Proven investor-unfriendly promoters underplay past IPO record!

Two decades ago they raised Rs 6 cr from public promising a lot, but could not deliver. That does not deter them from raising public money again and this time they want to mop up Rs 600 cr! In a disclosure-driven era, the least SEBI could have done is, insisting full disclosure on the failure of the promoters’ past public ventures. What’s the point in providing a 601-page offer document which does not reveal the promoters’ past record of raising public money? The role of investment bankers who do the cover-up of the promoters’ unsavory past is deplorable.

OFFER AT A GLANCE
Name	Navkar Corporation Ltd
Public Offer	Fresh issue of 3.29 cr to 3.47 cr shares Rs 10 and Offer for Sale of 58 lakh to 61.2 lakh shares from group company
Offer % on Final Equity	27.14% to 28.27%
Post-IPO Promoter Stake	71.73% to 72.86%
Offer Price	Between Rs 147 and Rs 155
Offer Amount	Rs 600 cr
Application Quantity	95 & Multiples of 95
Bid/Offer Opens	August 24, 2015
Bid/Offer Closes	August 26, 2015
Listing	BSE and NSE
IPO Rating	Nil
Book Running Lead Managers	Axis Capital, Edelweiss Financial, SBI Capital
Registrars	Link Intime India

 

The IPO

The initial public offer valued at Rs 600 cr consists of a fresh Issue of 3.29 to 3.47 cr equity shares of Rs 10 each aggregating to Rs 510 cr and an `offer for sale’ of 58 to 61.2 lakh equity shares aggregating to Rs 90 cr from Sidhhartha Corporation Pvt Ltd, one of the group companies of the promoters, which currently holds about 80.95 lakh shares at an average cost of Rs 25 a piece (acquired in 2013). The IPO is being made with a price band of Rs 147-155. Investors should apply for a minimum of 95 shares and multiples of 95 thereafter. Axis Capital, Edelweiss Financial and SBI Capital are appointed as Joint Global Coordinators & Book Running Lead Managers to the Issue while SBICAP Securities and Edelweiss Securities are acting as syndicate members.

 

IPO Object

Of the fresh issue proceeds, the company proposes to deploy Rs 115 cr on the capacity enhancement of the Somathane (Panvel) Container Freight Station (CFS), Rs 54 cr on development of the non-notified areas of its three CFSs and Rs 315 cr on a new logistics park. However, the fund requirement for these objects of the fresh issue has not been appraised by any bank or financial institution as the projects are fully funded by the equity issue.

At its Somathane CFS, the company proposes to enhance its existing capacity and operational efficiency by increasing the stacking capacity through technology upgrade by implementing the Rubber Tyred Gantry Crane system. Somathane’s is the only CFS among its three CFSs which has a private freight railway terminal along with modern infrastructure and facilities like custom bonded warehouses, warehouses, custom area and fully paved open yards for container handling and storage.

In order to complement the proposed increase in stacking capacity at the Somathane CFS, which is expected to enhance the company’s cumulative container handling capacity at all three CFSs to 562,889 TEUs per annum from the existing 310,000 TEUs, the company proposes to develop certain non-notified areas in its Ajivali CFS I, Ajivali CFS II and Somathane CFS to improve the operational efficiency. As all three CFSs are located in close proximity at Panvel, Maharashtra, they propose to utilise the non-notified areas of Ajivali CFS I and Ajivali CFS II to complement the increased container traffic expected at the Somathane CFS post enhancement of its stacking capacity.

The company proposes to establish a fully-integrated logistics park as a one-stop solution for importers and exporters which will provide a host of warehousing and other value added services including cold storage facility for perishable goods, a container maintenance, repair, servicing and cleaning yard, an empty container yard, and garage facility with a workshop for maintenance of vehicles. This logistics park is to be set up adjacent to the proposed inland container depot being developed at Umergaon, District Valsad (near Vapi), Gujarat, by the company’s subsidiary.

 

Lineage

The issuer-company, Navkar Corporation Ltd (NCL), incorporated in September 2008, was formed pursuant to the conversion of a partnership firm, Navkar Infra and Logistics Corporation. The partnership firm was reportedly constituted only a year earlier for the purpose of carrying the business of trading, manufacturing, importing and exporting, and providing infrastructure and logistics services, including operating container freight stations and allied services. Mehta brothers Shantilal Jayavantraj and Nemichand Jayavantraj along with five close relatives were the partners of the firm.

During the existence of the partnership firm, certain partners reportedly contributed land parcels, including land in Ajivali. Accordingly, in financial year 2008, the book value of the land was credited to the capital account. Subsequently, in August 2008, this land at Ajivali was revalued resulting in an increase in book value of such land and such increase in book value was credited to the current account of the firm.

In July 2008 the partners passed a resolution to carry out the business of the firm through a company limited by shares. Pursuant to the firm into a joint stock company, all the assets and liabilities of the partnership firm were taken over by NCL as a going concern and all the erstwhile partners were issued equity shares in proportion to their contribution of capital in the partnership firm. Further upon such conversion, the balance in the current account of the partnership firm, amounting to Rs 97.65 cr, was restated as unsecured loans given by certain members in proportion to their respective shares in the current account of the partnership firm. Some of these unsecured loans, aggregating to Rs 70.50 cr, have subsequently been converted to shares. As on March 31, 2015, the balance outstanding under such unsecured loans, restated upon conversion of the partnership firm was Rs 27.15 cr.

The company’s Ajivali CFS I and Ajivali CFS II were set up in 2008 and 2006 respectively by Preeti Logistics Ltd,  a wholly owned subsidiary of NCL , which was subsequently (in 2010), amalgamated with NCL. Meanwhile in 2009, NCL also established a CFS at Somathane.

 

`Proven’ Promoters

The promoters of NCL, Mehta brothers, are not new to the investing public. During the peak of the unprecedented primary market boom in mid-nineties the Mehtas tapped the capital market twice under two different banners and collected Rs 6.05 cr. Claimed to have been engaged for two decades in the trading business as distributors, C&F agents and agents for well known brand names like Colgate, Palmolive, Pan Parag, Rotomac Pens, etc., the Mehtas floated public Jayavant Products Ltd (JPL) in December 1995 to raise Rs 2.85 cr.

Interestingly, like Navkar Corporation, before going public JPL too took over the business of the promoters’ partnership firm, Jayavant Industries, engaged in manufacture and selling of brooms/handles, sweeping/toilet brushes and allied products. JPL tapped the capital market to fund its Rs 6 cr expansion project at Hubli which was apprised and partly funded by Karnataka State Industrial Corporation. As an existing profit making company, JPL promised a dividend of 20% from 1996-97 onwards.

Just four months after JPL’s public float, Mehtas were once again in the market, this time under the banner Jayavant Industries Ltd (JIL) for setting up a project for the manufacture of scented betel nut powder. JIL was touted as the pioneer in Karnataka to undertake production and marketing of pan products under the corporate sector in large scale. JIL’s project was estimated to cost Rs 5.29 cr of which Rs 3.20 cr was raised from the public.

Exuding great optimism, JIL’s prospectus read:”The chief promoter Nemichand Mehta who has revolutionized the broom market in the south and western parts of the country is pretty confident about the prospects for the betel nut powder business. Further, the promoters are already in the distribution of pan masala and Pan Parag for Kothari Products Ltd”. The prospectus categorically claimed that the promoter expected no impediments to achieve a turnover of Rs 9 cr in the first year itself.

Come post-issue, the promoters threw all their pre-issue promises into the wind. They even failed to pay the listing fees to the regional stock exchanges consequent to which the shares were de-listed by those exchanges. Eventually, the promoters sold their stake in JPL in February 2005 for a price of Rs 2 per share (FV 10) to a different management. JIL’s case was still worse. After eighteen long years Mehtas decided to sell their shares for just 75 paise!

 

CFS Operations

Coming to the present issuer company (NCL), even while their public companies were allowed to sink, the promoters seem to have propped their private interests very well. They have established themselves as a leading CFS operator in India with three CFSs (two at Ajivali and one at Somathane), which are strategically located in Panvel, Maharashtra, in close proximity to the JN Port, the largest container port in India. At the end of May 2015, the three CFSs had an aggregate installed handling capacity of 310,000 TEUs per annum. NCL has a private railway freight terminal which allows it to load and unload cargo from container trains operating between Somathane CFS and the JN Port and to transport domestic cargo to and from inland destinations on the Indian rail network. The company also reportedly owns and operates trailers for the transportation of cargo between CFSs and the JN Port by road. It can handle cargo at controlled temperatures at temperature controlled chamber and through Reefer plug points at CFSs. Its warehouses include a bonded warehouse and an area designated for the consolidation of less than container load containers. Thus NCL has become a fully integrated logistics company working with shipping lines, logistical service providers and customs house agents, importers and exporters.

As regards NCL’s financials, the company’s operating revenue has steadily increased from Rs 154 cr in FY11 to Rs 329 cr in FY15. Operating margin has consistently been above 30% in last four years. The company’s bottom line has grown from Rs 34 cr in FY11 to Rs 74 cr in FY14. More importantly, the company has had healthy cash flows from operations in last five years. Even though the company’s capital is already fairly large at Rs 110 cr, its asset base (Net Block) is also quite impressive at Rs 1100 cr which includes over Rs 703 cr of `land and land development.

	Consolidated		Stand-alone
(Amount in lakh)	Mar-15	Mar-14	Mar-15	Mar-14	Mar-13
Operating Revenue	32876	28885	32875	28885	22823
Trading Turnover	0	6051	0	6051	10513
Other Income	215	2084	326	2084	465
Gross Income	33091	37019	33201	37019	33800
Operating Profit	12174	14490	12301	14490	10642
Operating Margin %	36.4	35.5	36.4	35.5	30.5
Interest	2637	3304	2637	3304	3245
Depreciation	1521	1301	1521	1301	1020
Tax	702	884	707	884	706
Net Profit	7314	9001	7436	9001	5671
Net Oper. Cash Flow	12313	8221	6743	8221	7267
Equity Cap	10971	1828	10971	1828	1478
Reserves	63186	41307	39511	41307	29156
Share Premium	35324	13769	13769	13769	10619
Net Block	110085	69916	78973	69916	62051
Land & Development	70333	37720	42206	37720	35243
Land / Net Block %	66	54	53	54	57
Total Borrowings	45845	36826	41208	36823	37619
Consolidated Reserves got a boost due to amalgamation of NTL which boosted Capital Reserves Rs 22.95 cr and Share Premium Rs 215.55 cr

 

Valuation

The IPO price band (Rs 147-155) puts a market cap of Rs 2100-2200 cr for NCL.  Though NCL’s valuation seems reasonable as compared to Snowman Logistics, it looks over-priced when compared to Allcargo Logistics and Gateway Logistics. The fact that there is a lot of hype around NCL’s IPO and some big names have already committed Rs 180 cr (at the upper band of Rs 155 a share), the IPO may smoothly sail through and one may witness short term gain too. Nevertheless, while bidding NCL at this price, one should not overlook that the promoters average cost of holding is only around Rs 12. In fact, if one takes into account the original cost of acquisition all the land bought from the promoters, their subsequent revaluation and transfer price to the company besides the amount that the group company is going to get from the offer for sale, the promoters’ actual cost of holding may turn out to be negative!

Also, one should keep the following in mind while evaluating the future prospects of NCL. There is conflict of interest as several Promoter group entities engaged in similar activities to the public company.  NCL is capital intensive – and Power and Fuel intensive operations – for a given capital, revenue generation would be low. Income Tax benefits u/s 80-IA 4(i) set to expire in 2017 for 3 CFS which would result in lower tax benefits and consequently increased tax liability. After removing the effect of trading turnover, between fiscal 2011 and 2015, the CAGR in revenue worked out to 21% whereas the CAGR in PBT worked out to 22%. This shows that the growth can at best be linear. On a comparison of consolidated and unconsolidated Balance Sheet and Profit and Loss account, it is evident that the subsidiary did not contribute any revenue but only lead to the bloating of the Balance Sheet.

Further, there are risks associated with significant concentration of business in a single region, viz., JNPT port. Though the company has so far been able to service its debt, significant debt on the books is a major cause for worry.

HOW NAVKAR CORPORATION COMPARES WITH LOGISTICS PEERS
COMPANY NAME	MCAP	EQ	NB	REVEN	P/E	P/BV	P/R	P/NB	OPM	YLD	Share
	(Rs Cr)				(x)				(%)		Price
Container Corporn	30481	195	4071	6149	29.0	4.1	5.0	7.5	22.8	0.9	1563.35
Allcargo Logistics	3914	25	2092	5786	14.9	2.2	0.7	1.9	8.5	0.6	310.50
Gateway Distriparks	3664	109	1026	1096	22.7	4.0	3.3	3.6	29.4	2.1	336.95
Snowman Logistics	1637	167	360	213	58.7	3.9	7.7	4.6	22.4	0.5	98.00
Sical Logistics	929	56	1260	787	53.9	2.1	1.2	0.7	11.3	0	167.00
Arshiya	429	26	3621	339	–	1.2	1.3	0.1	12.1	0	32.50
Kesar Terminals	216	5	33	43	15.6	3.8	5.0	6.5	59.9	0.9	410.30
Sanco Trans	53	2	119	75	22.5	1.0	0.7	0.4	10.0	0.9	294.20
Navkar Corp  – High	2210	143	1101	329	30.2	3.4	6.7	2.0	36.4	0	155.00
– Low	2123	144	1101	329	29.0	3.2	6.5	1.9	36.4	0	147.00

 

Concern

What should disturb the investors most is the attitude of the promoters. The 600-odd pages offer document does not talk about the failure of the promoters’ past public ventures. What went wrong for the promoters’ previous two public companies that they had to finally sell them off at a discount heavy discount? The management’s reply is: “Promoters decided to disassociate with both companies. In terms of the exit process and appropriate compliances, all requisite procedures were followed.”

Why the CFS business was not undertaken under Jayavant Industries Ltd or Jayavant Products Ltd so as to reward those companies’ shareholders?  NCL’s reply is: “The promoter has disassociated themselves in 2005 with JPL and there was no consensus within JIL to enter business of CFS.” If this is the attitude of the promoters towards the aggrieved shareholders of their previous public ventures, what can investors in NCL IPO expect in the years to come?

Moreover, certain transactions of the NCL group are shrouded with suspicion. For instance, in FY13 NCL invested more than Rs 20 cr in Garnet International Ltd, a BSE- listed company, which amounted to 24% stake in the company. Interestingly, NCL was the single largest shareholder of the company yet, it did not have any board representation! What’s more, a significant amount of this investment has now been written off! A close scrutiny reveals that Garnet is controlled by the same people to whom NCL’s Mehtas sold Jayavant Products Ltd in 2005 at a hefty discount!