Guj Pipavav Port IPO: How good is it?

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The Rs 500 crore initial public offering (IPO) of Gujarat Pipavav Port (GPPL) is fully subscribed. The price band of the issue is fixed at Rs 42-48 per share. The issue will close on August 26.

However analysts are divided on it. In an exclusive interview to CNBC-TV18, Param Desai, Angel Broking said that the IPO is reasonably priced and is expected to give good returns going forward.

While, Jagannadham Thununguntla, SMC Capitals is of the view though the company looks good for a proxy play for India growth story, investors should be careful as most of the recently launched IPOs are overvalued.

Below is the verbatim transcript of the exclusive interview of Thununguntla and Desai with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: What is your call on this one?

Thununguntla: The positive point is that the company is in a good industry and shipping is a good proxy play for the India growth story. But one has to be careful because several of the recent issues that are coming, be it MakeMyTrip in US or the Gujarat Pipavav here are showing shades of overvaluation. While these issues are bringing new themes to the capital market, they are not coming for cheap. While these are quoted with the theme of India growth story, the substantial premium is attached to their valuations. So, the investors have to be little careful.

For example, MakeMyTrip, which has posted Rs 30 crore loss in the financial year before which it came for IPO, the company is currently valued at Rs 4,000 crore. Similarly, Gujarat Pipavav, which is posting about Rs 117 crore loss last year, is coming at a valuation of Rs 2,000 crore. These we cannot call as undervaluation. While industry is good, there is price for everything. If you keep chasing the price beyond that level, probably one may regret later on. Eating an apple everyday is good for health, but you should pay Rs 10 for it, not Rs 100.

Q: You seem to have a 'subscribe' on the issue, but would you concede that it is a bit on the expensive side?

Desai: If you talk about the valuation, let me touch upon the price to book multiple. Post issue the company will trade at 2.5 to 2.9 times and if you compare it globally, most of the companies do trade in 1-2 times price to book range of multiple. But we need to see this in the context that most of these ports are well-established, are in the moderate range of earnings growth profile over the next two-three years. If you do compare this with Indian peer like Mundra Port , which is trading at 6 times price to book, I feel the issue is reasonably priced.

Having said that, the company is definitely making losses as of now, but a lot of things would happen over the next two-three years such as the margin expansion with better capacity utilisation going up, we have the tariff rates of the container, the tariff rates are going up from 3,000 to 4,000 in the next year. Also, with the IPO process, they will bring down the interest cost expenditure. So, assuming all these things playing out, I feel the company will breakeven in CY11.

Q: While the past financials are nothing to write home about, the argument for the issues for people who like it seem to be that now they are on a take off phase, growth will compensate for the kind of valuations that you are seeing at this point in time, it is the asset that you should be paying for, not past financials. What do you have to say to that?

Thununguntla: Projections are projections because on the excel sheet one can prove almost anything in the world. So, if an investor has a high risk prospect on that, definitely he may ride the tide because some of the recent issues are seeing good subscription and good listing. The same positive momentum probably may rub off onto this issue and may find decent listings, but for the safe investors who want to play safe probably may prefer to give it a miss.

As far as comparison to Mundra Port is concerned, one has to be careful because Mundra Port itself is highly valued. It is like why we are trying to compare it with another highly valued issue and feeling good that this issue is underpriced. The valuation is the culprit. If you want to ride the tide, listing gains, probably one can go ahead, but quality wise there is a concern.