Three private equity funds which had invested in the venture are set to incur losses

Gujarat Pipavav Port is entering the capital market to raise Rs500 crore through a 100% book-building issue by offering 1.17 crore shares. The question is why are three private equity funds exiting the stock at a loss if the issue is worth investing in? The issue opens on 23 August 2010 and closes on 26 August 2010. The bidding for Qualified Institutional Buyers (QIBs) closes on 25th August. The initial public offer (IPO) has been assigned 'Grade 4' by rating agency Credit Rating and Information Services of India Ltd (CRISIL) which indicates 'Above Average' fundamentals. The company has set the price band at Rs42-Rs48 per share.

Gujarat Pipavav Port has been promoted by APM Terminals which has a global network of 50 terminals in 34 countries and five continents. It handled 31 million twenty-foot equivalent units (TEUs) in the year ended 31 December 2009. After taking over management control in March 2005, APM Terminals currently owns a 57.90% stake in Gujarat Pipavav Port.

In the calendar years ended 2007, 2008 and 2009, APM Terminals Pipavav handled 1.66, 2.07 and 3.37 million tonnes of bulk cargo and 0.19 million, 0.20 million and 0.32 million TEUs of container cargo, respectively.

The Infrastructure Fund of India, LLC (holding 4.9%) and The India Infrastructure Fund, LLC had acquired the shares for Rs42.85 and Rs66.45 respectively. These private equity (PE) funds are set to incur losses at a time when the IPO price band is set at Rs42-Rs48 per share. IDFC Infrastructure Fund is the second-largest stakeholder of the company with 10.20% holding. IDBI Bank Ltd holds 8.90%.

Gujarat Pipavav posted a net loss of Rs27.76 crore on a total income of Rs56.77 crore for the first quarter (January-March 2010). Its financial year begins in January. It reported a net loss of Rs117.66 crore for the year ended December 2009. The company will utilise the IPO proceeds to prepay its loan, for capital expenditure and investing in capital equipment. It will prepay Rs300 crore, a part of its loan in the financial year (FY10) and invest Rs82.54 crore for capex.

The company had entered into a 'Traffic Guarantee Agreement' with the government and Ministry of Railways/Western Railways and PRCL on 10 January 2003. Under this agreement, it has guaranteed to provide rail freight traffic of one million tonnes in the first year of operations, two million tonnes in the second year of operations and three million tonnes from the third year of operations onwards to Pipavav Railway Corporation Ltd (PRCL) until June 2034. However, Gujarat Pipavav Port was unable to meet these agreements for which it had to cough up Rs107.69 crore, Rs30.64 crore and Rs5.40 crore in the years 2008, 2009 and 2010 respectively to PRCL.

Mundra Port and SEZ Ltd which went public in late 2007, trades at a PE of 41. Mundra Port reported a net profit of Rs211.30 crore on revenues of Rs415.65 crore for the first quarter of the financial year (FY10). 

"Private ports will show good growth on the back of bulk buying of iron ore, food grains and coal. Iron ore and coal will be imported because of robust demand for steel, especially coal, because we don't have good quality coal in India. On the back of that, the demand for coal import will be higher which means that these ports will get good revenue. There's a good growth for ports in the next two years," said Shraddha Shroff, shipping analyst, KR Choksey Shares and Securities Pvt Ltd.

Kotak Mahindra Capital Company Ltd and IDFC Capital are the lead book running managers to the issue while IDBI Capital Markets Services Ltd is the co-lead book running manager.