Navkar Corporation: No immediate gains

At the upper end of the price band, Navkar is valued at 23 times its FY15 earnings, versus 20 times for a diversified revenue model of Gateway Distriparks

Navkar Corporation is a container freight station (CFS) operator with three CFSs — all located in Maharashtra’s Panvel — servicing the export and import of containers at the Jawaharlal Nehru Port (JN Port), Navi Mumbai.

The three units put together have a handling capacity of 0.31 million TEUs (twenty foot equivalent units), and handled about 0.26 million TEUs in FY15, a capacity utilisation of 87 per cent. Navkar also has a private railway freight terminal that allows it to load/unload cargo from container trains, operating between its CFS and JN Port as well as transport domestic cargo to/from delivery/pick-up points on the domestic rail network.

Of the Rs 600 crore it is raising, Rs 90 crore is via offer-for-sale, while the rest (Rs 510 crore) is through issue of fresh shares. About 60 per cent of the funds raised will be used for setting up a logistics park at Umergaon, Vapi, Gujarat. A major part of the remaining funds will be used in capacity expansion of its Somathane container freight station at Panvel, which will help to improve its capacity by 81 per cent to 562,000 TEUs by September 2016.

It is also developing an inland container depot (ICD) adjacent to the logistics park from internal accruals and debt. The ICD will have a capacity of 474,000 TEUs, and will include warehouses and a railway siding facility, which will facilitate the transportation of cargo from and to the nearest railhead. The facility will cater to the adjoining industrial cluster that houses companies from the chemicals, textiles, engineering, food products and steel sectors. With the Vapi ICD expected to come online by June 2016, the total capacity at the end of 2016 will triple to 1.03 million TEUs from the current levels.

While the company has managed to grow its volumes continuously in a fragmented and highly competitive CFS space, the key driver of the export-import sector is the domestic and global demand environment. Further, what will aid volumes is a move towards higher containerisation (intermediate to finished goods) that will help CFS and ICD players like Navkar.

The container sector is expected to grow at an annual rate of nine-11 per cent during FY15-17 (to Rs 6,000 crore in FY17), from six per cent annual growth between FY11-14 (revenues of Rs 4,500 crore in FY14). Given the high competition, there is little pricing power in the business (tariff revision is largely cost related) with revenue growth coming entirely from volumes. Over the FY13-15 period, the company recorded container volume growth of 10.5 per cent. Nevertheless, steady volume growth, high operating profit margins (35-40 per cent) and capacity utilisation are the key metrics in the business and Navkar has fared well on these counts.

While the company’s services revenues over the FY13-15 period have grown at 19.5 per cent. Overall revenues in FY15 were lower than FY14 as its trading segment ceased operations. Before 2014, the trading segment contributed significant revenues (upwards of 25 per cent) to the company’s total revenue. This came down to 17 per cent in FY14. The company decided to exit the business in FY15 due to lower profitability. Almost the entire revenue currently comes from services, of which cargo handling is the largest component accounting for 72 per cent of overall revenue. Profits, too, were higher in FY14, as there was a higher component of other income from forex gains at Rs 21 crore, compared with Rs 3 crore in FY15.

The closest peer to the company is Gateway Distriparks’ container freight station business. While total volumes for Gateway Distriparks was at 3.86 lakh TEUs with Mumbai contributing to about 2.23 lakh TEUs, Navkar’s Mumbai facilities handled 0.26 million TEUs in FY15.  At the upper end of the price band, Navkar is valued at 23 times its FY15 earnings per share as compared to 20 times for a diversified revenue model of Gateway Distriparks which also includes rail freight and cold chain businesses. Given the significant expansion in the next 18 months, earnings could see an uptick and premium is expected to come down vis-à-vis its larger peer. Given no immediate upside, investors will have to wait at least a couple of years for the growth to play out to justify this premium. Only those with a long-term investment horizon should apply to this issue.