Navkar: Boxed into a corner - Sell

The share price performance of Container Freight Station (CFS) operator Navkar has been insipid. This is despite the fact that the country’s export and import trade — which was on a downtrend — has picked up. In the first half of 2017-18, the value of exports and imports rose 7.3 per cent and 20.3 per cent y-o-y, respectively.

The company’s logistics park and inland container depot at Valsad, Gujarat (near the Delhi Mumbai Industrial Corridor Development Corp) — for which it raised funds through an IPO in September 2015 — has been operational. Navkar also owns and operates a private railway freight terminal (PFT) at Jawaharlal Nehru Port (JNPT), Navi Mumbai. And its new PFT at Valsad is expected to be operational soon.

Yet, these positives have failed to lift the stock price. The price has remained nearly unchanged from the levels seen last September (around ₹200), even as the market rallied. The muted performance may be due to reasons such as tepid volume growth, lacklustre profits and lingering concerns over the impact of Direct Port Delivery (DPD) implementation by the port authorities.

Navkar’s volumes are expected to pick up when rail operations commence. But these positives appear to be factored in the current valuations. As profits have slipped, even with the stock price unchanged, it trades at a trailing 12-month earnings multiple of 34 times, higher than the average multiple since listing of 30 times. While it is cheaper than Container Corporation’s (Concor) price-to-earnings multiple of 36 times, the two are not quite comparable. State-owned Concor is a leader in the segment, with access to strategic Government land for its CFS; its scale of operation is also large — over 15 times Navkar’s revenue and its market capitalisation is about ₹33,000 crore.

In contrast, Navkar has a small market cap — under ₹3,000 crore — adding to investment risk. The company has strong growth plans to increase volume at its new facility and a good execution track record. But investors can exit the stock, given the valuation, likely delays in revenue ramp up, and lingering concerns over DPD that have cast a cloud over growth prospects in the CFS segment.

There is a strong push by the JNPT port authorities to increase DPD volumes, and this poses a threat to CFS operators such as Navkar. With DPD, importers can directly pick up their consignments from the port rather than store it at a CFS. ICRA estimates that clearance time can be reduced to less than a day with DPD, from three to five days earlier. Acceptance has been improving — as of May 2017, 28 per cent of the total cargo in JNPT is on DPD. The Government targets improving this ratio to 40 per cent in FY 2018.

Navkar’s volumes at Panvel, Navi Mumbai were impacted by DPD and dipped marginally by 2 per cent y-o-y in the June quarter. As DPD affects imports, Navkar has been tilting its balance towards exports. From about a 30:70 mix of export to import volume last year, it has shifted to 40:60 at Vapi, Valsad. Still, as more volume shifts to DPD, CFS operators may have to devise new strategies to attract customers and grow their revenue.

The effect of DPD and the shift in export-import mix may impact realisation. This is because export realisations are much lower than that of import. In the June 2017 quarter, realisation fell to about ₹21,000 per 20-foot truck equivalent units (TEU), compared to ₹26,000 per TEU in the March 2017 quarter, due to higher share of export.

Also, Navkar’s rate for CFS and transportation is reportedly lower than the ongoing rate of ₹35,000 per TEU. There is likely to be additional pressures on price as volume growth in the new facility in Gujarat (started in the June quarter of 2017-18) has been slow. In the recent June quarter, volumes at the new facility nearly doubled to 5,780 TEUs, but it is way short of meeting the management’s expectation of one lakh TEUs in 2017-18.

Overall, volume growth in the June quarter of 2017-18 was only 4.7 per cent year-on-year. Management expects that realisations may be at about ₹21,000 per TEU levels in FY 2017-18. However, gaining both volume and realisation growth may be difficult to pull off and it is likely that realisation may take a hit.

Navkar’s 2016-17 consolidated revenue increased 3.7 per cent y-o-y to ₹384 crore. Net profit in the period was flat at ₹86 crore. In the June quarter of 2017-18, revenue increased nearly 6 per cent while profit fell 7.7 per cent. One reason for lower profit was higher deferred tax payment; profit before tax was up 5 per cent. Net profit margin has been at around 23-25 per cent levels.

Navkar has managed its debt well and repaid ₹65 crore in the June quarter; its net debt as of June 2017 is ₹383 crore and its total debt-to-equity ratio a comfortable 0.2 times. There are no planned capital expenses and based on cash availability, the company may choose to pay down debt over the next two to three years.

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