Brownfield expansion plan in Somathane CFS to trigger growth for Navkar Corporation (NCL): Currently, the company is increasing capacity of Somathane CFS from 2,20,000 TEUs to 4,72,889 TEUs which would be funded through the proceeds of the upcoming IPO. The additional capacities are expected to commence operating by 2HFY2017. As of now, the company is operating its existing CFS capacity at more than 85% utilization level. Further, with the Somathane CFS having a private freight railway terminal (PFT) along with modern infrastructure, we believe that this would be an added benefit for the company.
Greenfield expansion plan of a logistics park + ICD to boost company’s revenues: NCL is setting up a fully-integrated logistics park as a one-stop solution for importers and exporters. The company will operate this logistics park, spread across 28 acres (90% of the area is useable), through three models – (1) value basis, (2) space basis and (3) quantity basis. This facility has a huge potential to generate strong top-line growth for the company. The company would be spending around ~Rs315cr to develop the logistics park and it would be funded through the proceeds of the upcoming IPO. The logistics park is expected to commence commercial operation by 2HFY2017.
Further, NCL is also setting up a new inland container depot (ICD) at Umergaon, Valsad district (near Vapi), Gujarat, over 60 acres of land. The ICD is being developed by its subsidiary – Navkar Terminals Ltd (NTL) and is expected to complete by June 2016. The project is being funded through debt as well as internal accruals (NCL has already spent more than Rs400cr towards gross block in FY2015). This ICD will have a capacity of ~4,74,000 TEUs. Vapi is an industrial area supporting high traffic; thus, we believe that the company would get better utilization and there would be strong potential to generate significant revenue, going forward.
(1) Potential for improvement in ROE: Although the company’s RoE is currently lower, we believe there is substantial potential for it to improve going forward. This would be owing to the following reasons: – (a) The company would be investing around ~`115cr from the IPO proceeds towards capacity expansion. This would result in an increase in capacity by ~81% at a low investment cost. As a result, we expect the ROE to improve from the current 9.8% to 15.7% post expansion. (b) The company has already allocated funding for the upcoming ICD at Valsad, Gujarat, which resulted in an increase in gross block by more than Rs400cr in FY2015. So on excluding this funding amount, the ROE would be higher compared to our calculation.
(c) The upcoming logistics park will add to the top-line and contribute towards ROE expansion.
Outlook and Valuation: Currently, NCL looks slightly expensive in terms of PE valuation. Going forward, in our view, the company will be less expensive on a PE valuation basis on the back of exponential growth in revenue with strong expansion plans for existing CFSs (capacity of CFSs to increase by 81% to 5,62,889 TEUs at a low investment cost). The opening of the new ICD (4,74,000 TEUs) and the logistics park will also add to the revenues, thus leading to a higher EPS for the company. On the Price/Book value front, the company is valued at 2.3x (at the upper end of the price band; Pre-IPO book value per share); in terms of PE based valuation, the company is valued at 23.2x (at the upper end of the price band; Pre-IPO EPS) on the basis of FY2015 numbers. Considering future growth potential of the company, we recommend a Subscribe on the issue from a longer term perspective.

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