must leave at least 15-20% on the table.
Bigger peer Gateway Distriparks, having both CFS and rail logistics businesses with annual topline of over Rs. 1,000 crore, coupled with debt-free status, is ruling at a historic PE multiple of only 19 times. Its EV/EBITDA multiple of 11x is also favourable vis-à-vis Navkar’s EV/EBITDA multiple of 23x, while Navkar also has debt of Rs. 550 crore, which may increase on account of the ICD expansion. At Rs.155, Navkar is likely to have a market cap of Rs. 2,200 crore with enterprise value of Rs. 2,750 crore. On the other hand, Gateway Distriparks has enterprise value of Rs. 3,650 crore, despite 3 times its sales.
Given the confusion and non clarity on the past dealings by the promoter, coupled with expensive valuations, one may give the issue a miss. This is inspite the fact that the business prospects of the company, in the long run are quite promising, but are capital intensive as well. So, one can keep an eye on the stock, post listing, to consider for investment after carefully analyzing the subsequent 2 quarter numbers.
Disclosure: Not applying in the IPO.