19-03-2012, 10:42 AM
India ports
Our analysis of India’s infrastructure investment opportunities brought forth a major surprise. Our qualitative and
quantitative parameters favour neither roads nor airports, but rather, ports, and in particular, private sector ports.
We found out that, unlike other infra segments, private ports operate within a benign regulatory environment, besides
weak competition, supportive tariff flexibility, high entry barriers, healthy cash flows and strong cargo growth drivers.
Demand for port infrastructure is driven by the 3Cs: coal, containers and crude. We believe huge coastal coalfired
power plants – we project new capacity of 30GW in the next five years – and new cement/steel units will
require coal imports of 358m tonnes per year. Container infra demand is rising as usage increases and current
ports reach capacity. So, too, crude demand is fuelled by rising economic growth. We expect a surge in coal
imports at 20% CAGR, containers at 13% and crude at 6% over FY11-17. Against this compelling growth
backdrop, our study shows capacity at public ports will fall far short of demand. We expect private ports to step
into the gap.
We identified our top picks, Essar Ports and MPSEZ, using our eight-factor strategic rating scorecard. Essar Ports
rates strongly for its captive demand and significant valuation upside, while MPSEZ scores for high traffic growth,
operational excellence and strong execution capability. Marg is a high-risk, high-return play with high traffic growth
but high leverage. GPPL has strong management and operational/financial leverage but limited valuation upside.
Investment summary
Private sector ports – most preferred India infrastructure investment. In our detailed
proprietary analysis of India’s infrastructure investment opportunities, private ports score much
better than other infrastructure sectors on most parameters. Private ports benefit from a benign
regulatory environment as they are regulated by state governments that have been encouraging
port investments through progressive policies. The competitive scenario, too, is much better as
inefficient government ports struggle to add capacity. Unlike other sectors, private ports have
greater flexibility and certainty in charging tariffs. The sector has high entry barriers and offers
scalability and natural first-mover advantages.
Fig 1 – Private ports score strongly when compared with other infrastructure investments
Criterion Ports (private) Roads (BOTs) Power Airports (BOTs)
Regulatory environment Strong Medium Medium Weak
Entry barriers Strong Weak Medium Strong
First mover advantage Strong Weak Medium Strong
Competition Strong (low) Medium Medium Strong
Tariff flexibility Strong Weak Weak Weak
Traffic growth Strong Strong Weak Strong
Scalability Strong Medium Weak Medium
Rate of returns Strong Medium Medium Weak
Source: Standard Chartered Research
3Cs – coal, crude and containers – to drive traffic growth. Containers, crude and coal
currently form 67% of India’s total cargo traffic and are likely to continue to be the key growth
drivers, going forward. Private ports have been especially strong in attracting crude import
demand. While the petroleum, oil and lubricants (POL) segment mainly drove cargo traffic over
FY04-10, we believe coal will be the main driver in future. We expect 20% coal cargo traffic
CAGR over FY11-17, given that 30GW of coal-fired power generation capacity will come on line
during FY12-17, which would require imported coal.
Fig 2 – Key drivers of traffic growth
Cargo demand (m tpa) CAGR
(%)
Non-major/ private port
cargo (m tpa)
CAGR
Cargo type Key driver (%)
FY11 FY14E FY17E FY11-17E FY11 FY14E FY17E FY11-17E
Coal
30GW of coal-fired
capacity coming up
over FY12-17
119 223 358 20 46 116 218 30
Crude +
POL
60m tpa of refinery
capacity addition
over FY12-17
340 405 482 6 152 208 267 10
Containers
Growing economy
Increasing
containerisation
131 189 273 13 22 41 68 21
Others Iron-ore/ fertiliser/
agriculture 310 423 535 10 74 107 149 12
Total cargo
handled 899 1,240 1,648 11 294 471 702 16
Source: Standard Chartered Research estimates
High capacity utilisation here to stay – overcapacity not a concern. Our analysis of capacity
additions suggests there is little need for concern about overcapacity. Capacity utilisation at major
ports is 88%, with those on the west coast significantly over-extended – Mumbai, JNPT and
Kandla are running at 125%, 100% and 96% utilisation. Even a moderate estimate of 11% cargo
growth over FY11-17 would require a 2x capacity increase. Nevertheless, our study shows
government ports lag demand requirements while private ports just about meet the demand. We
expect major ports to run at >90% utilisation over FY11-17 and private ports to run at 70-80%.
Private ports score
better than other
infrastructure assets
on all counts
11% cargo CAGR
over FY11-17E driven
by 3Cs. Non-major
ports to corner major
share
India ports l 17 June 2011
l Equity Research l 4
Strategic rating scorecard. We introduce our proprietary scorecard, which evaluates companies
using four qualitative and four quantitative parameters. Our structured assessment takes in a
company’s intrinsic strengths and weaknesses, with an eye on long-term growth potential.
Our four qualitative parameters are: 1) Location; 2) Ecosystem; 3) Competition; and 4) Parentage.
Our four quantitative parameters are: 1) Capacity – Buffer and Efficiency; 2) Execution Capability;
3) Traffic Growth; and 4) Financial Strength – Cash Flow and Balance Sheet.
We used a four-point scorecard: 4 – Very Strong; 3 – Strong; 2 – Medium; and 1 - Weak. Our
scorecard shows that MPSEZ has the best long-term growth potential; it scored 26 out of 32
points. Next comes Essar Ports (24), followed by GPPL (18) and Marg (15).
Fig 3 – Assessing ports – MPSEZ and Essar Ports score high
Location Ecosystem Competition Parentage Capacity Execution Traffic
growth
Financial
strength
Overall
Score
MPSEZ 3.1 3.0 3.0 3.0 3.5 4.0 3.0 3.5 26.1
Essar Ports 2.5 3.1 3.0 3.0 2.5 3.0 4.0 2.5 23.6
GPPL 2.5 1.3 2.0 4.0 2.0 2.0 2.0 2.5 18.3
Marg 2.5 1.7 2.0 1.0 1.5 2.0 3.0 1.5 15.2
Source: Standard Chartered Research estimates
Our top picks are MPSEZ and Essar Ports. We favour MPSEZ (MSEZ IN, PT Rs201) for its
strong traffic growth, location/scale advantages and bulging ecosystem. We believe its valuation
has not factored in long-term growth potential. Essar Ports (ESRS IN, PT Rs190) benefits from
locational advantage and strong demand from group companies. It is significantly under-valued,
in our view.
Marg (MRGC IN, PT Rs163) is a small-cap, high-risk, high-return play. While we find the stock
accessible at attractive valuations, we do not like the fact that the company is over-leveraged and
critically dependent on high growth in cargo volume (coal-driven) and a substantial pick-up in real
estate projects. We find Gujarat Pipavav Ports (GPPV IN, PT Rs71) an interesting play on operating
and financial leverage. It promises strong container traffic growth and has excellent parentage in the
AP Moller Maersk group. However, we do not think it offers enough valuation upside.
MPSEZ a clear winner
on asset quality
India ports l 17 June 2011
l Equity Research l 5
Valuations not factoring in growth
Despite expensive near-term multiples, we believe the stocks look attractive, as current
valuations do not factor in strong potential earnings growth. We present below the operational
and earnings drivers that support our positive sector view.
Sustainable, strong earnings growth
Sector traffic growth is significantly high, driven by the 3Cs – coal, crude and
containers. We expect MPSEZ, GPPL, Essar Ports and Marg to report 31%, 16%,
22% and 33% traffic growth over FY11-17, respectively.
We expect 10-20% improvement in realisations over FY11-17 as traffic volume
increases utilisation.
Cash earnings significantly higher than reported profit
Our estimates show cash EPS is 15-25% higher that book EPS.
Our estimates show cash RoEs are 10-20% higher than book RoEs.
Inexpensive in market value and replacement value
The sector trades at a modest EV/tonne of 1.5-2.5x on replacement value despite
strong traffic growth and high RoCE. Furthermore, the historical cost of construction is
significantly lower than replacement cost, leading to higher PB.
Valuation methodology – DCFE for port assets
We use a sum-of-the-parts method to value the companies under our coverage. We value port
assets using DCFE, summing up the discounted post-tax cash flow arrived during the concession
period. All other assets are valued independently.
We use port tariffs that are in line with existing tariff structures and assume 3% yoy tariff and
cost escalation.
We estimate traffic growth in each cargo segment based on a port's dynamics. Pan India, we
estimate FY11-17 cargo CAGR of 6% for crude, 20% for coal, 13% for container and 11%
overall. We assume private ports will grow faster, with 16% CAGR during the period.
We use 13% cost of equity to discount cash flows for port assets. We put a 8.5% risk free rate,
5% market premium and 0.9 as market beta. Given the low variability in project cash flows,
our market beta is less than one.
We use different conglomerate discounts to factor in qualitative differences between the
companies to arrive at our price targets.
The table below summarises our valuation and price targets for the companies, based on
SOTP/DCF.
Fig 4 – SOTP valuation
Company
Capacity
m tpa
(FY14)
DCFE
ports
value
(Rs bn)
Other
assets
(Rs bn)
Total
value
(Rs bn)
Valuation /
share (Rs)
Discount
(%)
Price
target
(Rs)
Comments
MPSEZ 285 391 33 424 212 5 201
62% value contributed by 175m tonne
Mundra port; 50m tonne Abbot port and
40m tonne Hazira contribute 14% each
Essar Ports 125 111 0 111 271 30 190 50% contribution from 40m tonne Hazira
port and 28% from 45m tonne Vadinar port
GPPL 23 30 0 30 71 0 71 Single asset - Pipavav port 23m tpa by
CY13
Marg 21 13 4 17 359 25 163
72% contribution from 21m tonne Karaikal
port. We are attaching a further 50%
balance sheet leverage risk to Marg
Source: Standard Chartered Research estimates
India ports l 17 June 2011
l Equity Research l 6
Sustainable, strong earnings growth
Traffic growth to be significantly high
We believe traffic growth is likely to remain strong, primarily driven by the 3Cs – coal, crude and
container. We expect MPSEZ, GPPL, Essar Ports and Marg to report 31%, 16%, 22% and 33%
traffic growth over FY11-17E, respectively. We expect revenue and earnings growth to track
traffic growth.
Our analysis of India’s infrastructure investment opportunities brought forth a major surprise. Our qualitative and
quantitative parameters favour neither roads nor airports, but rather, ports, and in particular, private sector ports.
We found out that, unlike other infra segments, private ports operate within a benign regulatory environment, besides
weak competition, supportive tariff flexibility, high entry barriers, healthy cash flows and strong cargo growth drivers.
Demand for port infrastructure is driven by the 3Cs: coal, containers and crude. We believe huge coastal coalfired
power plants – we project new capacity of 30GW in the next five years – and new cement/steel units will
require coal imports of 358m tonnes per year. Container infra demand is rising as usage increases and current
ports reach capacity. So, too, crude demand is fuelled by rising economic growth. We expect a surge in coal
imports at 20% CAGR, containers at 13% and crude at 6% over FY11-17. Against this compelling growth
backdrop, our study shows capacity at public ports will fall far short of demand. We expect private ports to step
into the gap.
We identified our top picks, Essar Ports and MPSEZ, using our eight-factor strategic rating scorecard. Essar Ports
rates strongly for its captive demand and significant valuation upside, while MPSEZ scores for high traffic growth,
operational excellence and strong execution capability. Marg is a high-risk, high-return play with high traffic growth
but high leverage. GPPL has strong management and operational/financial leverage but limited valuation upside.
Investment summary
Private sector ports – most preferred India infrastructure investment. In our detailed
proprietary analysis of India’s infrastructure investment opportunities, private ports score much
better than other infrastructure sectors on most parameters. Private ports benefit from a benign
regulatory environment as they are regulated by state governments that have been encouraging
port investments through progressive policies. The competitive scenario, too, is much better as
inefficient government ports struggle to add capacity. Unlike other sectors, private ports have
greater flexibility and certainty in charging tariffs. The sector has high entry barriers and offers
scalability and natural first-mover advantages.
Fig 1 – Private ports score strongly when compared with other infrastructure investments
Criterion Ports (private) Roads (BOTs) Power Airports (BOTs)
Regulatory environment Strong Medium Medium Weak
Entry barriers Strong Weak Medium Strong
First mover advantage Strong Weak Medium Strong
Competition Strong (low) Medium Medium Strong
Tariff flexibility Strong Weak Weak Weak
Traffic growth Strong Strong Weak Strong
Scalability Strong Medium Weak Medium
Rate of returns Strong Medium Medium Weak
Source: Standard Chartered Research
3Cs – coal, crude and containers – to drive traffic growth. Containers, crude and coal
currently form 67% of India’s total cargo traffic and are likely to continue to be the key growth
drivers, going forward. Private ports have been especially strong in attracting crude import
demand. While the petroleum, oil and lubricants (POL) segment mainly drove cargo traffic over
FY04-10, we believe coal will be the main driver in future. We expect 20% coal cargo traffic
CAGR over FY11-17, given that 30GW of coal-fired power generation capacity will come on line
during FY12-17, which would require imported coal.
Fig 2 – Key drivers of traffic growth
Cargo demand (m tpa) CAGR
(%)
Non-major/ private port
cargo (m tpa)
CAGR
Cargo type Key driver (%)
FY11 FY14E FY17E FY11-17E FY11 FY14E FY17E FY11-17E
Coal
30GW of coal-fired
capacity coming up
over FY12-17
119 223 358 20 46 116 218 30
Crude +
POL
60m tpa of refinery
capacity addition
over FY12-17
340 405 482 6 152 208 267 10
Containers
Growing economy
Increasing
containerisation
131 189 273 13 22 41 68 21
Others Iron-ore/ fertiliser/
agriculture 310 423 535 10 74 107 149 12
Total cargo
handled 899 1,240 1,648 11 294 471 702 16
Source: Standard Chartered Research estimates
High capacity utilisation here to stay – overcapacity not a concern. Our analysis of capacity
additions suggests there is little need for concern about overcapacity. Capacity utilisation at major
ports is 88%, with those on the west coast significantly over-extended – Mumbai, JNPT and
Kandla are running at 125%, 100% and 96% utilisation. Even a moderate estimate of 11% cargo
growth over FY11-17 would require a 2x capacity increase. Nevertheless, our study shows
government ports lag demand requirements while private ports just about meet the demand. We
expect major ports to run at >90% utilisation over FY11-17 and private ports to run at 70-80%.
Private ports score
better than other
infrastructure assets
on all counts
11% cargo CAGR
over FY11-17E driven
by 3Cs. Non-major
ports to corner major
share
India ports l 17 June 2011
l Equity Research l 4
Strategic rating scorecard. We introduce our proprietary scorecard, which evaluates companies
using four qualitative and four quantitative parameters. Our structured assessment takes in a
company’s intrinsic strengths and weaknesses, with an eye on long-term growth potential.
Our four qualitative parameters are: 1) Location; 2) Ecosystem; 3) Competition; and 4) Parentage.
Our four quantitative parameters are: 1) Capacity – Buffer and Efficiency; 2) Execution Capability;
3) Traffic Growth; and 4) Financial Strength – Cash Flow and Balance Sheet.
We used a four-point scorecard: 4 – Very Strong; 3 – Strong; 2 – Medium; and 1 - Weak. Our
scorecard shows that MPSEZ has the best long-term growth potential; it scored 26 out of 32
points. Next comes Essar Ports (24), followed by GPPL (18) and Marg (15).
Fig 3 – Assessing ports – MPSEZ and Essar Ports score high
Location Ecosystem Competition Parentage Capacity Execution Traffic
growth
Financial
strength
Overall
Score
MPSEZ 3.1 3.0 3.0 3.0 3.5 4.0 3.0 3.5 26.1
Essar Ports 2.5 3.1 3.0 3.0 2.5 3.0 4.0 2.5 23.6
GPPL 2.5 1.3 2.0 4.0 2.0 2.0 2.0 2.5 18.3
Marg 2.5 1.7 2.0 1.0 1.5 2.0 3.0 1.5 15.2
Source: Standard Chartered Research estimates
Our top picks are MPSEZ and Essar Ports. We favour MPSEZ (MSEZ IN, PT Rs201) for its
strong traffic growth, location/scale advantages and bulging ecosystem. We believe its valuation
has not factored in long-term growth potential. Essar Ports (ESRS IN, PT Rs190) benefits from
locational advantage and strong demand from group companies. It is significantly under-valued,
in our view.
Marg (MRGC IN, PT Rs163) is a small-cap, high-risk, high-return play. While we find the stock
accessible at attractive valuations, we do not like the fact that the company is over-leveraged and
critically dependent on high growth in cargo volume (coal-driven) and a substantial pick-up in real
estate projects. We find Gujarat Pipavav Ports (GPPV IN, PT Rs71) an interesting play on operating
and financial leverage. It promises strong container traffic growth and has excellent parentage in the
AP Moller Maersk group. However, we do not think it offers enough valuation upside.
MPSEZ a clear winner
on asset quality
India ports l 17 June 2011
l Equity Research l 5
Valuations not factoring in growth
Despite expensive near-term multiples, we believe the stocks look attractive, as current
valuations do not factor in strong potential earnings growth. We present below the operational
and earnings drivers that support our positive sector view.
Sustainable, strong earnings growth
Sector traffic growth is significantly high, driven by the 3Cs – coal, crude and
containers. We expect MPSEZ, GPPL, Essar Ports and Marg to report 31%, 16%,
22% and 33% traffic growth over FY11-17, respectively.
We expect 10-20% improvement in realisations over FY11-17 as traffic volume
increases utilisation.
Cash earnings significantly higher than reported profit
Our estimates show cash EPS is 15-25% higher that book EPS.
Our estimates show cash RoEs are 10-20% higher than book RoEs.
Inexpensive in market value and replacement value
The sector trades at a modest EV/tonne of 1.5-2.5x on replacement value despite
strong traffic growth and high RoCE. Furthermore, the historical cost of construction is
significantly lower than replacement cost, leading to higher PB.
Valuation methodology – DCFE for port assets
We use a sum-of-the-parts method to value the companies under our coverage. We value port
assets using DCFE, summing up the discounted post-tax cash flow arrived during the concession
period. All other assets are valued independently.
We use port tariffs that are in line with existing tariff structures and assume 3% yoy tariff and
cost escalation.
We estimate traffic growth in each cargo segment based on a port's dynamics. Pan India, we
estimate FY11-17 cargo CAGR of 6% for crude, 20% for coal, 13% for container and 11%
overall. We assume private ports will grow faster, with 16% CAGR during the period.
We use 13% cost of equity to discount cash flows for port assets. We put a 8.5% risk free rate,
5% market premium and 0.9 as market beta. Given the low variability in project cash flows,
our market beta is less than one.
We use different conglomerate discounts to factor in qualitative differences between the
companies to arrive at our price targets.
The table below summarises our valuation and price targets for the companies, based on
SOTP/DCF.
Fig 4 – SOTP valuation
Company
Capacity
m tpa
(FY14)
DCFE
ports
value
(Rs bn)
Other
assets
(Rs bn)
Total
value
(Rs bn)
Valuation /
share (Rs)
Discount
(%)
Price
target
(Rs)
Comments
MPSEZ 285 391 33 424 212 5 201
62% value contributed by 175m tonne
Mundra port; 50m tonne Abbot port and
40m tonne Hazira contribute 14% each
Essar Ports 125 111 0 111 271 30 190 50% contribution from 40m tonne Hazira
port and 28% from 45m tonne Vadinar port
GPPL 23 30 0 30 71 0 71 Single asset - Pipavav port 23m tpa by
CY13
Marg 21 13 4 17 359 25 163
72% contribution from 21m tonne Karaikal
port. We are attaching a further 50%
balance sheet leverage risk to Marg
Source: Standard Chartered Research estimates
India ports l 17 June 2011
l Equity Research l 6
Sustainable, strong earnings growth
Traffic growth to be significantly high
We believe traffic growth is likely to remain strong, primarily driven by the 3Cs – coal, crude and
container. We expect MPSEZ, GPPL, Essar Ports and Marg to report 31%, 16%, 22% and 33%
traffic growth over FY11-17E, respectively. We expect revenue and earnings growth to track
traffic growth.