Logistics may not sound like the most exciting of businesses, but it has caught the fancy of investors, allowing a number of unlisted firms from the sector to tap the capital markets.
Prospects of a pickup in the economy, which will translate into more business for such companies, along with the expected introduction of the goods and services tax (GST), are factors behind the increased investor interest in logistics firms, said bankers who are in talks with some of these firms to take them public.
In April, VRL Logistics Ltd saw its Rs.460 crore initial public offering (IPO) being oversubscribed by 74 times—the most since 2010. Last year, Snowman Logistics Ltd, the cold chain unit of Gateway Distriparks Ltd, also saw its IPO oversubscribed by almost 59 times. Since listing, both firms have given strong returns, with VRL Logistics shares rising 44% from the issue price of Rs.205 and Snowman Logistics’ shares gaining 77% from the issue price of Rs.47.
Encouraged by this performance, at least three other firms are preparing to tap the primary market.
Gateway Distriparks’ rail logistics unit Gateway Rail Freight Ltd, Future Group’s Future Supply Chain Solutions Ltd and Dubai-based port operations and logistics firm DP World have all initiated talks for IPOs, according to four people aware of the developments. Together, they intend to raise at least Rs.3,000 crore from the markets.
“The pipeline of IPOs in the logistics space is significant. There is a lot of interest from companies to tap the primary market, especially after the successful issues of Snowman Logistics and VRL Logistics,” said the first person cited above, an investment banker, who did not wish to be named.
There is also strong interest from investors for such issuances as logistics is a good proxy for overall economic growth, he added. “The sector is a direct beneficiary of economic growth and companies in the sector have the need to raise capital to invest in expanding their business as economic growth revives.”
The Indian economy is expected to grow at close to 7.5%, according to estimates by the Reserve Bank of India. The logistics business typically grows at 1.5-2 times the country’s economic growth, noted a 9 March report from domestic brokerage Motilal Oswal. The report added that the total investment in transportation infrastructure is expected to increase from $319 billion in 2012-17 to $522 billion in 2017-22.
The largest of the proposed IPOs could come from DP World’s India unit, with the company looking to raise Rs.1,500-1,800 crore. The company, which manages cargo terminals at several Indian ports such as Nhava Sheva, Chennai, Kulpi, Mundra and Visakhapatnam, has started conversations with investment banks.
“They are keenly looking at the option and have been speaking with banks. They have made significant investments in India and are one of the biggest port terminal operators here,” said the first person quoted above, adding that the Indian government is focusing on improving port infrastructure and the firm is looking at an IPO as a means to tap this opportunity.
According to the firm’s website, DP World will invest almost $200 million to build a container terminal, which will have an annual handling capacity of 800,000 TEUs (twenty-foot equivalent container units) at the Nhava Sheva port near Mumbai. “The DP World spokesperson is travelling and unavailable for comment,” the firm said in an email response.
Gateway Rail, a unit that handles all rail operations for the Gateway Distriparks group, is looking at raising up to Rs.1,000 crore through its IPO. The firm owns and operates a fleet of 21 trains and over 235 road trailers at its rail-linked terminals, according to information available on the company’s website.
“Gateway Rail is currently in the process of mandating bankers for its IPO and is expected to finalize bankers by early next month,” said the third person quoted above, also requesting anonymity. In an email response, Gateway Rail declined to comment for this story.
In a filing to BSE on 29 January, Gateway Distriparks stated that its board, in response to the notice received from Blackstone GPV Capital Partners, had decided to initiate steps necessary for the IPO of the company’s subsidiary Gateway Rail Freight Ltd, in accordance with the terms of the share subscription and shareholders agreement dated 9 November 2009.
Private equity (PE) firm Blackstone had invested Rs.300 crore in Gateway Rail in 2009. “Blackstone will not like to comment on market/media speculations,” the firm said in an email.
Future Group’s logistics arm Future Supply Chain is also in preliminary talks with banks for a share sale. “Future is in discussions with banks and they are looking at an IPO of around Rs.400-500 crore, which will give the PE investor an exit and funds to the company to expand its network,” said the fourth person cited earlier. In 2009, Fung Capital, part of the Hong Kong-based Li and Fung Group, a global supply chain manager, had invested $30 million in the company.
In a BSE filing on 12 February, the firm stated that its board had approved the divestment of part of its investments in Future Supply Chain and authorized a committee to consider various options for a value up to Rs.700 crore, such as offer for sale as part of an IPO or sale to PE/strategic investors.
A spokesperson for Future Group said that the firm does not have any update to share on its divestment plan. An email sent to Fung Capital did not elicit any response.
“All these companies have achieved significant size to go for an IPO and command good valuations. Also, private equity investors in some of these companies are looking for exit opportunities and that is another reason why these companies are thinking about IPO,” said the second person cited earlier, who also requested anonymity, adding that listed peers are trading at good valuations, which is attracting companies to the primary market.
According to Jaideep Ghosh, partner and national head (transport and logistics), KPMG Advisory Services Pvt. Ltd, interest in the logistics sector is high.
“This is being fuelled by factors such as GST, the sentiment around Make In India and the overriding factor of the growth of the country’s economy, which is being pegged at 7% plus,” said Ghosh, adding that execution of investment plans announced in roads, railways and ports should all benefit the industry.