Sensex: 19287 Proxy play to India growth story …...29 April 2013 India Ports – Proxy play to...

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India I Equities Ports

Sector Report

Dhaval Dama+9122 6626 6728

[email protected]

Rajesh Zawar +9122 6626 6726

[email protected]

29 April 2013

India Ports

Proxy play to India growth story

Overweight Sensex: 19287

Nifty: 5871


Dhaval Dama+9122 6626 6728

[email protected]

Rajesh Zawar +9122 6626 6726

[email protected]

Ports

Sector ReportIndia I Equities

29 April 2013

India Ports


Key takeaways

Positive correlation with GDP. Ports play a vital role in India’s overall economic development. By volume, 90% of the country’s international trade relies on maritime transport (~70% by value). India’s port network comprises 13 major and 187 non-major ports. Over FY01-12, India’s GDP recorded a 7.6% CAGR, while cargo handled by its ports posted 8.6% CAGR. During the same period, India’s export-import (EXIM) trade rose from `4.3trn to `38.1trn, a 21% CAGR.

EXIM trade poised to scale up. Government of India (GoI) plans to increase India’s share of global trade from the current ~1.5% to 5%, with a corresponding increase in cargo traffic from 912m tons in FY12 to 2,484m tons by FY20. Towards this, it has planned investing `2.7trn in the ports sector to enhance capacity of major ports from 697m tons in FY12 to 1,460m tons by FY20. We believe any delay in expanding major ports spells opportunities for private port operators with strong promoters and appropriate infrastructure. Non-major ports to grow faster. With major ports already at high utilization levels (~90%), resulting in longer turnaround times for ships, volumes at non-major ports registered 13.5% CAGR over FY01-12 (non-major ports accounted for 38.5% of cargo handled in FY12, up from 23.7% in FY01). With excellent connectivity, Gujarat accounts for ~74% of the cargo handled by non-major ports and is likely to continue its dominance. We expect non-major ports to sustain their strong growth momentum, given their robust infrastructure, strong revenue assurance due to captive cargo, shorter turnaround time and more planned investments by private operators.

Operating leverage to benefit port operators. Given the back-ended nature of cash flows in the business, port operators need to attain a threshold utilisation level to breakeven. Incremental volumes above that would lead to expanded operating margins, raising profitability for such companies.

Our take. We prefer Essar Ports for its margin of safety, given its ‘take-or-pay’ contracts with Essar group companies and its rising focus on third-party business. We also like Gujarat Pipavav since it would be a key beneficiary of strong growth in containerised trade and increasing congestion at JNPT (Navi Mumbai). Risks. Slowdown in EXIM trade, delay in capex, slowdown in private investments.

Overweight Sensex: 19287

Nifty: 5871

Key Data RatingCurrent

Price (`) Target Price

(`)M. Cap

(US$ m)FY14 EPS

|(`)EV/Sales

(x)EV/EBIDTA

(x)P/E (x)

PBV (x)

RoAE (%)

RoACE (%)

Essar Ports Buy 88 130 696 9.0 5.7 7.3 9.6 1.2 13.4 11.4

Gujarat Pipavav Port Buy 48 62 440 2.9 6.2 13.9 16.8 1.6 9.9 7.6

Source: Company, Anand Rathi Research Note: Prices as on 25 Apr’ 2013

29 April 2013 India Ports – Proxy play to India growth story

Anand Rathi Research 2

India Ports


Positive correlation with GDP growth................................................................ 3

EXIM trade poised to increase .......................................................................... 9

Non-major ports to grow faster........................................................................ 10

Outlook and Valuation..................................................................................... 13

Company Section............................................................................................ 14

Essar Ports...............................................................................................15

Gujarat Pipavav Ports...............................................................................27



Positive correlation with GDP growth Classification of ports in India

Ports in India are classified as major and non-major. This is based on controlling authority, not size of operations. Major ports fall under the Ministry of Shipping. Those operated under concessions from state maritime boards or state governments are non-major. Those under the Ministry are governed by the Tariff Authority for Major Ports (TAMP), which regulates tariffs for vessels and cargo, and decides rates for lease of properties of major port trusts. Non-major ports are relatively free to set their own tariffs and hence have the advantage of attracting more cargo.

India has a coastline of ~7,517 km (on the western and eastern sides of the mainland and the islands), with 13 major ports (only one at Andaman & Nicobar Islands is non operational) and 187 non-major ports (only 48 operational).

Fig 1 – Number of ports in India, state-wise West Coast East Coast

Maharashtra – 55 Andaman & Nicobar Islands – 24

Gujarat – 41 Tamil Nadu – 18

Kerala – 14 Andhra Pradesh – 13

Karnataka – 11 Orissa – 3

Lakshadweep Islands – 10 West Bengal – 2

Goa – 6 Pondicherry – 1

Daman & Diu – 2

Total – 139 Total – 61

Source: Industry

Port volumes have positive correlation with GDP growth

Ports play a vital role in the overall economic development of India. This is so because maritime channels account for ~90% by volume (and 70% by value) of the country’s international trade. The importance and growth potential is highlighted by the fact that over FY01-12 growth in cargo handled (an 8.6% CAGR) outpaced GDP growth (at a 7.6% CAGR). Thus, there is a positive correlation between GDP growth and cargo volume growth handled by ports. One can infer that enhancement and development of port infrastructure would be a critical enabler of growth of the Indian economy.

Fig 2 – GDP growth vs cargo-traffic growth

2

4

6

8

10

12

14

16

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

(%)

GDP growth Total cargo growth Source: GOI, IPA



Evolving EXIM led to strong growth in volumes

Strong growth in EXIM trade

An inclement investment environment and the emergence of India as a key outsourcing hub for MNCs have led to a significant increase in the country’ EXIM trade. Over FY00-12, India’s exports rose from `1.6trn to `14.6trn, and non-gold, non-oil imports from `1.4trn to `13.1trn, at 20.2% and 20.5% CAGRs respectively.

Fig 3 – Strong growth in EXIM trade

0

3,000

6,000

9,000

12,000

15,000

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

-10-5051015202530354045

Exports Imports (excl oil, gold & silver)Growth in Exports (RHS) Growth in Imports (RHS)

(`bn) (%)

Source: GoI

The mix of exports has been changing; engineering goods, ~14% of exports in FY00, has increased to ~22% in FY12. We believe that, with the pick-up in the global economy, exports of engineering goods could increase again – after a slight dip in FY12.

During FY00-12, the proportion of India’s exports to Asia (excl. the Mid-East) was the highest, at ~31%. Exports to Europe were the second highest (~20%). We believe that improvement in European economies in future would lead to a pick-up in exports from India.

During FY12, India’s non-gold, non-oil imports constituted ~52% of its imports. The major proportion of imports was from Asia and Europe and has been rising. A pick-up in the Indian economy would lead to greater demand for such imports.

Fig 4 – Product-wise exports

0

25

50

75

100

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

Agri products Ores & minerals Leather itemsChemicals Engg goods TextilesReadymade garments Others Petroleum productsOther commodities

(%)

Source: GoI

Fig 5 – Region-wise break-up

0

25

50

75

100

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

Africa America Asia (excluding Middle East) the Middle East Europe OceaniaOthers

(%)

Source: GoI



Rapidly changing cargo-mix driving volumes

Significant growth in EXIM over the years has been driven by a rapid increase in domestic demand for various products and the emergence of India as a major manufacturing hub for the world. This has led to strong growth in port volumes over FY01-12, during which cargo traffic handled in India has nearly tripled—from 334m tons to 912m, an 8.6% CAGR.

During this period, the mix of cargo at ports has changed dramatically. Containerized trade volumes have rapidly risen—from 35.2m tons to 135.9m (a 13.1% CAGR) with its share in overall cargo traffic rising to 15%, far lower than the global standard of ~80%. Imports of coal have increased from 57.7m tons to 157.1m tons, a 9.5% CAGR. Most of the increase in coal consumption has been due to the sharp increase in the number of thermal power projects in the country. Given the slew of power projects lined up in the country (largely coal-based), coal volumes are expected to increase further. With India’s emergence as a major refining hub, POL is still a large part of the cargo mix. Growth in iron ore handled has slowed down in the past couple of years on account of the ban on iron ore mining in India. The current downtrend in iron ore cargo has been offset by the inward movement of coal in the country. Yet, over FY01-12, iron ore handled at Indian ports has increased from 46.2m tons to 96.9m tons, at a 6.9% CAGR. We expect volumes of iron ore handled at various ports to pick up once the mining ban is lifted.

Fig 9 – Cargo mix – FY01 (368m tons)

POL41%

Iron Ore13%

Fertilizer5%

Coal16%

Container10%

Other Cargo15%

Source: IPA

Fig 10 – Cargo mix – FY12 (912m tons)

POL37%

Iron Ore11%Fertilizer

3%

Coal17%

Container15%

Other Cargo17%

Source: IPA

Fig 6 – Product-wise imports

0

25

50

75

100

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

Food products TextilesChemicals Capital goodsNon-POL items (excl gold & silver) Other commodities

(%)

Source: GoI

Fig 7 – Region-wise break-up

0

25

50

75

100

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

Africa America Asia (excl. Middle East) the Middle East Europe OceaniaOthers

(%)

Source: GoI

Fig 8 – Steady growth in cargo volumes and container traffic

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5

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15

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30

FY02

FY03

FY04

FY05

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FY07

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FY12

(%)

Growth in cargo traffic Growth in container traffic Source: IPA



Strong infra at non-major ports For any port to become a preferred port of call for a major shipping line, its operational performance is paramount. The main considerations of operational performance are pre-berthing and turnaround times, and output (cargo that can be handled per berth/per day or per ship). Longer turnaround time beyond certain levels results in higher costs.

Fig 11 – Key factors for port success Key success factors

Infrastructure Revenue visibility Construction / execution

Capacity / utilisation Draft Efficiency/

MechanisationConnectivity /

evacuationStorage Tariff

Location / hinterland

Source: Companies

Private ports have better turnaround time

Turnaround time for major ports in India is much longer than the global standard (less than a day). Major ports in India operating at near full capacity utilization levels result in higher costs. The operational performance of major Indian ports is also lower than some non-major ports with better infrastructure. This is one of the key reasons for the gradual increase of non-major ports’ market share of cargo handled. We believe that, given their good infrastructure facilities, non-major ports will gain further market share.

Fig 12 – High turnaround time at major ports (days)

2.1

1.7

3.0

2.8

3.9

3.1

0.5

1.3

1.1

0.9

1.1

0.9

Chennai

JNPT

Mumbai

Paradip

Kandla

Kolkata

Pipavav

Mundra

Gangavaram

Rotterdam

Singapore

Shanghai

Source: IPA, Companies

High pre-berthing time at major ports

At present, at major ports in India utilisation levels are ~90%, higher than the global ~70% standard. Some major ports in India have been operating at over 100% utilisation levels, resulting in longer turnaround time. This has resulted in high pre-berthing time at major ports, currently varying from two to 40 hours, depending on port and cargo handled. High pre-berthing times at major ports results in operational inefficiencies, thereby increasing costs.



Subdued volume growth at major ports

Over FY01-12 cargo volumes at major ports have risen from 281m tons to 560m tons, a 6.5% CAGR. Given the present capacity constraints at major ports and delay in capacity expansions, we expect volume growth to be subdued at major ports, thus benefiting non-major ports.

In FY12, major and non-major ports in India had a cargo throughput of 912m tons, a modest 3% increase over the previous year. Thirteen major ports handled 61.4% of India’s total port cargo during FY12, and registered negative growth of 1.7%, (a 1.6% increase in FY11). During FY12, cargo handled by major ports comprised 194.1m tons for exports, 341.6m tons of imports and 24.4m tons of trans-shipment cargo. In FY12, only two major ports were able to clock growth of over 10%, Ennore (35.8%) and Cochin (12.4%).

Fig 16 – Traffic growth at major ports

(m tons)

0

100

200

300

400

500

600

FY51

FY60

FY70

FY80

FY90

FY00

FY10

FY12

Source: IPA

During the Eleventh Five-Year Plan (2007-12), major ports achieved average annual growth of only 3.9%; none of them achieved double-digit growth. Other ports which posted growth of more than the annual average growth during the Eleventh Five-Year Plan were JNPT (7.9%), Paradip (7.1%), Kandla (6.9%) and Cochin (6.3%).

Fig 13 – High pre-berthing time at major ports

2

12

3

4

1

2

21

6

2

19

8

10

44

10

Kolkata

Haldia

Paradip

Vizag

Ennore

Chennai

Tuticorin

Cochin

N.M.P.T.

Mormugao

Mumbai

J.N.P.T.

Kandla

Overal


Fig 14 – Utilisation levels across ports

0 20 40 60 80 100 120

KolkataHaldia

ParadipVizag

ChennaiEnnore

TuticorinCochin

N.M.P.T.Mormugao

MumbaiKandla

J.N.P.T.

Capacity Utilisation


Fig 15 – Capacity utilisation at major ports

300

400

500

600

700

FY06

FY07

FY08

FY09

FY10

FY11

FY12

(m tons)

80

85

90

95

100

(%)

Capacity Traffic Handled Utilisation (RHS) Source: IPA



Dedicated freight corridor to improve port connectivity

Hinterland connectivity is one the key factors in determining the success of a port. In India, roads account for the largest share of cargo traffic (~60%), much higher than global standards. Rail transportation currently accounts for ~22% of containerised trade and ~24% of overall cargo traffic in the country. Hence, the potential to increase the share of the railways in cargo transportation is huge in India. Currently, delay in cargo movement from ports results in higher operational costs – a problem that rail transportation could very well fix.

To capitalise on the rail network (the fourth-largest in the world) traversing 64,015 km, the Indian Railways has outlined its most ambitious infrastructure project, “dedicated freight corridors” (DFC) of 3,300 km along the Eastern and Western routes. These routes are highly saturated and account for ~55% of cargo traffic in India. The project cost for the entire project has been estimated at `70bn and the government plans to complete it by 2017.

We believe that DFCs would be game changers for the entire transportation sector, and enhance throughput of various ports. With the dedicated network in place, it is expected that trailer loads can increase from ~4,000 to ~15,000 tons, carrying capacity from 90 containers to 400 (double stacking). Maximum speed for trains is expected to increase from 75 kmph to 100 kmph, and station spacing of 7-10 km to 40 km. With the DFCs in place, the share of rail transportation in cargo traffic movement should go up from current levels to near optimal levels of 34%.

Fig 19 – Share of transport modes – port connectivity Present Mode Share % (2007) Optimal Mode Share %

Railways 24 34Roads 36 22Pipelines 30 44Others, including inland 10 waterways, conveyers, etc. Source: Ministry of Shipping – India Maritime Agenda

Port operators in the western region of the country will benefit significantly from the DFC due to the planned western corridor covering 1,483 km. Current traffic on the Western corridor mainly comprises containers from JNPT and the Mumbai port in Maharashtra and Pipavav, Mundra and Kandla in Gujarat. These containers are destined for inland container depots (ICDs) in northern India, especially at Tughlakabad, Dadri and Dandharikalan. Besides containers, other commodities moving on the western DFC are POL (petroleum, oil & lube), fertilizers, foodgrain, salt, coal, iron, steel and cement.

Fig 17 – Major port-wise volumes (m tons) FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Kolkata Dock System 8.7 9.9 10.8 12.6 13.7 12.4 13.0 12.5 12.2 Haldia Dock Complex 32.6 36.3 42.3 42.5 43.5 41.8 33.3 35.0 31.0 Paradip 25.3 30.1 33.1 38.5 42.4 46.4 57.0 56.0 54.3 Vishakhapatnam 47.7 50.1 56.5 56.4 64.6 63.9 65.5 68.0 67.4 Chennai 37.0 44.4 47.8 53.7 57.5 57.9 61.7 61.9 55.7 Cochin 13.2 13.6 13.3 14.8 15.5 15.0 17.2 17.5 20.1 Mumbai 29.6 34.8 41.9 52.0 56.8 51.7 54.3 54.3 56.2 JNPT 31.4 33.1 38.1 45.0 55.9 57.6 61.5 64.9 65.7 Kandla 45.9 47.3 51.2 59.0 70.8 78.0 85.5 88.9 82.5 All Ports 344.8 383.8 423.6 463.8 519.3 530.5 561.1 570.0 560.2

Source: IPA

Fig 20 – Western DFC details States KMs

Haryana 192

Rajasthan 553

Gujarat 588

Maharashtra 150

Total 1,483

Source: DFCIL

Fig 18 – Eastern DFC details States KMs

Punjab 88

Haryana 72

Uttar Pradesh 1,049

Bihar 93

West Bengal/Jharkhand 538

Total 1,839

Source: DFCIL



EXIM trade poised to increase At present, India accounts for a low ~1.5% of global trade. Given the critical importance of exports to slash the trade deficit, the government hopes to increase this to 5% by 2020.

Ports play a very important role in EXIM trade; hence states with coastlines have initiated measures to develop ports. The Indian government anticipates traffic at Indian ports to increase from 911.8m tons at present to 2,484.4m tons by FY20, a 13.4% CAGR. Traffic at major ports is likely to register a 10.2% CAGR, from 560.1m tons in FY12 to 1,214.8m tons by FY20, whereas traffic at non-major ports is expected to record a 17.5% CAGR, from 351.6m tons now to 1,269.6m by FY20.

We believe that, given the current economic scenario across the globe, and the slowdown in cargo traffic this year, traffic volumes projected by the GoI for FY20 could be slightly difficult to achieve.

Planned rise in major port capacities to handle higher volumes

The government has formulated ambitious plans to develop new ports, augment facilities, introduce state-of-the-art cargo-handling equipment and improve logistics in order to meet challenges arising from anticipated growth in trade. According to these plans, capacities at 13 major ports are likely to increase to 1,459.5m tons by 2020, from 696.5m in FY12.

352 projects have been identified by the government and capacity through these projects was proposed to be increased by around 763m tons over FY12-20. Investment in these projects has been estimated at `1,095bn. Of this, `729bn would come from the private sector; the balance `366bn would be funded through internal resources and budgetary support.

Besides the above-mentioned investment in major ports, there are 72 additional ongoing projects at a capital outlay of `185bn. These projects are estimated to add a further 143.7m tons of capacity to the major ports.

Fig 22 – Capacity expansion plans at major ports (m tons)

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

FY12

FY17

e

FY20

e

Source: IPA, Ministry of Shipping – India Maritime Agenda

Given the present funding scenario, we believe that capacity expansion at some of the major ports could be delayed as happened with JNPT, which has been operating at high utilisation levels. Any delay in capacity expansion at major ports would benefit non-major ports

Fig 21 – Expected cargo growth at ports

200

500

800

1,100

1,400

FY12

FY17

e

FY20

e

Major ports Minor ports

(m tons)

Source: Ministry of Shipping – India Maritime Agenda



Non-major ports to grow faster Strategic location, the key to future growth

India’s manufacturing sector accounts for ~15-16% of its GDP. The major manufacturing hubs in India—in Gujarat, Maharashtra, TamilNadu, Andhra Pradesh, Haryana, Punjab—are well connected with non-major ports. Thus, the ports catering to these states are doing well. We believe that the present non-major ports and those being developed in these areas would benefit from better connectivity, leading to volumes increasing.

Fig 23 – Strategically located to major manufacturing hubs

KalinganagarParadip

Tirupur

Sriperumbudur

Hospet

Manesar

Aurangabad

Pune

LudhianaGreater Noida

Nashik

Major portsMinor ports

KandlaAdani

(Mundra)Dahej

Pipavav

Hazira

MumbaiJNPT

RatnagiriRedi

Mormugao Karwar

New Mangalore

Calicut

Cochin

ColachelTuticorin

Nagapattinam

ChennaiEnnore

Kakinada

Visakhapatnam

Gopalpur

Haldia

Kolkata

Major manufacturing hubs

Source: Industry, Anand Rrathi Research

Increasing private participation benefiting non-major ports

In India in the past, providing/developing port infrastructure was largely in the hands of the government. After the liberalisation programme of the 1990s, the sector was opened up to private operators, resulting in the current levels of competition in the sector. Of the 187 non-major ports along India’s coast-line and sea-islands, only 48 are operational.

The non-major ports at end-FY12 had capacity to handle 544.7m tons of cargo. The maritime states have drawn up plans to increase capacities at non-major ports at a 15.1% CAGR over FY12-20, from 544.7m tons at end-FY12 to 1,263.9m tons by the end of the Twelfth Five-Year Plan (FY17) and 1,670.5m tons by FY20.

The proposed capacity enhancement is required to keep pace with traffic growth at non-major ports, projected to increase at a strong 17.5% CAGR over FY12-20.

To increase the capacity of non-major ports by an additional 1,126m tons, various states have planned investments of approx. `1,679bn. Most of the projects would be funded by the private sector through PPP (public-private partnership), BOT (build-operate-transfer) or BOOT. It is estimated that the private sector would meet 96.1% of the cost of development of non-major ports; the rest from state governments.

Fig 24 – State-wise projected capacities of non-major ports States (m tons) 2016-17 2019-20

Gujarat 586 864

Maharashtra 202 232

Goa 20 20

Karnataka 60 68

Andhra Pradesh 174 207

Tamil Nadu 35 45

Kerala 20 31

Orissa 168 202

Total 1,264 1,666




Bottlenecks at major ports buoy volumes at non-major ports

Volume growth at non-major ports in India has been buoyant on account of the high saturation levels at major ports. Volumes at non-major ports have recorded a 13.5% CAGR over FY01-12—from 87.4m tons to 352m (vs an 8.7% CAGR for volume growth at all ports). This is much higher than volume growth at major ports. In that period, the proportion of cargo traffic at non-major ports in India has risen from 23.7% to 38.5%. Non-major ports would have an edge over major ports for various reasons—high revenue assurance through captive volumes, flexibility to decide tariffs to attract volumes, better infrastructure and private-sector investment.

Volumes at non-major ports to exceed those at major ports Over FY01-12, the proportion of coal handled at non-major ports rose significantly; volumes swelled from 9.6m tons to 78.4m. Today, non-major ports handle quantities of coal equal to those handled by major ports. India now accounts for ~20% of global coal imports. The International Energy Agency estimates that by FY17 India will be the world’s second-largest coal importer and the largest by sea-borne trade. This increase originates from power-sector requirements (several commissioned projects and those in pipeline). In that period, volumes of POL handled at non-major ports have risen sharply, from 46.4m tons to 161.1m tons. Growth here has been driven by the sharp scaling up in refining capacities in India.

The government estimates that non-major ports in India will handle 1,270m tons during FY20, more than major ports (1,215m tons). Volume growth of non-major ports would be primarily fuelled by coal (a 20% CAGR expected) on account of projected thermal power capacity additions. Non-major ports, still lag major ports in container volumes (15.7m tons vs 120.2m tons in FY12) and container volumes are expected to increase at a 38.3% CAGR for non-major ports due to greater operational efficiencies. The proportion of petroleum and associated products (45.8%), the single largest commodity handled at non-major ports in FY12, is expected to decline.

The sharp scaling-up of volumes at non-major ports would benefit private port operators once infrastructure is in place. We expect Adani SEZ, Essar Ports and Gujarat Pipavav to benefit from this.

In non-major port volumes, Gujarat dominance to continue

Gujarat has India’s longest coastline (1,600 km) and is strategically located, being the nearest maritime outlet to the Middle East, Africa and Europe. It

Fig 27 – Major ports

0 50 100 150 200

POL

Iron Ore

Fertilizer

Coal

Container

Other Cargo

FY01 FY12

(m tons)

Source: IPA

Fig 28 – Non-major ports

0 20 40 60 80 100 120 140 160 180

POL

Iron Ore

Fertilizer

Coal

Container

Other Cargo

FY01 FY12

(m tons)

Source: Ministry of Shipping

Fig 25 – Traffic handled by non-major ports

0

100

200

300

400

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

(m tons)

0

10

20

30

40(%)

Traffic Handled by Non- Major Ports Growth (RHS) Source: Ministry of Shipping

Fig 26 – Increasing imports of coal in India

-

50

100

150

200

250

FY08

FY09

FY10

FY11

FY12

FY13

e

FY14

e

FY15

e

FY16

e

FY17

e

0.0

10.0

20.0

30.0

40.0

50.0

Coal Imports Growth (RHS)

(m ton) (%)

Source: Ministry of Shipping



has the highest number of ports in India (41; one major, 40 non-major). Gujarat handled ~74% of non-major-port cargo traffic in FY12. From FY01 to FY12, its non-major port capacity has more than doubled, from 135m to 323m tons; and capacities are expected to further increase by FY17 to 586m tons.

India’s north-west generates ~60% of container volumes transhipped in the country. JNPT the largest container port is operating at full capacity leading to higher turnaround time. Gujarat, being well connected to the north-west by rail and road, has emerged as a strategic location for new ports.

Fig 29 – Traffic handled by non-major ports FY01 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Gujarat 71.3 103.5 131.3 150.5 152.8 205.5 230.9 259.0

Maharashtra 6.0 11.2 11.6 11.4 10.4 12.5 14.9 19.9

AP 4.8 17.7 18.6 19.3 29.7 43.6 43.3 43.9

Goa 3.2 11.8 14.3 12.8 11.9 13.9 14.6 14.5

TN 0.3 0.7 0.8 0.9 0.9 1.2 1.6 1.2

Karnataka 0.7 4.1 6.6 8.9 5.0 8.6 3.1 0.6

Others 1.0 1.2 1.8 2.6 2.5 3.5 7.0 12.4

Total 87.4 150.1 184.9 206.4 213.2 288.8 315.4 351.5


Non-major ports in Gujarat would be chief beneficiaries of the coming dedicated freight corridor and any delay in capacity expansions at major ports. This would be due to better port connectivity and greater operational efficiency at non-major ports. We believe that the strong focus of the Gujarat government to attract industries would benefit private port operators.

Operating leverage to kick in

In initial stages ports require significant investment in infrastructure. Once utilisation levels hit a certain threshold, operational efficiencies start kicking in. Any further volumes above the threshold would result in significant expansion in operating margins, along with cash flows and profitability. Also, with higher utilisation levels port companies’ return ratios improve. We believe that incremental volumes for private port operators such as Gujarat Pipavav, Essar Ports and Adani SEZ would lead to sharply improved profits and margins.

Fig 30 – Higher utilisation to aid margin expansion for port operators

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Outlook and Valuation We expect the ports sector to benefit on account of more EXIM trade volumes because of a recovery in economic activities, an increase in cargo traffic, the government’s thrust on infrastructure and investment by private operators. We believe that private port operators with facilities in Gujarat would benefit due to the strategic location and the thrust of the state government to attract industry.

We have used the P/BV multiple to value port companies in order to factor in the back-ended nature of cash flows since improving utilisation levels over a certain period of time would result in higher cash flows and better return ratios due to operating leverage.

Essar Ports. We are positive on Essar Ports due to its high revenue visibility from its “take-or-pay” revenues from Essar group companies and an increase in revenues from third-party cargo. At our target of `130, its stock would trade at 2x Mar’14 P/BV (higher than its past two-year average of 1.5x). The major reason for assigning a higher multiple is the strong revenue assurance and the commissioning of the new port facilities.

Gujarat Pipavav Port. Promoted by the AP Moller Maersk group we like Gujarat Pipavav Port for its strategic location and its infrastructure. We believe that the company would be a major beneficiary of the high congestion levels at JNPT, resulting in higher container traffic for it. At our target of `62, its share would trade at 2x Dec’14e P/BV (in line with its past two-year one-year-forward average). The one-year-forward P/BV in the past two years has largely ranged between 2x and 2.5x.

Risks

Slowdown in world trade. A further slowdown in trade could have a negative effect on volumes for the companies.

Delay in capex. Any delay in planned capex for the companies would be negative.

Further slowdown in economic activities. Any further slowdown in economic activities could lead to lower volumes for the port operators. Further delay in commissioning of thermal power plants could lead to lower-than-expected coal demand in the country.

Rising competition from major ports. Major ports managing to achieve the planned capex within the scheduled time frame could result in a slight loss of third-party volumes for private ports.

Fig 31 – Peer comparison Revenues (`m) P/E (x) P/Bv (x) EV/EBITDA (x)

Company M. Cap (US$m) FY12 FY13e FY14e FY12 FY13e FY14e FY12 FY13e FY14e FY12 FY13e FY14e

Essar Ports 696 11,088 14,215 16,298 55.7 11.2 9.6 1.6 1.4 1.2 10.1 8.2 7.3

Gujarat Pipavav Port 425 4,160 4,508 4,909 31.5 19.7 16.8 1.9 1.8 1.6 13.8 13.7 13.9

Source: Company, Anand Rathi Research



Company Section


Dhaval Dama+9122 66266728

[email protected]

Rajesh Zawar +9122 66266726

[email protected]

Key financials (YE Dec) FY11 FY12 FY13 e FY14 e FY15 e

Sales (`m) 19,829 11,088 14,215 16,298 21,682

Net Profit (`m) 701 2,995 3,315 3,871 5,952

EPS (`) 1.7 7.3 7.7 9.0 13.9

Growth (%) 12.2 326.9 6.2 16.8 53.8

PE (x) 50.8 55.7 11.2 9.6 6.2

P BV (x) 1.6 1.6 1.4 1.2 1.0

RoE (%) 1.5 2.9 13.5 13.4 18.0

RoCE (%) 4.3 9.3 11.1 11.4 14.1

Dividend Yield (%) - 0.6 1.2 1.4 1.7

Net Gearing (%) 198.3 248.7 208.4 184.9 136.0

Source: Company, Anand Rathi Research Note: Essar Ports was split off from Essar Shipping in FY11

Ports

Initiating Coverage India I Equities

29 April 2013

Essar Ports

Captive volumes offer predictability; initiating with a Buy

Key takeaways

Second-largest port operator in India. Essar Ports (ESP) operates two ports on the west coast of India (Vadinar and Hazira in Gujarat) and one on the east coast (Paradip in Orissa). Additionally, it is setting up a port at Salaya, Gujarat. By FY15, its capacity would be 158m tpa (outlay of `18bn), strengthening its position as the second-largest private port operator in the country. Hazira has potential to emerge as an 150m tpa port in the future. Enhanced capacity and locations would enable it to cater to demand for diverse products across various regions.

'Take-or-pay’ contracts offer margin of safety. The ‘take or pay’ contracts with Essar group companies guarantee minimum revenue and volume offtake. Minimum revenues from these ‘take or pay’ contracts are expected to improve from `9.4bn in FY12 to ~`15.9bn in FY15, offering assurance of revenue growth irrespective of volumes handled. We expect revenues from Essar group companies to be higher than the minimum assured revenues, at ~`19bn in FY15.

Third-party revenues to rise significantly. In FY12, ~2-3% of the company’s revenue arose from third-party contracts. With ramped-up capacity, we expect reduced dependence on captive volumes of group companies and rising volumes from third parties. We expect revenue from third parties to be scaled up from `200m in FY12 to `2,331m in FY15.

Our take. We believe ESP is set to benefit from the high revenue visibility on account of ‘take or pay’ contracts. With rising capacities, it is also set to benefit from higher third-party volumes. At our target of `130, the stock would trade at a P/BV of 2x its FY14e earnings. We initiate coverage on it with a Buy. Risks. Delay in capacity expansions of group companies, keener competition for third-party cargo, and a slowdown in group companies’ business.

Rating: Buy Target Price: `130

Share Price: `88

Relative price performance

Essar Port

Sensex65

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105

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Source: Bloomberg

Key data ESRS IN / ESRS.BO52-week high / low `110 / `73Sensex / Nifty 19287 / 58713-m average volume US$0.4m Market cap `38bn / US$696mShares outstanding 427.9m

Shareholding pattern (%) Dec ’12 Sep ’12 Jun ’12

Promoters 80.3 80.3 80.3 - of which, Pledged 17.2 17.2 17.2Free Float 19.7 19.7 19.7 - Foreign Institutions 8.0 7.9 8.0 - Domestic Institutions 0.1 0.1 0.1 - Public 11.6 11.7 11.6

29 April 2013 Essar Ports – Captive volumes offer predictability; initiating with a Buy


Quick Glance – Financials and Valuations Fig 1 – Income statement (`m)

Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Net revenues 19,829 11,088 14,215 16,298 21,682 Revenue growth (%) (35.7) (44.1) 28.2 14.7 33.0 - Op. expenses 11,741 2,179 2,807 3,471 5,399 EBIDTA 8,088 8,910 11,408 12,826 16,283 EBITDA margin (%) 40.8 80.4 80.3 78.7 75.1 - Interest expenses 4,738 4,208 5,108 5,593 5,837 - Depreciation 3,208 2,202 2,440 2,852 3,408 + Other income 1,032 223 131 359 477 - Tax 346 (622) 645 830 1,503 Effective tax rate (%) 29.5 (169.7) 16.2 17.5 20.0 Reported PAT 828 988 3,346 3,911 6,012 +/- Extraordinary items - (2,355) - - -+/- Minority interest (127) (349) (31) (40) (60)Adjusted PAT 701 2,995 3,315 3,871 5,952 Adj. FDEPS (`/share) 1.7 7.3 7.7 9.0 13.9 Adj. FDEPS growth (%) 12.2 326.9 6.2 16.8 53.8 Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (`m) Year-end: Mar FY11 FY12 FY13e FY14e FY15e

PAT 701 640 3,315 3,871 5,952 +Non Cash Items 2,988 1,380 2,830 2,852 3,408 Cash profit 3,689 2,019 6,145 6,723 9,360 - Incr/(Decr) in WC (9,904) 270 2,216 2,377 1,758 Operating cash flow 13,594 1,750 3,929 4,345 7,602 -Capex (76,537) 12,882 7,478 3,367 (1,000) Free cash flow 90,131 (11,132) (3,549) 979 8,602 -Dividend - 241 501 601 751 + Equity raised (53,595) (170) 1,987 - (0) + Debt raised (30,260) 10,237 2,319 3,000 (4,000) -Investments (4,120) 94 (94) - - -Misc. items (14) (106) 94 - - Net cash flow (1,236) (1,294) 256 3,378 3,851 +Opening cash 2,805 1,569 275 531 3,908 Closing cash 1,569 275 531 3,908 7,759 Source: Company, Anand Rathi Research

Fig 5 – PE band

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Fig 2 – Balance sheet (`m) Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Share capital 4,106 4,106 4,280 4,280 4,280 Reserves & surplus 17,520 17,918 22,990 26,260 31,461 Shareholders’ fund 21,806 22,023 27,270 30,540 35,741 Debt 44,815 55,051 57,370 60,370 56,370 Minority Interest 634 644 199 199 199 Deferred Tax Liab (net) 2 434 968 968 968 Capital employed 67,256 78,153 85,807 92,077 93,278 Net Fixed assets 65,153 78,728 83,766 84,281 79,874 Investments 11 105 11 11 11 - of which liquid 43 27 27 27 27 Working capital (2,386) (2,116) 101 2,478 4,235 Cash 1,569 275 531 3,908 7,759 Capital deployed 67,256 78,153 85,807 92,077 93,278 Net Debt/Equity (%) 198.3 248.7 208.4 184.9 136.0 W C turn (days) 47.2 (74.1) (25.9) 28.9 56.5 Book Value (`/share) 53.1 53.6 63.7 71.4 83.5 Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `88 Year-end: Mar FY11 FY12 FY13e FY14e FY15e

P/E (x) 50.8 55.7 11.2 9.6 6.2 P/B (x) 1.6 1.6 1.4 1.2 1.0 P/C (x) 9.1 17.6 6.5 5.5 4.0 EV/Sales (x) 4.0 8.1 6.6 5.7 4.0 EV/EBITDA (x) 9.7 10.1 8.2 7.3 5.3 Mcap/Sales (x) 1.8 3.2 2.6 2.3 1.7 RoAE (%) 1.5 2.9 13.5 13.4 18.0 RoACE (%) 4.3 9.3 11.1 11.4 14.1 Dividend yield (%) - 0.6 1.2 1.4 1.7 Dividend payout (%) - 37.7 15.1 15.5 12.6 Debt/Equity (x) 0.9 2.5 2.3 2.1 0.4 Interest Coverage (x) 1.0 1.6 1.8 1.8 2.2 Inventory days 15.5 4.8 1.8 4.0 4.0 Debtor days 55.4 39.8 47.5 52.0 50.0 Fixed Asset Turnover 47.2 (74.1) (25.9) 28.9 56.5 Source: Company, Anand Rathi Research

Fig 6 – FY12 cargo volume split (43.23m tpa)

Crude (SPM)28.2%

Dry bulk23.4%

Liquid product (jetty)19.2%

Liquid intermediate

14.8%

Liquid product (road/rail)

10.0%

Project cargo0.3%

Break bulk/ containers

4.1%

Source: Company



Second-largest private port operator The second-largest private port operator in India (after Adani Ports), Essar Ports was established to handle captive volumes of Essar group companies. It operates port facilities for dry bulk, break bulk, general cargo and liquid cargo on India’s east and west coasts. Its diverse locations ensure that it would benefit from the anticipated growth opportunities in India.

Strategically located facilities

ESP operates two ports on the west coast (with one more coming up) and one on the east coast (with another to be operative in FY15). Its current operational capacity (104m tpa) is expected to rise to 158m tpa by FY15. Its ports are strategically located, with a high degree of scalability and a huge “catchment” area in the hinterland.

Fig 7 – Port locations

Source: Company

Strong infrastructure at various facilities

Vadinar port facility – best of its class in liquid cargo

In 2007, to handle liquid cargo for Essar Oil, the company set up liquid-cargo-handling capacity at Vadinar, its first port. This is one of the best liquid-cargo-handling facilities in the world, with liquid-cargo capacity of 58m tpa. The EBIDTA margin (~82-83%) is the highest in the liquid-cargo business.

Fig 8 – Details of the Vadinar facility SPM: Draft – 32 metres

Berth A: 305 metres; Draft: 20 metres

Berth A: 295 metres; Draft: 16 metres

Rail and road gantries

Infrastructure

Crude, product and intermediate tanks (3.12m kilolitres)

Capacity 58m tpa

Cargo Crude oil, petroleum products

Project Status Operational since 2007

Concession Till 2027 from the Kandla Port Trust for marine assets. tank farms, rail and road gantries, pipelines and infrastructure set up outside port area owned in perpetuity

Key Customer Essar Oil

Source: Company

Hazira facility – potential to be a 150m-tpa facility

Currently, at Hazira, the company operates a port with capacity of 30m tpa. This has been operational since May’10 and was established to handle iron



ore volumes for Essar Steel. ESP is in the process of enhancing capacity at Hazira by another 20m tpa and expects to complete it by 1HFY15. During FY12, it handled ~0.7m tons of third-party cargo here. We believe that the Hazira terminal could drive major growth for the company as connectivity would improve significantly once the western dedicated freight corridor is complete. Potential for port expansion and storage facilities at Hazira are huge. The port has a ~5km water front, of which ~4.5km can be built for port facilities with capacity of ~150m tpa at a single location. This compares favourably with Essar Ports’ FY15 estimated port capacity of 158m tpa at five locations according to current development plans.

Fig 9 – Hazira port facility details Hazira - operational Hazira - expansion

Infrastructure Berth: 550 metres, Draft 14 metres Berth: 1100 metres, Draft 16 metres Capacity 30m tpa 20m tpa

Cargo Iron ore, coal, limestone, finished steel products, project cargo, containers

General cargo, coal, containers, petrochemicals

Project status Operational since May’10 Under development Concession From GMB till 2035 To be signed with GMB Key customer Essar Steel, Essar Power, mercantile mercantile

Source: Company

Paradip – New facility to handle iron ore & merchant coal demand

In Dec’12, ESP successfully commissioned the first phase (16m tpa) of its Paradip port. This would handle iron ore for Essar Steel, which recently commissioned a 6m-tpa plant in the vicinity. The company expects to handle other dry bulk cargo at its recently commissioned Paradip facility. ESP plans to expand capacity at Paradip by 14m tpa, which would be used to handle third-party coal volumes for clients like SAIL, TISCO, Jindal steel, Bhushan steel etc.

Fig 10 – Paradip facility details Paradip Iron ore Paradip II (Coal berth) Infrastructure Berth: 230 metres, Draft 12.5 metres Berth: 370 metres, Draft 17 metres Capacity 16m tpa 14m tpa Cargo Iron ore and other dry bulk cargo Coal Project Status Commissioned – Dec’12 Under development Concession From PPT, till 2025 From PPT (30 years) Key Customer Essar Steel, mercantile Mercantile

Source: Company

New facility at Salaya – to handle coal for Essar Power

The company is setting up a 20m tpa facility at Salaya, Gujarat, to handle coal and is expected to commission it by end-FY14. This will handle the requirements of group companies such as Essar Power, which has a 1.7GW operational power plant nearby, and Essar Oil’s captive power plant at Vadinar. ESP also plans to cater to merchant coal demand for various traders in the region importing coal at nearby shallow draft port of Okha.

Fig 11 – Salaya facility details Infrastructure Berth: 385 metres, Draft 14 metres

Capacity 20m tpa

Cargo Coal

Project Status To be commissioned by FY14 end

Concession 25 yrs, expected to be signed by Jun’13

Key Customers Essar Power, Essar Oil, mercantile sales

Source: Company



‘Take-or-pay’ offers margin of safety Minimum guaranteed revenues

The company has signed take-or-pay agreements with other Essar group companies. This ensures minimum revenue irrespective of volumes. These contracts have cost-escalation clauses and pass-through charges. Under such contracts, group companies which are ESP’s clients will pay on the basis of actual or assured volumes, whichever is higher. Cargo handled will be reconciled at the end of every quarter, and finally annually, against assured volumes. Such contracts secure minimum revenue for ESP every year.

Take-or-pay contracts

During FY12, 54% of ESP’s capacity was tied up through take-or-pay contracts with group companies. Minimum revenue guaranteed for FY12 was ~`9.4bn. This is expected to increase to `15.9bn by FY15.

Essar Oil, the only client for Vadinar facility

The company expects Essar Oil’s 20m-tpa Vadinar refinery to operate at peak capacity in FY14 and FY15. Essar Oil plans to increase this capacity to 38m tpa in future (no capex plans have been announced yet).

ESP’s volumes at the Vadinar port completely depend on captive volumes from Essar Oil. On the expected ramp-up in utilization at Essar Oil, we expect volumes at the Vadinar port to hold above the take-or-pay levels and increase from 31m tons in FY12 to 44m tons in FY15. Revenue from this port is expected to register a 5.5% CAGR over FY12-15, while the EBIDTA margin is expected to come around 80%.

ESP also plans to increase its capacity at Vadinar to cater to volumes arising from oil refineries in the vicinity. We believe that capex would take some time and will happen, post FY15.

Fig 12 – Take or pay contract details Vadinar Hazira Paradip Salaya

Storage volumes are TOP 23.75m tons (FY13,FY14, FY15) FY13 - 7m tons 4.08m tons (EPGL ph 1)

Crude storage capacity - 1.14mL/month

FY14 - 7.5m tons 2.04m tons (EOL PET coke)

Minimum assured volumes

Product storage capacity - 1.81mL/month

FY15 - 8m tons 2.04m tons (VPCL)

FY13- `5.6bn FY13- `5.5bn FY13 - `1.2bn US$ 13.32m/pa (EPGL ph 1)

FY14 - `5.7bn FY14- `5.5bn FY14 - `1.33bn US$ 17.2m/pa (EOL PET coke)

Min assured revenue

FY15- `5.5bn FY15 - `1.46bn US$ 12.2m/pa (VPCL)

`35/KL (crude handling) ` 200/MT `172/ ton US$ 4/ton (EPGL ph 1)

`40/KL (product handling) Additional `21/MT (FY13) US$ 8/ton (EOL PET coke)

`115/KL/month (crude storage) US$ 6/ton (VPCL)

Tariff per MMT

`174/KL/month (product storage)

Handling charges - 2% pa from FY15

3% escalation per annum 3% escalation/annum No escalation Escalation clause

Storage charges - 3% every two years from FY15

once operational draft of 16m is reached subject to further escalation

Source: Company



Essar Steel to drive revenues at Hazira and Paradip

At the Hazira and Paradip ports, Essar Steel is the captive customer. Essar Steel has raised steel production capacity at Hazira from 4.6m tpa to 10m tpa. At Paradip, it operates a 6m-tpa palletization plant and plans to raise capacity here by FY15 by another 6m tpa. Thus, the Paradip port would benefit from the increased volumes. ESP has take-or-pay agreements at Hazira for 24m tpa (including iron ore, coal, limestone and finished steel products) and at Paradip for 8m tpa. We expect volumes at Hazira and Paradip to come below the agreements due to current slowdown in demand for steel. Hence, revenue at these ports would be on the basis of the agreements, and are expected to register a 24.7% CAGR over FY12-15.

Salaya revenues to be driven by Essar Energy

Essar Energy, the customer at the Salaya coal terminal, has a 1.71 GW thermal plant in the area and plans to raise it to 3.63 GW in future. This plant runs on imported coal, which would be brought through the Salaya port. ESP plans to commission its Salaya port by 1QFY15; take-or-pay volumes here are 8m tpa. On the delayed commissioning of the additional power capacity by Essar Energy, we expect ESP’s revenues to be based on minimum guaranteed volumes in FY15.

Fig 13 – Captive volumes at Vadinar

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Fig 15 – Billed volumes at Hazira and Paradip

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Fig 16 – Billed revenues from Hazira and Paradip

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Greater thrust on third-party revenue Huge potential for third-party cargo

In 9MFY13, at its Hazira port, the company handled ~0.7m tons for third parties. Such volumes are expected to increase further due to mounting demand from coal traders and project cargo customers in the nearby regions.

At present, 5m to 6m tons of coal are handled at the nearby shallow draft Okha port. Once Salaya is operational, the company plans to handle coal and bauxite for industries and coal traders in the region. The company estimates the FY16 potential of third-party cargo at Salaya at around 6m-8m tpa.

It plans to invest in oil storage tanks and product tanks for consumers, traders and national oil companies at Vadinar. By FY16, third-party cargo potential at Vadinar is expected to be 5m-7m tpa.

Third-party revenue to increase robustly

During FY12, the company derived ~2-3% of its revenue from third-party contracts. With its ramped-up capacity, it expects to reduce dependence on captive (group-company) volumes and increase volumes from third parties. We expect third-party cargo at Hazira to grow stoutly, from 0.6m tons in FY12 to 3m tons in FY15 on account of coal demand for various power projects in the vicinity.

The company has recently commissioned its Paradip port and we expect third-party cargo demand to be high here from industries in the region and from coal and iron ore traders. Third-party volumes at Paradip are expected to reach 2.5m tons by FY15.

Once commissioned in FY15, the Salaya port would benefit from the demand for coal, currently handled at various shallow berths in the region. We expect Salaya to handle ~3m tons of third-party cargo in FY15.

We expect overall volumes from third-party cargo to increase from 0.6m tons in FY12 to 8.5m by FY15 while the proportion of third-party revenue would go up from 2-3% to 11%. The increasing proportion of third-party revenue would help the company reduce dependence on captive volumes.

Fig 17 – Higher volumes from third-party

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Fig 18 – Increasing third-party revenues

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Financials

Revenue growth to be buoyant

The company recently began operations at Paradip and expects to commission the Salaya port by FY15. Given the high assured revenue from Essar group companies and strong growth in third-party revenue, we expect Essar Ports’ FY12-15 revenue growth to be buoyant. We expect it to record a strong 25% CAGR in revenue over FY12-15. The EBIDTA margin, however, is expected to slip slightly when the cargo mix changes as the Paradip and Salaya ports turn operational. The operating margin in FY15 is expected to be a healthy 75%.

Strong growth in profitability Given the healthy operating-margin increase, the company would be able to fund part of its capex plans from internal accruals. Net profit is expected to improve from `640m in FY12 to `5,952m in FY15, a 108% CAGR. Return ratios are expected to improve significantly, with the RoE rising from 2.9% in FY12 to 18% in FY15 and the RoCE from 9.3% to 14.1%.

Fig 21 – Healthy growth in net profit

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Fig 19 – Revenue growth robust

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Fig 20 – Strong operating margins

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(`m) (%)




Fig 22 – Income statement (`m) Year-end: Mar FY11 FY12 FY13e FY14e FY15e Revenue 19,829 11,088 14,215 16,298 21,682 - Op. expenses 9,004 9,332 11,898 13,495 17,280 - Employee Costs 508 220 251 359 542 - Other Administrative 407 202 239 310 455 EBIDTA 8,088 8,910 11,408 12,826 16,283 - Interest 4,738 4,208 5,108 5,593 5,837 - Depreciation 3,208 2,202 2,440 2,852 3,408 + Other income 1,032 223 131 359 477 - Tax 346 (622) 645 830 1,503 PAT 828 988 3,346 3,911 6,012 + Minority Interests (127) (349) (31) (40) (60)Consolidated PAT 701 640 3,315 3,871 5,952 Dividend - 241 501 601 751 FDEPS (` / share) 1.7 1.6 7.7 9.0 13.9 CEPS (` / share) 9.6 4.9 13.4 15.7 21.9 DPS (` / share) - 0.5 1.0 1.2 1.5 BV (` / share) 53.1 53.6 63.7 71.4 83.5 Shares outstanding 410.6 410.6 428.0 428.0 428.0 Growth Rates Revenue (%) (35.7) (44.1) 28.2 14.7 33.0 EBIDTA (%) (26.3) 10.2 28.0 12.4 26.9 Net PAT (%) (25.2) (8.8) 418.4 16.8 53.8 Diluted EPS (%) 12.2 (8.8) 397.3 16.8 53.8 FY12-15e Revenue CAGR(%) 25.0 FY12-15e EBITDA CAGR (%) 22.3 FY12-15e EPS CAGR (%) 107.5 Margins EBIDTA (%) 40.8 80.4 80.3 78.7 75.1 EBIT (%) 24.6 60.5 63.1 61.2 59.4 Net Profit (%) 3.5 5.8 23.3 23.8 27.5


Fig 23 – Balance sheet (`m) Year-end: Mar FY11 FY12e FY13e FY14e FY15e Sources of Funds Share capital 4,106 4,106 4,280 4,280 4,280 Reserves & surplus 17,520 17,918 22,990 26,260 31,461 Shareholders’ fund 21,806 22,023 27,270 30,540 35,741 Debt 44,815 55,051 57,370 60,370 56,370 Deferred Tax Liab (net) 2 434 968 968 968 Minority interests 634 644 199 199 199 Capital employed 67,256 78,153 85,807 92,077 93,278 Application of Funds Gross Fixed Assets 37,926 49,297 57,492 66,492 75,492 Less: Depreciation 5,740 8,052 10,492 13,344 16,752 Net Fixed Assets 32,186 41,245 47,000 53,148 58,741 Investments 11 105 11 11 11 Goodwill 14,611 16,132 16,133 16,133 16,133 Current Assets Inventories 226 69 75 282 193 Debtors 832 1,586 2,110 2,533 3,407 Loans and Advances 11 608 739 887 1,020 Current Liab and Provisions 7,183 9,127 9,796 9,939 10,406 Net Current Assets (816) (1,841) 631 6,386 11,995 Working Capital (2,386) (2,116) 101 2,478 4,235 Cash 1,569 275 531 3,908 7,759 Capital deployed 67,256 78,153 85,807 92,077 93,278 No. of shares (m) 410.6 410.6 428.0 428.0 428.0 Net Debt/Equity (%) 198.3 248.7 208.4 184.9 136.0




Fig 24 – Cash-flow statement (`m) Year-end: Mar FY11 FY12e FY13e FY14e FY15e

Consolidated PAT 701 640 3,315 3,871 5,952

+Depreciation 3,208 2,202 2,440 2,852 3,408

Cash profit 3,689 2,019 6,145 6,723 9,360

- Incr/(Decr) in WC (9,904) 270 2,216 2,377 1,758

Operating cash flow 13,594 1,750 3,929 4,345 7,602

-Capex (76,537) 12,882 7,478 3,367 (1,000)

Free cash flow 90,131 (11,132) (3,549) 979 8,602

-Dividend - 241 501 601 751

+ Equity raised (53,540) (180) 2,432 - (0)

+ Debt raised (30,260) 10,237 2,319 3,000 (4,000)

-Investments (4,120) 94 (94) - -

-Misc. items (14) (106) 94 - -

Net cash flow (1,236) (1,294) 256 3,378 3,851

+Opening cash 2,805 1,569 275 531 3,908

Closing cash 1,569 275 531 3,908 7,759


Fig 25 – Ratio analysis @ `88 Year-end: Mar FY11 FY12e FY13e FY14e FY15e Valuations P / E 50.8 55.7 11.2 9.6 6.2 P / BV 1.6 1.6 1.4 1.2 1.0 M Cap / Sales 1.8 3.2 2.6 2.3 1.7 EV / Sales 4.0 8.1 6.6 5.7 4.0 EV / EBIDTA 9.7 10.1 8.2 7.3 5.3 Dividend Dividend yield (%) - 0.6 1.2 1.4 1.7 Dividend payout (%) - 37.7 15.1 16.2 12.8 Leverage Net Debt / Equity 198 249 208 185 136 Interest Coverage 1 2 2 2 2 Return Ratios RoE (%) 1.5 2.9 13.5 13.4 18.0 RoCE (%) 4.3 9.3 11.1 11.4 14.1




Outlook and valuations We believe that the company offers a high degree of margin of safety owing to the guaranteed revenues that it would obtain from various Essar group companies. Revenues from third-party customers are expected to grow strongly once the new facilities become operational. We expect the remaining capex of `18bn to be complete by FY15 (total capex planned was `93bn). On the completion, free-cash-flow generation would strongly improve. Most of the debt is long term, repayable over 10 years.

We value the stock on a P/BV basis to factor in the back-ended nature of cash flows. Improving utilisation levels over a period of time would result in higher cash flows and better return ratios due to operating leverage. At our target of 2x P/BV, the stock would trade at `130, factoring in utilisation levels at ~70%, with an 18% RoE in FY15.

Fig 27 – P/BV band

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Risks Slowdown in world trade. Further slowdown in trade could hit

volumes.

Delay in capex. Any delay in planned capex would be negative. Rising competition from major ports. Major ports managing to

achieve the planned capex within their scheduled time-frames could result in a slight loss of third-party volumes.

Fig 26 – Peer Comparison EV / EBITDA (x) P/E (x) RoE (%) P/BV (x)

Company FY12 FY13e FY14e FY12 FY13e FY14e FY12 FY13e FY14e FY12 FY13e FY14e

DP World 12.7 11.8 10.5 25.3 22.2 20.0 6.7 6.8 7.3 1.7 1.5 1.5

Adani Ports and SEZ 23.1 16.5 13.9 28.6 23.7 17.1 22.7 23.7 25.7 5.9 5.0 3.9

China Merchants hldgs 16.0 15.3 13.9 16.1 14.1 12.5 8.1 9.2 10.0 1.3 1.3 1.2

Intl Container term svc 14.5 12.3 10.3 33.3 30.1 24.7 16.5 16.5 18.1 4.8 4.4 3.9

Shanghai International 8.3 7.8 7.5 13.1 11.6 10.5 10.1 11.0 11.6 1.2 1.2 1.2

Essar Ports 10.0 7.6 6.6 21.6 12.4 10.1 7.0 11.6 12.6 1.5 1.4 1.2

Gujarat Pipavav port 14.7 11.7 9.6 34.6 20.0 16.0 6.5 9.1 10.3 1.8 1.8 1.6

Mean 14.2 11.9 10.3 24.7 19.2 15.9 11.1 12.6 13.7 2.6 2.4 2.1




Company Background Essar Ports is part of the Essar group, a multinational conglomerate in steel, oil and gas, power, communications and business process outsourcing (BPO), shipping, ports and logistics, projects, and minerals. With operations in more than 25 countries in five continents, the group employs 75,000 people, and has revenues of US$17bn. In FY12 the company was hived off from Essar Shipping. It offers port and terminal services for liquid, dry bulk, break bulk and general cargo. It is expanding operations at Vadinar and Hazira in Gujarat and building a port at Salaya, Gujarat, as well as two terminals at Paradip, Orissa, on India’s east coast. Essar Ports was established to handle captive volumes for various Essar group companies and plans to broaden its focus to third-party operations.

Fig 28 – ESSAR group structure

Resources

Iron Ore

• 2 Bn tonnes of reserves

• 80% stake in NewZim Minerals

• 27 MTPA pellet plants

Coal

• 210 MT coal reserves

Steel Making & Marketing

14 MTPA steel-making capacity

5 MTPA processing and

distribution capacity

375+ retail outlets under the Essar

Hypermart brand

1: Listed on LSE, a FTSE 100 company 3: For consolidated group figure eliminate $ 2.6bn of inter group transactions (March ‘ 12) 2: Listed on BSE & NSE

Essar Group

Oil & Gas

2,109 MMBOE reserves

36 MMTPA refining capacity

c. 1,400 retail outlet

Power

450 MT coal reserves

3,310 MW operational capacity

Going upto 6,700 MW by 2014

Shipping2

23 ships. 4 new ships on order

13 rigs incl. 1 semisubmersible Fleet of 5,000 chartered trucks BPO

55,000+ Aegis employees 55 global Aegis locations Real Estate Portfolio of approx. 16 mn sq. ft. in residential, commercial and mixed use projects Telecom Services GSM services in Kenya with 3 mn subscribers 1,200 branded retail outlets under The MobileStore in India

Ports2

104 MTPA operational capacity 54 MTPA projects under construction/development 158 MTPA planned capacity

Projects

Engineering, Procurement &

Construction 2nd largest equipment bank in India

Energy1 Steel Infrastructure Services

3,067 employees US$ 19.45 bn revenue3




76% 100% 100% 100%

Source: Company

Key management personnel

Managing director Rajiv Agarwal is a chartered accountant, cost and works accountant and company secretary, with over 25 years’ experience in retail, BPO, telecoms, manmade fibres, shipping and logistics.

Chief executive officer K K Sinha, with a Bachelor’s in Mechanical Engineering from BIT, Sindri, and a Master’s in Business Administration from FMS, University of Delhi, has over 32 years’ experience with industry majors such as Petronet India, Indian Oil Corp. and Bokaro Steel.


Dhaval Dama+9122 66266728

[email protected]

Rajesh Zawar +9122 66266726

[email protected]

Key financials (YE Dec) CY11 CY12 CY13 e CY14 e CY15 e

Sales (`m) 3,968 4,160 4,508 4,909 5,602

Net Profit (`m) 571 740 1,180 1,384 1,554

EPS (`) 1.3 1.5 2.4 2.9 3.2

Growth (%) - 13.5 59.5 17.3 12.3

PE (x) 35.7 31.5 19.7 16.8 15.0

P BV (x) 1.3 1.9 1.8 1.6 1.4

RoE (%) 3.6 5.3 9.3 9.9 10.1

RoCE(%) 5.5 6.7 8.3 7.6 7.5

Dividend Yield (%) - - - - -

Net Gearing (%) 35.0 21.7 35.1 54.5 33.8


Ports

Initiating CoverageIndia I Equities

29 April 2013

Gujarat Pipavav Port

Strategic location, capex to drive growth; initiating with a Buy

Key takeaways Strategic location, a key advantage. The company, Gujarat Pipavav Port (GPP), operates a multi-purpose port at Pipavav in south-west Gujarat. The all-weather facilities are protected by two islands which act as a natural breakwater. The port is 152 nautical miles from JNPT, India’s largest container terminal (~10 hours running time) and offers excellent access and options to global shipping lines. It is also well connected to India’s north-west, which accounts for ~60% of container volumes by road and rail. Capex to gear up for future opportunities. GPP is in the process of executing capex of ~`11bn to expand its present berth capacity. It plans to double container capacity by 1QCY15 to 1.5m TEUs and increase bulk-handling capacity to 10m tons. On the bulk-handling capacity expansion, it would stand to benefit from the additional demand for coal that would arise from proposed power plants of groups like Videocon, Torrent Power, Simplex and Visa. It would also be in a position to benefit from the pick-up in trade from an improving economy.

Operating leverage to aid margin growth. GPP has successfully managed to turn around its business operations, making a profit of ~`740m in CY12 against losses in CY10. The main reason was higher utilisation levels, which have aided its margin expansion from 7.6% in CY08 to 43.1% in CY12. We expect the operating margin to improve to 46.1% in CY15, given the steady improvement in utilisation levels. Our take. We believe that JNPT’s present saturation levels and the good connectivity to the Pipavav port would result in diversion of container volumes to GPP. With its planned capex, it would benefit from an improving trade scenario in future and from its strong parentage. At our target of `62, the stock would trade at a P/BV of 2x its CY14e earnings and a P/E of 21.7x. We initiate coverage on it with a Buy. Risks. Further slowdown in trade, increasing competition.

Rating: Buy Target Price: `62 Share Price: `48

Relative price performance

Pipavav

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Key data GPPV IN / GPPL.BO52-week high / low `62 / `41Sensex / Nifty 18226 / 54953-m average volume US$0.4m Market cap `24bn / US$425mShares outstanding 483.4m

Shareholding pattern (%) Dec ’12 Sep ’12 Jun ’12

Promoters 43.0 43.0 43.0 - of which, Pledged - - -Free Float 57.0 57.0 57.0 - Foreign Institutions 31.1 27.8 26.1 - Domestic Institutions 14.2 13.8 21.1 - Public 11.7 15.4 9.8

29 April 2013 Gujarat Pipavav Port – Strategic location, capex to drive growth; initiating with a Buy


Quick Glance – Financials and Valuations Fig 1 – Income statement (`m)

Year-end: Dec CY11 CY12 CY13e CY14e CY15e

Net revenues 3,968 4,160 4,508 4,909 5,602 Revenue growth (%) 39.7 4.9 8.3 8.9 14.1 - Op. expenses 2,140 2,342 2,533 2,715 3,020 EBIDTA 1,828 1,819 1,974 2,194 2,583 EBITDA margin (%) 46.1 43.7 43.8 44.7 46.1 - Interest expenses 852 684 404 430 542 - Depreciation 558 549 557 567 711 + Other income 153 154 167 187 224 - Tax - - - - -Effective tax rate (%) - - - - -Reported PAT 571 740 1,180 1,384 1,554 +/- Extraordinary items - - - - -+/- Minority interest - - - - -Adjusted PAT 571 740 1,180 1,384 1,554 Adj. FDEPS (`/share) 1.3 1.5 2.4 2.9 3.2 Adj. FDEPS growth (%) - 13.5 59.5 17.3 12.3 Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (`m) Year-end: Dec CY11 CY12 CY13e CY14e CY15e

PAT 571 740 1,180 1,384 1,554 +Non Cash Items 558 549 557 567 711 Cash profit 1,129 1,289 1,737 1,951 2,265 - Incr/(Decr) in WC 122 114 1,053 1,479 (2,252) Operating cash flow 1,007 1,175 684 472 4,517 -Capex 469 1,770 2,723 3,800 2,000 Free cash flow 538 (595) (2,039) (3,328) 2,517 -Dividend - - - - - + Equity raised (571) (4,297) (0) - 0 + Debt raised (1,215) (3,614) 2,500 3,500 500 -Investments - - - - - -Misc. items (571) (7,745) - - - Net cash flow (677) (761) 461 172 3,017 +Opening cash 1,949 1,272 511 972 1,143 Closing cash 1,272 511 972 1,143 4,160 Source: Company, Anand Rathi Research

Fig 5 – PE band

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Fig 2 – Balance sheet (`m) Year-end: Dec CY11 CY12 CY13e CY14e CY15e

Share capital 4,236 4,834 4,834 4,834 4,834 Reserves & surplus 11,440 7,283 8,463 9,847 11,401 Shareholders’ fund 15,675 12,117 13,297 14,681 16,236 Debt 6,759 3,145 5,645 9,145 9,645 Deferred Tax Liab (net) - - - - -Minority Interest - - - - -Capital employed 22,434 15,262 18,942 23,826 25,880 Net Fixed assets 12,819 14,039 16,204 19,438 20,727 Investments 830 830 830 830 830 - of which liquid 43 27 27 27 27 Working capital (232) (118) 936 2,414 163 Cash 1,272 511 972 1,143 4,160 Capital deployed 22,434 15,262 18,942 23,826 25,880 Net Debt/Equity (%) 35.0 21.7 35.1 54.5 33.8 W C turn (days) (26.9) (15.3) 33.1 124.5 84.0 Book Value (`/share) 37.0 25.1 27.5 30.4 33.6Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `48 Year-end: Dec CY11 CY12 CY13e CY14e CY15e

P/E (x) 35.7 31.5 19.7 16.8 15.0 P/B (x) 1.3 1.9 1.8 1.6 1.4 P/C (x) 18.1 18.1 13.4 11.9 10.3 EV/Sales (x) 6.3 6.0 6.0 6.2 5.0 EV/EBITDA (x) 13.7 13.8 13.7 13.9 10.8 Mcap/Sales (x) 5.1 5.6 5.2 4.7 4.2 RoAE (%) 3.6 5.3 9.3 9.9 10.1 RoACE (%) 5.5 6.7 8.3 7.6 7.5 Dividend yield (%) - - - - -Dividend payout (%) - - - - - Debt/Equity (x) 0.4 0.2 0.4 0.7 0.2 Interest Coverage (x) 1.5 1.9 3.5 3.8 3.5 Inventory days 6.1 7.5 10.0 11.0 12.0 Debtor days 27.1 31.3 35.0 36.0 37.0 Fixed asset turnover 0.3 0.3 0.3 0.3 0.3 Source: Company, Anand Rathi Research

Fig 6 – CY12 revenue break-up

Container operations

70%

Bulk cargo operations

30%

Source: Company



Strategic location, robust infra Established in 1992, Pipavav is India’s first private-sector port. AP Moller Maersk acquired a 13.5% stake in 2001, and took it over completely by raising that to 54% in 2005. APM Terminals, the ports and terminals arm of the A.P. Moller-Maersk group, manages and operates the Pipavav port and has a 43.01% stake in the company. Maersk Line is owned by A.P. Moller-Maersk and is one of the key clients for the company. APM Terminals is one of the largest container-terminal operators in the world and offers the global shipping community an integrated global terminal network of 69 ports and 160 inland facilities in 68 countries.

Location – A key advantage

Pipavav is strategically located 152 nautical miles from JNPT (Mumbai), ~10 hours steaming time away. It has excellent access to shipping lines for international routes as well as for the cargo belt in north-west India. This belt accounts for ~60% of containerized trade in the country. The company is in a position to benefit from increasing containerization in India and over-capacity utilization at JNPT. The all-weather facilities of GPP are protected by two islands, which act as a natural breakwater, maximizing port safety.

Proximity to major trade hubs in Gujarat

Pipavav is connected to major trade routes by an 11-km four-lane expressway connected to National Highway 8E, linked to the national road network. It is closer than JNPT to major business centres in Gujarat. This is greatly beneficial to it.

Fig 8 – Road distances between major hubs in Gujarat (km) Pipavav North Gujarat Navi Mumbai

Ahmedabad 337 428 545

Amreli 90 355 795

Baroda 341 503 448

Bhavnagar 140 420 734

Jamnagar 318 337 844

Mahuva 40 520 834

Porbandar (Reefer) 253 435 942

Rajkot 230 247 761

Veraval (Reefer) 170 458 893

Source: Company

Rail network connecting the north-west region

GPP has invested `830m (38.8%) in Pipavav Railway Corp. (PRC), a rail transportation joint venture with the Indian Railways. PRC has connected Pipavav to the Indian Railways network through a 269-km broad-gauge rail link to 22 stations.

Rail transport is primarily utilised by bulk- and container-cargo customers of the company. PRC provides railway transport for ~50% of the container cargo handled at the port. It was the first to introduce double-stack trains in India and operates double-stack container trains of standard 40-foot containers up to the inland container depot (ICD) at Kanakpura in Jaipur. GPP has tied up with the Container Corp. of India and several private container train operators to improve connectivity to major ICDs in north-west India.

Fig 9 – PRCL Rail Link

Source: Company

Fig 7 – Road connectivity

Source: Company



As per industry estimates almost 60% of India’s container volumes are generated in the north-west hinterland. Pipavav is strategically located, compared to the current major gateway, JNPT. It is about ~200-300 km nearer the major ICDs in the northern hinterland than JNPT.

The rail network established by the company and GPPs proximity to the north-west region have led to strong container-volume growth for the company. The rail terminal can handle 22 trains a day and operates at ~50% capacity, providing ample room for further growth.

Fig 11 – Rail distances, compared to peers Rail distances (km) Pipavav Mundra JNPT

ICD Tughlakabad (New Delhi) 1,333 1,276 1,513

ICD Sabarmati (Ahmedabad) 398 367 491

ICD Ludhiana (Ludhiana) 1,590 1,551 1,895

ICD Kanakpura (Jaipur) 980 920 1,150

ICD Dadri 1,280 1,223 1,460

Source: Company

Strong infrastructure capabilities

GPP currently provides facilities to handle and store container cargo, bulk cargo and LPG cargo. It has container capacity of ~850,000 TEUs a year, bulk-cargo capacity of ~5m tpa and liquid cargo capacity of ~2m tpa. The port has one of deepest drafts among Indian ports, with a depth of 14.5 metres, and can accommodate some of the largest container ships calling at Indian ports (container vessels having capacity of 6,200 TEUs).

Fig 12 – Current facilities Cargo Berths (no.) Berth Length Draft (mtr.) Capacity Storage

Container 2 735 14.5 0.85m TEU 130,000 Sq mtr

Bulk 3 690 13.5 5mtpa 100,000 sq mtr

Liquid 1 200 11.5 2mtpa 2,750 KL

Source: Company

The Mumbai port handles a huge amount of liquid traffic and generates a major part of its revenues from this. Unfavourable rules at Mumbai have resulted in diversion of liquid cargo to ports in Gujarat. Management believes that setting up a liquid logistics facility would prove to be highly beneficial for the company as it could emerge as a strong alternative to Mumbai. GPP has strategic tie-ups with three companies, Aegis Logistics, Gulf Petrochem and IMC, to import and export liquid commodities. Aegis Logistics expects to complete its facility by FY14.

Saturation at JNPT to benefit

Capacity utilization at major ports in India is fairly high (~90%). Such high utilization levels result in congestion at ports due to operational inefficiencies leading to loss of time. During FY12, utilisation levels at Mormugao, Mumbai and JNPT, all on the western coast, were 93%, 126% and 129% respectively. For this reason we believe container traffic in coming years would be diverted to non-major ports on the western coast such as Mundra and Pipavav.

Further delay in capacity expansion at JNPT would also lead to cargo being moved to Pipavav and Mundra. We believe that the present situation at major ports would be beneficial for the company.

Fig 10 – ICD connectivity

Source: Company



Capex to gear up for future growth Expanding container capacity

The company plans to construct a 348-metre container-ship berth, which would increase its container-handling capacity from 0.85m TEUs to 1.5m TEUs. This would be completed by 1QCY15 at a capital outlay of ~`6.1bn. On this completion, the company would benefit from an improvement in both global trade and domestic economy.

Bulk cargo capacity to double from current levels

GPP plans to double its bulk-cargo-handling facility, from 5m to 10m tons once commercial agreements with bulk cargo customers are in place. It operates a multi-purpose conveyor system and plans to add a dedicated conveyor system for coal. It will also add a 110-metre dry bulk berth, extending from Berth 1. Capital outlay estimated for this expansion is ~`2.3bn. With the new bulk-handling capacity in place, it plans to benefit from power projects coming up in the region, which would depend on imported coal.

GPP also intends to develop common infrastructure facilities (such as internal roads) and dredging relating to the bulk- and container-capacity expansion, at a capital outlay of ~`2.6bn.

Capex funding plans

Capital outlay for the present expansion is ~`11bn, most of which would be expended on container-capacity expansion. The company plans to go in for ECB of ~`8bn to fund this capex.

Fig 15 – Capex plans (`m) Particulars Container Bulk Common infra TotalBerth 2,280 545 - 2,825Dredging - - 2,070 2,070Yard & Conveyor 940 1,380 - 2,320Equipment 2,380 285 - 2,665Roads - - 545 545Others 472 75 - 547Total 6,072 2,285 2,615 10,972

Source: Company

Fig 13 – Existing port layout

Source: Company

Fig 14 – Proposed port layout

Source: Company



Volume growth to be steady GPP’s income stems from port services, mainly for container and bulk cargo. Container cargo revenue comes from charges for container handling, berth services, marine services and storage. The company’s bulk cargo revenue consists of charges for handling and storage, marine services, berth-hire, wharfage, stevedoring and port operation charges.

The company also generates other operating income from lease rentals from various port users and incidental income from operations. Revenue from LPG cargo comes from marine services and ancillary services to vessels. Service income varies depending on the type, volume and complexity of service contracts. Marine services are entirely handled by the port without any third-party operators.

GPP also operates a container freight station (CFS) which offers services such as stuffing and de-stuffing of containers, cargo consolidation, packaging and repackaging and cargo warehousing. It handles cargoes such as cotton, soda ash, ceramic tiles, wood pulp, agricultural products, sesame seeds, stones and cattle feed. GPP also generates additional revenues from land-related and infrastructure activities.

GPP also obtains rental income from leasing out land to other parties. Two private parties currently operate CFSs at Pipavav to provide cargo handling and storage operations there. They utilise ~11,000 sq. mt. of covered warehousing and paved stockyards for their CFS operations.

Container volumes to grow moderately

During CY07-12, GPP registered strong growth in container traffic, volumes compounding 24.3%. In CY12 container traffic declined 7% yoy as Maersk shifted one of its major ships to Mundra. Despite the significant decline in 2Q and 3Q CY12 volumes (~20%) due to the shift, for the year container volumes were down only 7%. On the stabilising of a new service started by Maersk at Pipavav, we expect volumes to recover from the drop. High congestion at major ports in the western region would also benefit GPP. We expect container volumes to recover in CY14 with the stabilising of new services and any recovery in economic activities. Container volumes for GPP are expected to register a steady 7.3% CAGR over CY12-15.

Fig 16 – Container volume growth

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Bulk volumes to be subdued due to lower coal imports

Over CY07-12, bulk cargo volumes have seen a healthy 12.7% CAGR. The strong growth in volumes came from robust growth in coal imports for power plants nearby. With uncertainty regarding tariff issues in the power sector, in CY12 volumes of coal imports declined 21% yoy. The company has tried to make up for the declining coal volumes by focusing on wheat exports. It recently tied up with the government-owned Food Corporation of India to export wheat. GPP is expected to benefit from the increasing volumes of wheat exports. It has also decided to go slow on the planned capex for bulk cargo berths as it expects volumes to be subdued due to lack of clarity in the power sector.

We expect volume growth to be subdued in the bulk cargo segment and expect a 6.6% volume CAGR over CY12-15.

Fig 17 – Bulk cargo volumes

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Liquid cargo terminals to drive growth

GPP has 2m tpa LPG/liquid facilities, which are currently underutilised. It has leased land to set up storage tanks to Aegis Logistics, Gulf Petrochem and IMC. The three companies have already commenced constructing tankage facilities for liquid cargo.

Aegis Logistics has a MoU with the company to take on lease 75 acres at Pipavav to develop a 600,000-kilolitre (kl) oil terminal and a petrochemicals complex, which is expected to be completed by CY13. Aegis Gas is also planning to develop a 70,000-100,000-kl tankage facility on 25 acres at the port, to be used to store liquid cargo.

Gulf Petrochem is setting up a 100,000-kl tank facility at the port on ~22 acres on lease. GPP has also signed an agreement with IMC by which the latter will take on lease ~25 acres to develop tankage facility at the port. IMC is India’s largest independent bulk liquid storage company.

All three liquid cargo customers are expected to complete their facilities by end 2013/early 2014 in a phased manner. These lease rentals for the land used by these three companies, fees for the liquid cargo handled at the port and port charges for the vessels transporting the liquid would generate income for GPP. We have not factored in any volume and revenue assumptions from the liquid terminal facilities and await commencement of operations.



Financials

Operating leverage to kick in over CY12-15 The company has recently started billing in dollars up to ~60% of marine and handling charges. After this, per-TEU realization in the container segment has increased. We expect revenues to record a 10.4% CAGR over CY12-15, driven by growth in container and cargo volumes. Higher revenue would widen the EBIDTA margin from 43.7% in CY12 to 46.1% in CY15, primarily on account of the operating leverage.

Improving return ratios Given the healthy increase in operating margins, the company would be able to fund part of its capex plans from internal accruals. Net profit is expected to improve from `740m in CY12 to `1,554m in CY15, indicating a 28.1% CAGR. Return ratios are expected to improve significantly, with the RoE rising from 5.3% now to 10.1% in CY15 and the RoCE from 6.7% to 7.5%.

Fig 18 – Revenue growth robust

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Fig 19 – Expansion in margins

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Fig 20 – Healthy growth in net profit

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Fig 21 – Improving return ratios

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Fig 22 – Income statement (`m) Year-end: Dec CY11 CY12 CY13e CY14e CY15e Revenue 3,968 4,160 4,508 4,909 5,602 - Op. expenses 2,170 2,980 3,223 3,535 4,090 - Employee Costs 341 361 388 407 454 - Other Administrative - 800 861 933 1,053 EBIDTA 1,828 1,819 1,974 2,194 2,583 - Interest 852 684 404 430 542 - Depreciation 558 549 557 567 711 + Other income 153 154 167 187 224 - Tax - - - - -PAT 571 740 1,180 1,384 1,554 Consolidated PAT - - - - -Dividend - - - - -FDEPS (` / share) 571 740 1,180 1,384 1,554 CEPS (` / share) - - - - -DPS (` / share) 1.3 1.5 2.4 2.9 3.2 BV (` / share) 2.7 2.7 3.6 4.0 4.7 Shares outstanding - - - - -Growth Rates Revenue (%) 39.7 4.9 8.3 8.9 14.1 EBIDTA (%) 59.8 (0.5) 8.6 11.2 17.7 Net PAT (%) (204.3) 29.5 59.5 17.3 12.3 Diluted EPS (%) (204.3) 13.5 59.5 17.3 12.3 CY12-15e Revenue CAGR(%) 10.4 CY12-15e EBITDA CAGR (%) 12.4 CY12-15e EPS CAGR (%) 28.1 Margins EBIDTA (%) 46.1 43.7 43.8 44.7 46.1 EBIT (%) 32.0 30.5 31.4 33.2 33.4 Net Profit (%) 14.4 17.8 26.2 28.2 27.7


Fig 23 – Balance sheet (`m) Year-end: Dec CY11 CY12 CY13e CY14e CY15e Sources of Funds Share capital 4,236 4,834 4,834 4,834 4,834 Reserves & surplus 11,440 7,283 8,463 9,847 11,401 Shareholders’ fund 15,675 12,117 13,297 14,681 16,236 Debt 6,759 3,145 5,645 9,145 9,645 Deferred Tax Liab (net) - - - - -Minority interests - - - - -Capital employed 22,434 15,262 18,942 23,826 25,880 Application of Funds Gross Fixed Assets 17,515 17,828 18,128 18,428 27,428 Less: Depreciation 3,063 5,367 5,924 6,491 7,201 Net Fixed Assets 12,698 12,462 12,204 11,938 20,227 Investments 830 830 830 830 830 Goodwill - - - - -Current Assets Inventories 57 115 132 163 205 Debtors 295 418 446 522 614 Loans and Advances - 172 203 221 252 Current Liab and Provisions 1,144 1,372 1,495 1,791 1,898 Net Current Assets 1,040 393 1,907 3,558 4,323 Working Capital (232) (118) 936 2,414 163 Cash 1,272 511 972 1,143 4,160 Capital deployed 22,434 15,262 18,942 23,826 25,880 No. of shares (m) 423.6 483.4 483.4 483.4 483.4 Net Debt/Equity (%) 35.0 21.7 35.1 54.5 33.8




Fig 24 – Cash-flow statement (`m) Year end: Dec CY11 CY12 CY13e CY14e CY15e

Consolidated PAT 571 740 1,180 1,384 1,554

+Depreciation 558 549 557 567 711

Cash profit 1,129 1,289 1,737 1,951 2,265

- Incr./(Decr.) in WC 122 114 1,053 1,479 (2,252)

Operating cash-flow 1,007 1,175 684 472 4,517

-Capex 469 1,770 2,723 3,800 2,000

Free cash-flow 538 (595) (2,039) (3,328) 2,517

-Dividend - - - - -

+ Equity raised (571) (4,297) (0) - 0

+ Debt raised (1,215) (3,614) 2,500 3,500 500

-Investments - - - - -

-Misc. items (571) (7,745) - - -

Net cash-flow (677) (761) 461 172 3,017

+Opening cash 1,949 1,272 511 972 1,143

Closing cash 1,272 511 972 1,143 4,160

Souce: Company, Anand Rathi Research

Fig 25 – Ratio analysis @ `48 Year-end: Dec CY11 CY12 CY13 e CY14 e CY15 e

Valuations

P / E 35.7 31.5 19.7 16.8 15.0

P / BV 1.3 1.9 1.8 1.6 1.4

M Cap / Sales 5.1 5.6 5.2 4.7 4.2

EV / Sales 6.3 6.0 6.0 6.2 5.0

EV / EBIDTA 13.7 13.8 13.7 13.9 10.8

Dividend

Dividend yield (%) - - - - -

Dividend payout (%) - - - - -

Leverage

Net Debt / Equity 35 22 35 55 34

Interest Coverage 1 2 4 4 3

Return Ratios

RoE (%) 3.6 5.3 9.3 9.9 10.1

RoCE (%) 5.5 6.7 8.3 7.6 7.5




Outlook and valuations GPP has successfully managed to turn around its business operations from a loss-suffering entity in CY10 to a ~`740m profit in CY12. The chief reason was greater container volumes and more bulk cargoes. We expect it to benefit from power plants coming up nearby, which depend on imported coal. High utilisation levels at JNPT would result in the shifting of container traffic to nearby ports like GPP. It is also strategically positioned to benefit from container traffic originating in north-west India (due to its location and rail connectivity) and hence would benefit from a pick-up in EXIM trade.

We value the stock on a P/BV basis to factor in the back-ended nature of cash flows. Improving utilisation levels over a certain period of time would result in higher cash flows and better return ratios from operating leverage. At our target of 2x P/BV, the stock should trade at `62, factoring in utilisation levels at ~70%, and a 21.9% RoE (excl. CWIP).

Fig 27 – P/BV band

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Risks Slowdown in world trade. Further slowdown in trade could hit

volumes.

Delay in capex. Any delay in planned capex would be negative. Rising competition from major ports. Major ports managing to

achieve their planned capex within the scheduled time frame could result in a slight loss of third-party volumes.

Fig 26 – Peer Comparison EV / EBITDA (x) P/E (x) RoE (%) P/BV (x)

Company FY12 FY13e FY14e FY12 FY13e FY14e FY12 FY13e FY14e FY12 FY13e FY14e

DP World 12.7 11.8 10.5 25.3 22.2 20.0 6.7 6.8 7.3 1.7 1.5 1.5

Adani Ports and SEZ 23.1 16.5 13.9 28.6 23.7 17.1 22.7 23.7 25.7 5.9 5.0 3.9

China Merchants hldgs 16.0 15.3 13.9 16.1 14.1 12.5 8.1 9.2 10.0 1.3 1.3 1.2

Intl Container term svc 14.5 12.3 10.3 33.3 30.1 24.7 16.5 16.5 18.1 4.8 4.4 3.9

Shanghai International 8.3 7.8 7.5 13.1 11.6 10.5 10.1 11.0 11.6 1.2 1.2 1.2

Essar Ports 10.0 7.6 6.6 21.6 12.4 10.1 7.0 11.6 12.6 1.5 1.4 1.2

Gujarat Pipavav port 14.7 11.7 9.6 34.6 20.0 16.0 6.5 9.1 10.3 1.8 1.8 1.6

Average 14.2 11.9 10.3 24.7 19.2 15.9 11.1 12.6 13.7 2.6 2.4 2.1




Company Background Incorporated in 1992 as a joint venture between the Gujarat state government and Seaking Engineers (now SKIL Infrastructure), Gujarat Pipavav Port (GPP) is the first private port in India. AP Moller Maersk acquired a 13.5% stake in 2001 and, after raising its holding to 54% in 2005, took over completely. Part of the AP Moller-Maersk (APMM) group, APM Terminals is the world's second-largest ports and terminals company. Pursuant to the Concession Agreement with the Gujarat Maritime Board and the Government of Gujarat, APM Terminals has the exclusive right to develop and operate the Pipavav port and related facilities until Sep’28.

From its relationship with APM Terminals, GPP benefits through access to modern technology, operational know-how, best industry practices, increased bargaining power and competitive rates for purchase of port equipment, and access to experienced personnel resources from APM Terminals. It also benefits in developing business with shipping lines and assistance in building relationships with third parties in shipping. Maersk Line, a part of the APMM Group is one of the largest customers of GPP. Maersk Line operates regular cargo shipping services from Pipavav port to international destinations, the Middle East, Europe and the U.S.

Fig 28 – APMM’s share in GPP’s revenue (%)

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Key management personnel

Managing director Prakash Tulsiani, a certified chartered accountant from the Institute of Chartered Accountants of India (ICAI) has been associated with the Maersk group since 1993. He was chief operating officer of Gateway Terminals’ project at JNPT in Navi Mumbai.

Chief operating officer Ravi Gaitonde has over 28 years’ experience in shipping and been associated with the Maersk group since 1985.

Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.

Anand Rathi Ratings Definitions

Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below:

Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5% Anand Rathi Research Ratings Distribution (as of 28 Feb 2013) Buy Hold Sell Anand Rathi Research stock coverage (184) 65% 27% 8% % who are investment banking clients 4% 2% 0% Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned.

Further, the information herein has been obtained from various sources which we believe is reliable, and we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (hereinafter referred to as “Related Investments”). ARSSBL and/or Anand Rathi may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of the companies mentioned in the Research Report or in related investments, and may be on taking a different position from the ones which haven been taken by the public orders. ARSSBL and/or Anand Rathi and its affiliates, directors, officers, and employees may have a long or short position in any securities of the companies mentioned in the Research Report or in Related Investments. ARSSBL and/or Anand Rathi, may from time to time, perform investment banking, investment management, financial advisory or any other services not explicitly mentioned herein, or solicit investment banking or other business from, any entity and/or company mentioned in this Research Report; however, the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the other companies of Anand Rathi, even though there might exist an inherent conflict of interest.

Furthermore, this Research Report is prepared for private circulation and use only. It does not have regard to the specific investment objectives, financial situation and the specific financial needs or objectives of any specific person who may receive this Research Report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this Research Report, and, should understand that statements regarding future prospects may or may not be realized, and we can not guarantee the same as analysis and valuation is a tool to enable investors to make investment decisions but, is not an exact and/or a precise science. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investments mentioned in this report.

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This material was produced by ARSSBL, solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is distributed in the United States of America by Enclave Capital LLC (19 West 44th Street, Suite 1700, New York, NY 10036) and elsewhere in the world by ARSSBL or an authorized affiliate of ARSSBL (such entities and any other entity, directly or indirectly, controlled by ARSSBL, the “Affiliates”). This document does not constitute an offer of, or an invitation by or on behalf of ARSSBL or its Affiliates or any other company to any person, to buy or sell any security. The information contained herein has been obtained from published information and other sources, which ARSSBL or its Affiliates consider to be reliable. None of ARSSBL or its Affiliates accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions.

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4. However, one or more of ARSSBL or its Affiliates may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those securities or options thereon, either on their own account or on behalf of their clients.

5. As of the publication of this report, ARSSBL does not make a market in the subject securities.

6. ARSSBL or its Affiliates may or may not, to the extent permitted by law, act upon or use the above material or the conclusions stated above, or the research or analysis on which they are based before the material is published to recipients and from time to time, provide investment banking, investment management or other services for or solicit to seek to obtain investment banking, or other securities business from, any entity referred to in this report.

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