India Ports - Gateways To India

l Equity Research l India l Infrastructure l
17 June 2011
India ports
Gateways to India
Our analysis of Indias 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.
Rec OP OP IL OP Mkt cap (US$bn) 6.3 0.9 0.6 0.1 Price (Rs) 152 106 64 96 PT (Rs) 201 190 71 163 EPS (Rs) EPS CAGR (%) P/E (x) EV/EBITDA (x) FY12E FY13E FY11-14E FY12E FY13E FY12E FY13E 5.8 8.0 35 26 19 18 14 3.4 7.4 131 31 14 14 10 1.0 2.1 70 64 30 20 15 7.7 9.2 65 13 10 10 7
Ticker MPSEZ MSEZ IN Essar Ports ESRS IN GPPL* GPPV IN Marg MRGC IN
*FY12E corresponds to CY11E and so on. Share price as of 16 June 2011. Source: Company, Bloomberg, Standard Chartered Research estimates
Gaurav Pathak
Gaurav.Pathak@sc.com +91 22 6755 9674
Shashikiran Rao
Shashikiran.Rao2@sc.com +91 22 6755 9764
Important disclosures can be found in the Disclosures Appendix

All rights reserved. Standard Chartered Bank 2011 http://research.standardchartered.com
India ports
17 June 2011
Contents
Investment summary Valuations not factoring in growth
Sustainable, strong earnings growth Cash earnings significantly higher than reported profit Inexpensive on market value and replacement value India comparative valuation Global comparative valuation
3 5
6 7 8 10 11
Ports: preferred infrastructure investment

Benign regulatory environment Maritime Agenda projects 11% cargo growth over FY11-20 Captive ecosystem to drive cargo growth at minor ports
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13 13 14
Growth riding on 3Cs coal, containers and crude

3Cs as traffic driver Increasing containerisation
15
15 16
High utilisation here to stay

Capacity addition at major ports not keeping pace Capacity addition at private ports just meeting current requirements Minor ports benefiting from weakness at major ports Container capacity lagging demand
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17 18 19 19
Strategic rating scorecard

Qualitative scorecard Quantitative scorecard
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22 25
Appendix Company section

Mundra Port and Special Economic Zone Essar Ports Gujarat Pipavav Ports Marg
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30 43 52 62
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Equity Research
India ports
17 June 2011
Investment summary
Private sector ports most preferred India infrastructure investment. In our detailed proprietary analysis of Indias 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. Private ports score better than other infrastructure assets on all counts Fig 1 Private ports score strongly when compared with other infrastructure investments
Criterion Regulatory environment Entry barriers First mover advantage Competition Tariff flexibility Traffic growth Scalability Rate of returns
Source: Standard Chartered Research
Ports (private) Strong Strong Strong Strong (low) Strong Strong Strong Strong
Roads (BOTs) Medium Weak Weak Medium Weak Strong Medium Medium
Power Medium Medium Medium Medium Weak Weak Weak Medium
Airports (BOTs) Weak Strong Strong Strong Weak Strong Medium Weak
3Cs coal, crude and containers to drive traffic growth. Containers, crude and coal currently form 67% of Indias 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 11% cargo CAGR over FY11-17E driven by 3Cs. Non-major ports to corner major share
Cargo type Key driver Cargo demand (m tpa) CAGR Non-major/ private port CAGR (%) cargo (m tpa) (%) FY11 FY14E FY17E FY11-17E FY11 FY14E FY17E FY11-17E 119 223 358 20 46 116 218 30
30GW of coal-fired capacity coming up over FY12-17 60m tpa of refinery Crude + capacity addition POL over FY12-17 Growing economy Containers Increasing containerisation Iron-ore/ fertiliser/ Others agriculture Total cargo handled Coal
Source: Standard Chartered Research estimates
340
405
482
152
208
267
10
131 310 899
189 423 1,240
273 535 1,648
13 10 11
22 74 294
41 107 471
68 149 702
21 12 16
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%.
Equity Research
India ports
17 June 2011
Strategic rating scorecard. We introduce our proprietary scorecard, which evaluates companies using four qualitative and four quantitative parameters. Our structured assessment takes in a companys 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 MPSEZ Essar Ports GPPL Marg 3.1 2.5 2.5 2.5 3.0 3.1 1.3 1.7 3.0 3.0 2.0 2.0 Parentage 3.0 3.0 4.0 1.0 Capacity 3.5 2.5 2.0 1.5 Execution 4.0 3.0 2.0 2.0 Traffic growth 3.0 4.0 2.0 3.0 Financial strength 3.5 2.5 2.5 1.5 Overall Score 26.1 23.6 18.3 15.2
MPSEZ a clear winner on asset quality
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.
Equity Research
India ports
17 June 2011
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) 285 125 23 21 DCFE ports value (Rs bn) 391 111 30 13 Other assets (Rs bn) 33 0 0 4 Total Valuation / Discount value share (Rs) (%) (Rs bn) 424 111 30 17 212 271 71 359 5 30 0 25 Price target (Rs) 201 190 71 163 Comments 62% value contributed by 175m tonne Mundra port; 50m tonne Abbot port and 40m tonne Hazira contribute 14% each 50% contribution from 40m tonne Hazira port and 28% from 45m tonne Vadinar port Single asset - Pipavav port 23m tpa by CY13 72% contribution from 21m tonne Karaikal port. We are attaching a further 50% balance sheet leverage risk to Marg
MPSEZ Essar Ports GPPL Marg
Equity Research
India ports
17 June 2011
Sustainable, strong earnings growth

Traffic growth is likely to remain strong 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. Fig 5 Current traffic and traffic growth (m tonnes)
300 250 200 MT 150 98 100 52 50 0 MPSEZ Essar Ports FY11 cargo FY14E cargo GPPL FY17E cargo Marg 39 9 16 22 5 15 27 168 130 264
Source: Companies, Standard Chartered Research estimates
Inherently high EBITDA margins
Operating leverage likely to improve going forward The sector inherently has high EBITDA margins and benefits from economies of scale. We expect the ports to report EBITDA margin of around 50-70%, depending on cargo mix and capacity utilisation. As traffic volume increases, we expect significant improvement in EBITDA due to better realisation and utilisation. Fig 6 EBITDA/tonne of the ports
300 249 250 200 Rs/ MT 150 105 100 50 0 MPSEZ FY11 EBITDA/MT
263 272 201 177 156 134 205
174 145
187
Essar Ports FY14E EBITDA/MT
GPPL FY17E EBITDA/MT
Marg
Fig 7 EBITDA margins EBITDA improvement from higher volume and mechanisation
80 70 60 50 % 40 30 20 10 0 MPSEZ FY11 EBITDA margin
65
70
71
69
72
73 55 47 57 50 53 55
Essar Ports FY14E EBITDA margin
GPPL Marg FY17E EBITDA margin
Equity Research
India ports
17 June 2011
Essar Ports and Marg look significantly under valued on PEG
PE and implied PE The stocks look expensive on near-term P/E multiples, but factoring in strong, sustainable earnings growth we believe there is significant valuation upside. Essar Ports and Marg look significantly under valued on PEG (PE/earnings growth). Fig 8 PE and implied PE valuation
Current Company MPSEZ Essar Ports GPPL *** Marg price (Rs) 152 106 64 96 Price 201 190 71 163 PE (FY12E) 26x 31x 64x 13x 35x 55x 71x 21x PE (FY14E) 14x 11x 22x 5x 18x 19x 25x 8x target (Rs) Current price Implied @PT Current price Implied @PT
*** For GPPL FY12E corresponds to CY11E and so on. Source: Standard Chartered Research estimates
Fig 9 PEG ratio (current and implied)

Company Current price (Rs) MPSEZ Essar Ports GPPL *** Marg
PEG (FY12E) Price target (Rs) 201 190 71 163 @current price 0.7x 0.2x 0.9x 0.2x Implied @PT 1.0x 0.4x 1.0x 0.3x 152 106 64 96
*** For GPPL FY12E corresponds to CY11E and so on.
EV/EBITDA multiples Given the high interest and depreciation costs in the initial years, we believe EV/EBITDA multiples give a better comparison on relative multiples. Fig 10 EV/EBITDA multiples
Company EV/EBITDA EV/EBITDA (FY12E) (FY14E) @current Implied @current Implied Price (Rs) Target (Rs) price @TP price @TP 152 201 18x 22x 11x 13x Current Price 106 64 96 190 71 163 14x 20x 10x 19x 22x 10x 8x 12x 6x 10x 13x 6x EBITDA CAGR FY11/14E 47 38 39 40
MPSEZ Essar Ports GPPL *** Marg
Cash earnings significantly higher than reported profit

Companies looking healthy on cash RoEs Given the higher depreciation in the initial years, cash earnings and the corresponding cash RoEs are significantly higher that book RoEs. We believe the sector should command premium valuations given the healthy cash flows.
Fig 11 Cash EPS 15-25% higher that book EPS

Company MPSEZ Essar Ports GPPL *** Marg Current price (Rs) 152 106 64 96 Price target (Rs) 201 190 71 163 Diluted EPS (Rs) FY12E 5.8 3.4 1.0 7.7 FY14E 11.2 10.0 2.9 20.0 Cash EPS (Rs) FY12E 8.5 8.8 2.2 32.9 FY14E 14.2 18.3 4.2 93.5 Price to Cash EPS FY12E 17.8 12.1 29.5 2.9 FY14E 10.6 5.8 15.1 1.0 PT to Cash EPS FY12E 23.6 21.7 32.9 5.0 FY14E 14.1 10.4 16.8 1.7
Equity Research
India ports
17 June 2011
Fig 12 Cash RoE FY12-14E

60 50 40 % 30 20 10 0 MPSEZ Essar Ports Cash RoE FY12E Cash RoE FY14E GPPL Marg 16 36 37 38 24 26 17 19 12 24 39 53
Fig 13 RoE over FY12-14E

35 30 25 % 20 15 10 5 0 MPSEZ RoE FY12E Essar Ports GPPL Marg RoE FY14E 6 12 15 11 6 13 6 6 25 27 30
11
Cash RoE FY13E
RoE FY13E
Inexpensive in market value and replacement value

Sector trades at a modest EV/tonne of ~1.5-2.5x on replacement value Despite strong traffic growth and high RoCEs, the sector trades at a modest EV/tonne of ~1.52.5x on replacement value of greenfield capacity, which ranges between Rs800/tonne and Rs1,100/tonne. Fig 14 EV/tonne of installed capacity vs traffic growth over FY11-14E
3,000 2,500 Rs/ tonne 2,000 1,500 1,575 1,000 500 0 MPSEZ Essar Ports GPPL Marg EV/ installed capacity (LHS) (FY12E) Traffic CAGR (RHS) (FY11-14E)
2,629 2,232 1,926 48 1,267 36 873 2,156 44 1,861
80 70 60 50 40 30 20 10 0 EV/ installed capacity (LHS) (FY14E) %
21
Sector likely to continue trading at premium PB multiples
Furthermore, the sector trades at high PB multiples given that historical cost of construction is significantly lower than replacement cost, particularly for MPSEZ. We believe the sector would continue to trade at premium PB multiples given high earnings growth, strong cash earnings and higher replacement value. Fig 15 Gross block/tonne of installed capacity over FY12E/14E
2,500 2,114 2,000 Rs/ tonne 1,500 1,000 500 0 MPSEZ Essar Ports Gross block/MT (FY12E) GPPL Gross block/MT (FY14E) Marg 984 1,125 811 806 698 1,071 905
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India ports
17 June 2011
Fig 16 PB and implied PB valuation

Current Company MPSEZ Essar Ports GPPL Marg
Price target (Rs) 201 190 71 163
price (Rs) 152 106 64 96
PB (FY12E) @current Implied price @PT 5.9x 7.8x 1.9x 3.5x 0.6x 3.3x 3.9x 1.0x
PB (FY14E) @current Implied price @PT 3.6x 4.7x 1.4x 2.7x 0.5x 2.6x 3.0x 0.9x
Equity Research
India ports
17 June 2011
India comparative valuations

Fig 17 Comparative valuation
Mundra Port and SEZ Valuation Price (Rs) Target price (Rs) Book value per share (Rs) Market capitalisation (US$bn) Total fixed assets (Rs m) Net worth (Rs m) FY12E Debt (Rs m) FY12E Cash (Rs m) FY12E Traffic (MTPA) Port capacity FY12E Port capacity FY14E
Container (%) Dry Bulk (%) Liquid Bulk (%)
Essar Ports 106 190 57 0.9 71,872 23,289 64,638 2,248 84 125 8 56 36 54 98 1 53 46 36 10 10,180 39 10,180 0 7,515 7,515 1,409 131 30.9 1.9 14.1 0.1 11 7 73 2.8 1.6 1,267 873
GPPL *** 64 71 18 0.6 13,111 7,782 9,576 2,632 13 23 7 93 0 11 16 63 35 2 21 11 3,473 23 3,473 0 1,669 1,669 424 70 63.7 3.5 19.7 0.2 10 10 50 1.1 1.5 2,629 1,454
Marg 96 163 159 0.1 21,777 6,304 28,248 1,870 14 21 0 100 0 8 15 3 92 5 44 22 10,210 25 2,533 7,678 3,149 59 304 65 12.5 0.6 9.6 0.3 8 7 35 4.2 1.2 2,156 1,861
152 201 26 6.3 193,061 51,491 146,054 7,513 202 285 19 73 8 98 168 15 75 11 48 16 36,969 45 31,988 3,142 25,388 22,769 11,617 35 26.1 5.9 17.7 0.3 27
# #
Cargo traffic FY12E Cargo traffic FY14E

Container (%) Dry Bulk (%) Liquid Bulk (%)
CAGR traffic growth FY11/FY14E CAGR traffic growth FY14/FY17E Earnings Rs m (FY12E) Revenue Revenue CAGR (FY11-14E, %) Port revenues SEZ/ other revenues EBITDA Port EBITDA PAT PAT CAGR (FY11-14E, %) Ratios P/E (FY12E) P/BV (FY12E) EV/EBITDA (FY12E) Asset turnover RoE (%)
#
RoCE (%)
12 68 3.0 3.2 2,232 1,575
EBITDA margin (%) Gross D/E
Interest coverage (EBIT/Gross debt) EV/MTPA (FY12E) EV/MTPA (FY14E)

#
3-year average FY12-14E. ***FY12E corresponds to CY11E and so on; PAT CAGR is for CY11-13E. Prices as of 16 June 2011. Source: Standard Chartered Research estimates
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17 June 2011
Global comparative valuation

A comparison of Indias private ports with major port asset owners across the world shows that Indian private ports have higher RoE and higher earnings growth, leading to higher near-term multiples, which in the long run return to the global average. Fig 18 Global comparison
Port developers Ticker Price Target NA NA NA NA NA 201 190 71 163 Rating Country Market cap (US$bn) 7.3 1.0 10.5 2.3 2.1 6.3 0.9 0.6 0.1 RoE P/B (x) PE (x) EV/EBITDA (x) (TTM) % 1FY 2FY 3FY 1FY 2FY 3FY 4.4 5.8 5.0 7.9 8.0 27.4 11 10 8 0.8 2.2 1.4 7.2 8.6 5.9 1.9 3.5 0.6 25 26 26 86 90 26 31 64 13 22 23 20 77 77 19 14 30 10 20 14.2 12.3 11.2 21 14.0 13.1 12.2 17 12.9 11.5 10.3 70 11.0 64 14 11 22 5 8 18 14 20 10 9.6 7 14 10 15 7 9.1 7 11 8 12 6
HPHT SP EQUITY POT NZ Port Of Tauranga Ltd** EQUITY DPW DU DP World Ltd** EQUITY 2880 HK Dalian Port (Pda) Co Ltd** EQUITY 600717 CH Tianjin Port Co Ltd** EQUITY Mundra Port and SEZ MSEZ IN Hutchison Port Holdings** Essar Ports GPPL Marg ESRS IN GPPV IN MRGC IN
NA NA NA NA NA OP OP IL OP
Singapore New Zealand Dubai Hong Kong China India India India India
Note 1FY current financial for all the operators, 2FY and 3FY - two subsequent financial years. Share price data as of 16 June 2011 Source: **Bloomberg consensus, Standard Chartered Research estimates
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India ports
17 June 2011
Ports preferred infrastructure investment

In our detailed proprietary analysis of Indias 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 19 Ports vs. other infrastructure asset classes
Criterion Ports (minor/private) Roads (BOTs) Strong: Minor ports are Medium: All road regulated by state governments concessions awarded by that have been encouraging NHAI or state agencies are private port investments under heavy scrutiny and through progressive policies. the awarding process has been slow. Strong: Availability of good marine locations with natural draft and placid waters. Hinterland connectivity is limited and hence favors incumbents. Weak: Technical and financial constraints for bidding for projects are low, leading to competition between large and local developers. Power Medium: Plethora of regulating bodies and government intermediation in various aspects. But, off-take agreements are well documented. Medium: New entrants emerging as power generators. Getting projects with requisite approvals and linkages difficult. Airports (BOTs) Weak: Existing private sector BOTs tightly regulated on all aspects: capex, tariff, etc. Regulations evolving with great scope for uncertainty. Strong: 150 km barrier for new airports makes competing airports difficult. AAI controls most airports offering little scope for good new investments Strong: High skill requirement for project execution, making it difficult for new entrants.
Regulatory environment for investments
Entry barriers
First-mover advantage
Strong: Post setting up a Weak: Competition is private port, most maritime localised and each new boards do not allow another project has different traffic port within a stipulated distance and execution dynamics. of an existing port. Strong (Low): Major ports are not expanding capacity to keep pace with demand, benefiting private ports. Strong: Minor port tariffs, not regulated by TAMP, constrained only by competition.
Medium: Project execution manageable but long gestation period requires stronger balance sheets.
Competition
Medium: Few good projects Medium: Dominated by large on offer and aggressive private and government competition resulting in high generators. bids. Weak: Toll rates regulated under concession agreement.
Strong (Low): Exclusive for the captive city. Little competition from public sector
Tariff flexibility
Weak: Tariffs/ rate of returns Weak: Tariffs/ rate of regulated by PPAs. Merchant returns will be regulated by rates market dependent. AERA.
Traffic growth
Strong: Linked to GDP growth Strong: Linked to local Weak: Units generated Strong: Linked to GDP and location dynamics of key economic and traffic growth dependent on capacity, growth and domestic & cargos. of each stretch. offtake requirement and PLF. foreign passenger traffic for the city. Strong: Post high initial cost on marine infrastructure, subsequent berth additions at lower capex. Port generates own demand as ecosystem evolves. Medium: No capacity Weak: Marginal capacity expansion possible. expansion possible on However, variable cost per variable cost. passenger falls with incremental traffic. Medium: Successive phases typically have high cost. Demand constrained by growth in the city
Scalability
Rate of returns
Strong: Margins 60%+; mature Medium: Margins 80-85%; Medium: Margins 50-60%; RoE is 20-25%. mature RoE 12-20%. mature RoE 14-18%.
Weak: Margins 35-40%+; mature RoE in 10-18%.
Source: Standard Chartered Research (1) State governments can concession airports, not serviced by AAI airports, but these are largely in tier III cities. Do not have any captive traffic and hence not very lucrative. (2) The Central government has slackened airport privatisation, barring Navi Mumbai airport, we do not see any lucrative airport investment opportunity in the near future. (3) We might see some acceleration in NHAI ordering in the near future, but contracting over the past one year has been very slow (4) For the port sector, coastal regulations and environmental clearances also come under the Central government.
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17 June 2011
Benign regulatory environment

Minor or private ports regulated by state maritime boards and free to formulate tariff charges All major (government) ports are regulated by The Major Port Trusts Act, 1963 and the Tariff Authority for Major Ports (TAMP). The Major Port Trusts Act has a provision to constitute port authorities/trusts at major ports and to vest them with administrative and management control of the ports. TAMP was constituted in April 1997 to provide an independent authority to regulate all tariffs, both vessel related and cargo related. TAMP has jurisdiction only over major port trusts and private terminals therein. Minor or private ports are regulated by the respective state maritime boards, and are free to formulate tariff charges. This scenario has benefited private sector ports, providing them with greater flexibility. The Indian government plans to introduce a new Port Regulatory Authority (PRA) Bill in Parliament in the next session; the Bill seeks to bring all ports (including private sector ports) under a common regulatory body, which will fix tariffs and monitor performance. We believe this could impact private ports as 1) it will give government ports more flexibility to fix tariffs and help streamline operations, 2) state regulators will have the freedom to prescribe tariff rates but they will have to follow the common guidelines issued by the Ports Regulatory Authority Bill, 3) the authority will monitor performance at all ports and frame performance norms, 4) the regulatory authority will have powers to call for information, investigate, and inspect the books or other documents of any port authority or private operator and 5) the regulator will have the power to take action against port operators, including powers to cancel licences and/or levy huge penalties. All the maritime states will have to establish similar Ports Regulatory Authorities, which would regulate private ports in the state, failing which these ports would be regulated by the PRA. We believe that most state governments, who are in favor of private ports given the economic benefits to their respective states, would safeguard the interests of the private ports and the sanctity of the concession agreements. We hence expect the benign regulatory scenario to be maintained.
New Port Regulatory Authority (PRA) Bill to bring all ports under a common regulatory body
Maritime Agenda projects 11% cargo growth during FY11-20

The shipping ministrys Maritime Agenda 2020, which is to replace the current National Maritime Development Project, foresees 11% cargo demand growth over FY10-20 if India is to sustain current GDP growth rate of 8-9%. Fig 20 Cargo growth scenarios
2,000 1,800 1,600 1,400 1,200 1,000 800 600 FY10 FY11 FY12E FY13E FY14E FY15E FY16E FY17E
Fig 21 Trade growth

1,400 1,200 1,000 800 600 400 200 0 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12E 2012-13E 2013-14E 2014-15E 2015-16E 2016-17E Exports Imports Merchantile trade
Source: RBI, Maritime Agenda
Cargo volume likely to post 11% CAGR over FY11-17E
Pessimistic( 6% GDP growth) Middle case (9% GDP growth) Optimistic case (11% GDP growth
Source: Crisil, Standard Chartered Research est., Maritime Agenda
Over the past 20-year and 10-year periods, Indias mercantile trade in monetary terms has grown at 12.9% and 20.2%, respectively. At the other end, Indias port traffic has grown at 9.1% over the past 20 years and at 9.7% over the past 10 years. We expect cargo traffic in volume terms to grow at 11% CAGR over FY11-17E with traffic at private ports growing at 16%.
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India ports
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Fig 22 Historical cargo growth

900 800 700 600 500 400 300 200 100 0 1990-91 1992-93 1994-95 1996-97 1998-99 2000-01 2002-03 2004-05 2006-07 2008-09
Fig 23 Future cargo growth

1,800 1,500 1,200 MT 900 600 300 0 FY11 FY12E FY13E FY14E FY15E FY16E FY17E 899 1,022 1,126 1,240 1,365 1,500 1,648
MT
Cargo handled historical

Cargo at major port Cargo at minor port Total cargo handling demand
Captive ecosystem to drive cargo growth at minor ports

Minor ports are developing captive ecosystems to drive traffic growth. Captive ecosystems attract more industrial and manufacturing units, leading to incremental traffic growth.
Coastal coal-fired power generation units: Over 30GW of coal-fired power generation capacity is likely to be added over FY12-17E, which would necessitate additional coal import of 230m tpa on a pan-India level. A large part of this capacity is being set up near minor ports along with rail-merry go-round (MGR) or conveyor belt linkages with the ports. Expansion in ferrous/non-ferrous/cement manufacturing capacity: Our materials team expects 35m tonnes of ferrous capacity and 54m tonnes of cement capacity to be added over FY12-17E, which would necessitate additional import of 111m tpa of thermal/coking coal. In addition, iron ore export is a major driver for several minor ports. Parentage: Apart from regional traffic and traffic from captive ecosystems, ports with strong parentage also generate significant cargo from the promoter group. MPSEZ, Dhamra, Essar and Pipavav have benefited from strong parentage. SEZ and industrial zones. Our visits to Mundra SEZ and Essar Ports impressed us, given the amount of industrial activity in the region. The creation of SEZs and industrial zones have helped bring in new manufacturing units, creating incremental traffic.
Hinterland growth Manufacturing growth in the hinterland is pushing cargo volume towards minor ports, as major ports fail to add capacity. Gujarats ports benefit from their proximity to the northern hinterland on the west coast. The Delhi-Mumbai corridor, Indias busiest cargo route, could potentially have a dedicated freight corridor by FY16-17. This would improve connectivity to hinterland locations, further boosting cargo flow from the hinterland. south Indias hinterland, especially on the East coast, has good connectivity to the ports. We expect industrialisation in the south to provide further impetus to container, bulk and project cargo.
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Growth riding on 3Cs coal, containers and crude

The 3Cs likely to drive strong 16% traffic CAGR over FY11-17E at private ports The 3Cs coal, containers and crude are likely to drive strong 16% traffic CAGR over FY1117E at private/non-major ports, in our view. Our analysis indicates that coal imports are likely to post 20% CAGR over FY11-17E, amid rising demand from coastal power plants and steel/cement units. Nevertheless, capacity addition at government ports is likely to fall far short of demand, with private ports stepping in to fill in the gap.
Coal would be the primary cargo growth driver. We estimate that 30GW of coal-fired power generation capacity is coming up, necessitating 230m tpa of additional coal imports by FY17. Of this, around 149m tpa will be tied to respective ports under long-term contracts. Container growth will be driven by better connectivity to north India/regional hinterlands, increasing industrialisation and containerisation of bulk cargo. Crude demand will be dependent on increase in refining capacity and greater crude consumption. However, growth in crude will only benefit a few select ports with contracted refining cargo.
3Cs as cargo traffic driver

Containers, crude and coal currently form 67% of total cargo traffic Containers, crude and coal currently form 67% of total cargo traffic and are likely to remain key growth drivers going forward. Private ports have been especially good at attracting crude import demand. They currently handle 54% of total POL traffic into the country, and we expect it to rise when the Bhatinda refinery is commissioned. While POL was the main driver of traffic growth between FY04 and FY10, we believe coal will be the main driver in future. Fig 24 Crude/POL demand
600 500 186 195
Fig 25 POL handled by ports

600 500
185
172
153
220
196
220
270
288
200 100 0
200 100 0
145
152
300
174
300
181
190
208
POL traffic to reach 483m tpa by FY17
185
209
MT
226
MT
246 FY16E 209
180
197
168
168
175
2009-10
2010-11
2011-12E
2012-13E
2013-14E
2014-15E
2015-16E
2016-17E
FY10
FY11
180
FY12E
186
FY13E
191
FY14E
FY15E
203
Crude imports
POL Exports/ imports
POL handled in non-major ports POL handled in major ports

Source: Crisil, Standard Chartered Research estimates
We estimate that India needs to increase its coal imports at a CAGR of 20% to 358m tpa by FY17 from 122m tpa in FY11 to cater to demand from the power, steel and cement industries. Of the incremental demand of 230m tpa, 142m tpa will be absorbed by the power industry and 88m tpa by the others. New capacity addition will clearly be the main driver of this growth. By FY17, India will have 37GW of power generation capacity completely dependent on imported coal (from zero in end-FY10 and about 7GW by end-FY12).
Equity Research
FY17E
215
267
400
400
15
India ports
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Fig 26 Coal import demand

400 300 MT 200 100 0 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E 40 30 20 10 0 GW
Fig 27 Coal traffic major/ minor ports

400 300 MT 116 200 100 0 FY11 FY12E FY13E FY14E FY15E FY16E FY17E 73 46 80 71 99 146 175 118 218 130
Thermal coal (others) Coking coal Thermal coal imports (power) Imported coal capacity (GW)
Source: Standard Chartered Research Estimates, Coal vision 2025
Coal handled (minor ports) Coal handled (major ports)

Non-major ports likely to handle about 70% of coal imports
In FY11, major and non-major ports handled coal imports in the ratio of 54:44. With massive coalhandling capacities coming up at private sector ports, we expect non-major ports to handle about 70% of coal imports in future (excluding coal terminals operated through the PPP route in major ports). Fig 28 Dedicated coal terminal addition over FY12-17E
Port Paradip Ennore Tuticorin Vishakapatnam New Mangalore Mormugao Mundra Total coal capacity addition
Source Maritime Agenda, Standard Chartered Research estimates
Expected date of completion FY13 FY14 FY17/18 FY13/14 FY16 FY14 FY12
Dedicated coal capacity (MTPA) 14 8 14 14 6 10 60 116
Status Development under BOT Yet to be awarded Being developed under BOT route Yet to be awarded Being developed under BOT route Constructed and operational -
Increasing containerisation
Container traffic likely to post 13% CAGR over FY11-17 Container traffic posted a 10% CAGR over FY04-10 and we expect it to grow by 13% over FY1117. Nevertheless, there has not been much container berth capacity addition at ports. At the current rate of capacity addition, there would be a shortage of container handling berths going forward. In FY11, 67% of container traffic was handled by two major ports JNPT (on the west coast with 44%) and Chennai (on the East coast with 23%). Both these container terminals are already operating at 90%+ utilisation and their much needed capacity expansion has yet to reach the bidding stage. In the private sector, only MPSEZs Mundra port and GPPLs Pipavav port have dedicated mechanised container terminals. They handle about 15% of total container traffic. Going forward, we estimate a 13% CAGR in container cargo traffic growth over FY11-17E, which translates into 270m tonnes or 22.5m TEU by FY17. Furthermore, CIIs container cargo forecast at 6.5% GDP growth is 23m TEU by FY17, which is in line with our estimates. In the next section, we have analysed container demand versus container capacity addition. We expect container terminals to remain over-utilised. Container terminals are currently operating at more than 80% capacity and we expect the situation to continue at least until FY16.
Equity Research
108
89
98
30GW of imported coal-based generation capacity addition
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17 June 2011
High utilisation here to stay

Our analysis of capacity addition suggests we need not be worried about over capacity. 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. A conservative estimate of 11% cargo growth implies 2x capacity addition. Nevertheless, our study shows that government ports lag demand requirements and private ports just about meet traffic demand. We expect major ports to run at >90% utilisation over FY11-17E and private ports to hover around 70-80% utilisation.
Capacity addition at major ports not keeping pace

At 84% utilisation, turnaround times are 4-5 days A conservative estimate of 11% cargo growth would imply port capacity needs to increase 2x for efficient utilisation. The Maritime Agenda estimates an investment of Rs3trn is required to increase port capacity to 3,200m tpa from the current 1,075m tpa by FY20E. Existing port capacity (major and non-major ports) is operating at 84% utilisation, which is not conducive for efficient port operation, resulting in turnaround times of 4-5 days extremely high by global standards. Over FY01-11, major ports cargo handling capacity posted a 7.5% CAGR against total cargo handled CAGR of 8%. Current capacity utilisation at major ports is 88%. Capacity utilisation at major ports in western India, however, is 95% with key ports such as Mumbai, JNPT and Kandla running at 125%, 100% and 96% utilisation, respectively. This high capacity utilisation leads to lower efficiencies with average turnaround time for Mumbai, JNPT and Kandla at 4.6, 4.9 and 5.6 days, respectively. Fig 29 Major ports capacity growth
1,000 900 800 MTPA 947 700 811 778 751 732 600 500 400 FY10 FY11 FY12E FY13E FY14E FY15E FY16E FY17E 599 645 665 MT 6% CAGR
Fig 30 Major ports cargo growth

1,050 900 750 600 632 696 713 739 770 FY16E 450 300 150 0 FY10 FY11 FY12E FY13E FY14E FY15E FY17E 561 570 899 8% CAGR
Capacity addition at major ports not meeting demand
The prospects for capacity addition at major ports do not look good. We expect capacity at major ports to rise by 113m tpa in the next five years, with a further 130m tpa to come on stream in FY17. The key bottleneck impeding the expansion of projects has been the lack of flexibility at major ports. Fig 31 Major ports capacity utilisation to remain at 90-95%
100 96 92 % 88 84 80 FY10 FY11 FY12E FY13E FY14E FY15E FY16E 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 FY17E
Capacity utilisation of major ports

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Most capacity addition projects back-ended
Fig 32 Major port capacity expansion roadmap and status

Port Paradip Vizag Ennore Project Iron ore berth Coal berth POL (SBM) Coal berth Iron ore berth RO-RO Ennore Chennai Tuticorin Mormugoa Cochin Mumbai JNPT Kandla New Mangalore Total addition
Source: Crisil, Standard Chartered Research
Capacity (m tpa) 10 10 15 8 12 15 48 6 5 7 12 9.6 30 58 12 7 249
Expected CoD 2012-13 2012-13 2014-15 2012-13 2012-13 2013-14 2015-16 2016-17 2015-16 2013-14 2012-13 2011-12 2014-15 2016-17 2016-17 2015-16 2012-13
Status Awarded Awarded (Essar Ports) NA Awarded Awarded Awarded Bidding yet to begin Bidding stage Bidding stage Bidding stage Awarded/ Mundra Awarded Awarded/ but uncertain Proposed Proposed Bidding stage Awarded
Container Container Container Container Coal berth Container container Marine chemical Container offshore berthing Iron ore berth
Capacity addition at private ports just meeting current requirements

Current capacity utilisation at minor ports is ~68% and we expect private ports to have gradually increasing utilisation levels. We estimate 16% traffic growth at minor ports from 294m tonnes in FY11 to 702m tonnes by FY17. Capacity addition at minor ports could follow the same trend, posting 12% CAGR over FY11-17E from 430m tpa to 851m tpa, respectively. Fig 33 Non-major ports capacity growth
900 800 MTPA 700 851 779 600 712 628 500 430 545 400 300 FY10 346 499 12% CAGR MT
Fig 34 Non-major ports cargo growth

800 700 600 500 300 289 100 0 294 200 362 414 552 623 FY16E
FY17E
16% CAGR
FY11
FY10
FY12E
FY13E
FY14E
FY15E
FY16E
FY17E
FY11
FY12E
FY13E
FY14E
471
FY15E
Fig 35 Non-major ports capacity utilisation to increase but below 85%

85 80 % 75 70 65 FY12E FY13E FY14E FY15E FY16E FY10 FY11
Capacity utilisation at minor ports

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FY17E
702
400
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India ports
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Minor ports benefiting from weakness at major ports

Market share of major ports likely to fall to 54% by FY17 from 63% in FY11 The port sector was nationalised in 1963 under The Major Ports Act (1963). There are 12 ports classified as major ports, which come under the jurisdiction of the Central government. All these ports are located in major cities and thereby have excellent rail/road connectivity to the hinterland. Plans to expand capacity at these ports, however, have been slow to take off and remain inadequate. The increase in evacuation infrastructure has not kept pace given these ports are within existing cities. Due to this, the average turnaround time and pre-berthing time has been increasing at major ports. On the other end, private ports offering better services and higher efficiencies are gaining traffic share through a better customer focused approach. The market share of major ports has fallen from 74% in FY01 to 63% in FY11. We expect the trend to continue with market share of major ports falling to 54% by FY17. Furthermore, capacity addition at minor ports has been timely and has enabled them to cater to bulging traffic demand. Delay in capacity addition at major ports is lowering their market share. Fig 36 Traffic handled by major and minor ports over FY17E
1,800 1,600 1,400 1,200 1,000 800 600 400 200 0
Fig 37 Non-major ports capacity growth by state

900 750 600 450 300 150 0 2009-10 2010-11 2011-12E 2012-13E 2013-14E 2014-15E 2015-16E FY17E 2016-17E 120 100 80 60 40 20 0 FY10 FY11 FY12E FY13E FY14E FY15E FY16E %
702
294
362
414
MT
471
552
FY11
570
FY12E
632
FY13E
696
FY14E
713
FY15E
739
FY16E
770
FY17E
899
MTPA
623
Gujarat Orissa
Maharashtra Other states
Andhra Pradesh
Cargo at major port
Cargo at minor port
Under the Major Ports Act, state governments can develop small and non-major ports through concession agreements with the private sector. State governments have been using this provision to drive investment into the port sector in their respective states. Gujarat has been an early pioneer, given its natural advantages (long coast and proximity to northern India), but other states such as Andhra Pradesh, Goa and Pondicherry, too, have been providing strong support to their respective port projects.
Container capacity lagging demand

We expect container terminals to operate at 80% until FY16 Container terminals are currently operating at more than 80% capacity and we expect the situation to continue at least until FY16, despite significant expansion in capacity by private players and assuming all the projects at major ports in the Maritime Agenda come on stream. Fig 38 Container demand vs capacity growth (TEU)
40 30 m TEU 20 20 10 0 FY10 FY11 FY12E FY13E FY14E FY15E FY16E FY17E 10 12 12 11 13 12 15 14 16 18 20 23 24 33 MTPA
Fig 39 Container capacity breakup and capacity utilisation

500 400 300 200 100 0
16
Containers cargo demand (m TEU) Total container capacity (TEU)

New major ports (LHS) Non-Major capacity (LHS) Existing major (LHS) Container cap.util (%) (RHS)
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We expect the shortage of container handling capacity to continue, given: Unhealthy 90%+ container capacity utilization at major ports
None of the new container terminals proposed at major ports have progressed much, hence, we do not foresee any of the projects coming up by FY16 at the earliest. In comparison, private sector ports are in expansion mode. Currently, only JNPT and Chennai among the major ports are well integrated with international shipping routes. The Maritime Agenda visualises massive capacity expansion at other major ports, which currently have small or no container capacity. These ports face logistics issues regarding railway transport and have low efficiency at their existing container operations. Because of this, container traffic continues to flock to JNPT, despite its average time to berth of 3-4 days. Furthermore, small container ports will find it difficult to get export traffic that has traditionally flocked to larger ports, making it inefficient for container operators to work with smaller ports. To gain significant container traffic, new ports will need to tie-up with overseas container operators.
A window for private container ports
This offers a window to existing private container ports. We expect MPSEZ and GPPL to capitalise on this because of their strong international tie-ups. We estimate container cargo handled by private ports would post a 21% CAGR over FY11-17E to 68m tpa (5m TEU) or 25% of total container traffic, up from 14% in FY11. Fig 40 Container capacity (m TEU)
40 m TEU 30 MT 20 10 0 2009-10 2010-11 2011-12E 2012-13E 2013-14E 2014-15E 2015-16E 2016-17E
Fig 41 Container traffic growth (m TEU)

300 250 183 59 FY16E 205 68 FY17E 200 136 149 41 FY14E 166 48 FY15E 150 101 114 100 50 0 122 26 FY12E
15 FY10
22 FY11
31 FY13E
Chennai Other major ports Pipavav
JNPT Mundra Port and SEZ*
Container cargo at major ports (MTPA Container cargo in Minor ports (MTPA)
Source: Standard Chartered Research estimates, Maritime Agenda
Source: Standard Chartered Research estimates, Maritime Agenda
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17 June 2011
Fig 42 Container capacity additions

Coast West Sector Major Port JNPT Existing FY17 capacity target Project (m TEU) (m TEU) 4.9 10.72 Fourth container terminal/ also extending the existing terminals 0.34 1.5 International container and transshipment terminal Diamond harbor container terminal 4 container jetties Project status Project award under litigation with operators of existing terminal. We do not expect it to come on stream before FY16 Project being executed by DP World, on schedule, strong chances of completion by FY13 Feasibility report approved, land recently acquired, but not yet bid, very unlikely to come by targeted FY14, FY17 looks more feasible Approval for taking the project under PPP mod from MoS awaited, targeted only for FY17/18 completion Bidding underway Strong progress
West
Major
Cochin
East
Major
Kolkata
0.44
2.76
East
Major
Chennai
2.7
5.25
Construction of Mega cargo terminal
East West
Major Nonmajor Nonmajor Nonmajor
Ennore Mundra
0 2.5
1.25 5
West West
Hazira (Adani) Pipavav
0 0.6
2.5 1.9
Construction of a new container terminal Conversion of existing bulk berths to container berths Addition of container berths to existing Extension of existing terminal and adding more berths
JV formed, no other work in progress Expansion on track
Source: Crisil, Standard Chartered Research
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17 June 2011
Strategic rating scorecard

We introduce our proprietary scorecard that evaluates companies in a structured and consistent way, based on four qualitative and four quantitative parameters. We assess the companies intrinsic strengths and weaknesses, looking for strategic advantages and disadvantages that will drive 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 MPSEZ has the best strategic positioning and long-term growth potential (it scored 26 out of 32). Next comes Essar Ports (24), followed by GPPL (18) and Marg (15).
Qualitative scorecard
Fig 43 Qualitative scorecard: MPSEZ and Essar Ports top the scores
MPSEZ Criteria Location Criteria detail Potential for marine infrastructure growth Dredging requirement Alignment to existing shipping routes Access to hinterland (Northern or Southern) Contracted cargo Captive economy Level of industrialisation Competition Competition Group advantage in cargo Parentage generation Weighted average company score
Source: Standard Chartered Research Estimates
Essar Ports Hazira 3 3 3 4 2 2 4 3 3 Vadinar 1 3 1 3 4 3 3 3 3 Hazira 3 3 3 4 4 3 4 3 3 11.6 Salaya 3 2 2 2 3 2 2 3 3
GPPL Pipavav 2 2 3 3 2 1 1 2 4 9.8
Marg Karaikal 2 3 2 3 2 1 2 2 1 7.2
Mundra 4 3 2 3 3 4 3 3 3 12.1
Ecosystem
Mundra port scores well on draft and waterfront availability
1)
Location. Here we review a ports location in relation to existing shipping routes, its evacuation facilities and options, coastline/waterfront availability, geological and hydrological conditions. Waterfront availability and draft affect the supply side (i.e., port capacity scalability), while its position in relation to shipping and surface transport routes affect the demand side (i.e., cargo demand). On this parameter, MPSEZs Mundra and Hazira ports score high, so does Essars Hazira port. We believe they have the potential to become mega ports. Other ports have slight disadvantages, constraining their growth potential. In the table below, we show our estimates of potential capacity addition at the ports.
Fig 44 Ports scalability based on current plans

MPSEZ (m tonnes) Current capacity FY14E capacity FY17E capacity Mundra 60 177.5 192.5 Hazira 0 25 70 Essar Ports Vadinar 46 58 58 Hazira 30 40 50 Salaya 0 20 20 GPPL Pipavav 12 20 32 Marg Karaikal 5 21 40-47
Marine-side potential. The ability to expand a ports capacity depends on waterfront availability (for berthing), land (for storage and transport) and an adequate channel. MPSEZs Mundra port scores high given the natural draft availability (16 metres+ without dredging), naturally placid waters and long waterfront. Essar Ports Vadinar is a constrained asset as it is close to a marine national park, thus limiting growth. In the table below, we compare the marine conditions of the different ports.
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Fig 45 Ports marine conditions

MPSEZ Mundra Dredged draft Total draft Tiding conditions Breakwater type 16 20 Good (<4 m) Under water Hazira 10 14/16 Poor (4-8m) To be constructed Vadinar NA 16 (SPM 32) Good (<4 m) Not required Essar Ports Hazira 10-12 14 Moderate (4-8m) Riverine, hence not feasible Salaya NA 14 Low (<4 m) Not required GPPL Pipavav 13-14 14 Moderate Natural (Island) Marg Karaikal 12 12 Good Present
Source: Company, Standard Chartered Research
Draft requirements. MPSEZs Mundra port has good draft and is the only port that can handle Capesize vessels. Private ports have invested heavily to increase draft and are well placed to benefit from the predominance of large-size Panamax vessels in international trade. On the other hand, the major ports have drafts of around 10-13 metres. All the major ports under NMDP and the Maritime Agenda aim to increase draft, but the projects have been slow to take off.
Fig 46 Draft and vessel handling capacity

25 20 metres 15 16 16 13.4 15 12.5 12.5 12.5 12.5 14 14 11.7 11.5 10.8 10.7 10 5 0 New Mangalore Mundra Adani Hazira Murmugao Vishakapatnam Mumbai Pipavav JNPT Essar Hazira Chennai Tuticorn Kolkatta Salaya Karaikal Vadinar Kandla Paradip Cochin Haldia 20 10.5 12 10 7.5 Can handle Panamax vessels DWT of 60,000MT Supramax vessels DWT of 52,000MT Handymax vessels DWT of 10,000MT
Mundra may emerge as Indias only transshipment hub
Only Mundra has 17mt+ draft: can handle capesize vessels: DWT of 100,000 MT
Source: Standard Chartered Research, IPA
Alignment to existing shipping routes. MPSEZs and Essars Hazira ports and GPPLs Pipavav port are poised to receive spill-over traffic from JNPT, which is only 120 nautical and 152 nautical miles, respectively, from these ports. The Mundra, Vadinar and Salaya ports (all located in the Gulf of Kutch) are 400+ nautical miles from JNPT. Though the three ports are less than 100 nautical miles from Kandla, Kandla is not a major container port. MPSEZs Mundra port, however, has managed to enter the container-shipping route through an agreement with P&O Terminals (now DP World) and is now a mid-sized container terminal. Margs Karaikal port lies between Chennai and Tuticorn and hence is in a well-established shipping lane. Nevertheless, we believe that the spill-over traffic pie in the south is much smaller than for Gujarat ports. Access to the hinterland. The northern hinterland generates over 50% of cargo traffic into the country. MPSEZs Mundra port is the closest port to the north. The Hazira ports hinterland is highly industrialised and caters to Surat, south Gujarat and Maharashtra. Hazira is strategically located along the Delhi-Mumbai corridor and hence has good transport routes to the northern region. Margs Karaikal port is close to Chennai port, the second-largest container terminal in India, and has good rail and road connectivity to the Tamil Nadu hinterland.
2)
Ecosystem. Ports need to develop captive ecosystems to achieve strong growth. We assess contracted cargo (long-term agreements), captive economy, i.e., economy of areas primarily serviced by a particular port, and the level of industrialisation in the particular hinterland. All these affect the port on the demand side. MPSEZs Mundra port has an ideal mix of both parameters long-term contracted cargo off-take from refineries/power plants, an industrialising hinterland and the SEZ. MPSEZs and Essars Hazira ports have the richest hinterland in highly industrialised south Gujarat, a region that is currently largely 23
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untapped and serviced from Mumbai/JNPT. GPPLs Pipavav and Margs Karaikal have reasonably good hinterlands with moderate industrialisation, but do not have any contracted cargo.
Contracted cargo. We like port assets that have captive cargo customers and have signed long-term contracts that help generate annuity-type earnings streams. Essar Ports and MPSEZ score high on this parameter as they have over 90m tpa and 50m tpa, respectively, of contracted coal and crude cargo. These commitments would amount to 30-50% of their capacity by FY14. This gives them good revenue and margin visibility particularly useful as bulk cargo handling in Gujarat is becoming commoditised given the numerous government ports trying to corner the market. The table below summarises contracted cargo by port.
Gujarat Pipavav Ports # NA NA
Fig 47 Contracted cargo as of FY14

(m tpa) Coal/ iron ore Crude
Source: Standard Chartered Research estimates @ The coal includes coal to be delivered to the Adani Power and Tata Power plants, crude includes HPCL and IOC off-take *45m tpa is broken down as Hazira: 25m tpa of coal and iron ore, Paradip: 10.8m tpa of coal, Salaya 9.1m tpa #GPPL and Marg currently do not have any firm bulk cargo contracts, though they are in negotiations with power generation units coming up in the vicinity
Mundra Port and SEZ@ 30 20
Essar Ports* 45 45
Marg # NA NA
Captive economy. MPSEZs Mundra port has been successful in attracting investments into the region. We expect the Mundra SEZ to contribute substantially to cargo demand going forward. All the other projects, however, depend heavily on economic growth in the immediate hinterland for a large part of their traffic. Among other projects, Hazira and Pipavav have rich captive hinterlands that are currently underserviced.
Fig 48 Hinterlands for various ports

MPSEZ Mundra Hazira Essar Ports Salaya North Surat/ Vapi/ Saurashtra Valsad/ (Jamnagar industrial industrial belt belt) AhmedabadIndore belt Northern and region Maharashtra Hazira GPPL Pipavav Marg Karaikal Vadinar North Surat/ Vapi/ Mundra Saurashtra Valsad/ SEZ/ Kutch/ (Jamnagar industrial Rajasthan industrial belt belt) AhmedabadNorthern Indore belt NA region and Maharashtra
Primary Hinterland
South Saurashtra Northern (Bhavnagar Tamil Nadu belt) Northern region Southern Tamil Nadu, Bangalore belt
Secondary hinterland
3)
Competitive Scenario. Our analysis shows that container cargo will be the least competitive segment, while ad-hoc bulk cargo would be the most competitive segment despite immense growth potential. Essars and MPSEZs ports are not likely to face any competitive pressure for bulk cargo due to secure long-term agreements. For container cargo, MPSEZ and GPPL are in a strong competitive position given container-handling capacity addition (especially by major ports) on the west coast is likely to fall well short of demand. GPPL and Marg have not yet entered into any long-term agreements for bulk cargo and they will face competitive pressure from existing and new ports. In this regard, Marg is better placed as it could face competition only from existing public sector major ports (Chennai and Tuticorin), which are running at maximum utilisation. GPPL faces tough competition from other GMB ports for bulk cargo. Parentage. We assess the affect of parentage on a ports ability to generate cargo demand and on management capabilities. MPSEZ and GPPL score high on both these counts, while Essar Ports scores high on cargo generation, but moderate on operational capabilities. We believe Marg has demonstrated its execution capabilities, but lags in cargo generation.
4)
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Advantage in cargo generation. GPPLs parent is AP Moller Maersk, the worlds largest shipping company. This has helped it generate cargo from the group. Essar Ports has utilised its parent groups interests in steel, power and refinery to secure bulk cargo trade, but we do not believe the benefit is scaleable beyond the initial head start. The Adani group has been using MPSEZs Mundra port for its trading purposes and for importing coal for its power plants, generating captive cargo for the port.
Quantitative scorecard
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. Fig 49 Quantitative scorecard of ports
Criteria Capacity - Buffer - Efficiency Execution capability Traffic growth FY11/FY17E Financial strength - Cash flows - Balance sheet Weighted overall score
MPSEZ 4 3 4 3 4 3 14
Essar Ports 3 2 3 4 3 2 12
GPPL 2 2 2 2 3 2 8.5
Marg 2 1 2 3 2 1 8
1)
Capacity Buffer and Efficiency. With demand remaining strong, we expect players such as MPSEZ that are adding capacity ahead of demand (i.e., players with high traffic growth but low capacity utilisation) to be well placed. GPPL is likely to operate at optimum capacity utilisation over most of FY11-17 and we expect capacity addition only post FY13-14. Essar Ports currently has low capacity utilisation of 58%, but we believe that the buffer will be taken up by group captive demand, and hence does not have immediate capacity to cater to external demand. Most non-major ports score over major ports in terms of efficiency parameters with turnaround times of about 2-3 days against major port average of 4.4 days. We believe that while these are early days yet for most of the ports in our coverage, given the high degree of mechanisation and capacity buffer they have, all the ports could sustain these advantages vis--vis major ports.
Fig 50 Ports capacity utilisation

120 100 80 % 60 40 20 0 MPSEZ FY11 utilisation
96 75 59 59 58 78 77 72 67 59 56 67
Essar Ports FY14E utilisation
GPPL FY17E utilisation
Marg
MPSEZ rates high on execution capability
2)
Execution Capability. MPSEZ rates high on execution parameters vital for port growth: 1) execution at current location, 2) appetite to work on new locations and 3) partnering with customers (shipping lines as well as end-users). We are positive about Essar Ports appetite for growth in newer locations, but it could struggle to partner with non-group customers, especially for container traffic. GPPL has good management and is able to attract container traffic, but it does not plan to expand significantly for bulk cargo growth or look at geographical expansion beyond Pipavav. Marg is a new entrant; it has shown good 25
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execution capability at Karaikal port and has an inclination to grow in newer locations, but we believe the company needs to partner with customers for bulk cargo and also will need to rope in strong partners/operators to secure its growth on the container cargo front. Fig 51 Execution capability
Mundra Port and SEZ Very strong. Execution track record on Demonstrated execution current location capability Essar Ports Gujarat Pipavav Ports ltd. Strong Especially since APM Terminals took over the long delayed project Marg Medium It is developing execution capability as it moves up the learning curve, given only two years of operation
Strong
Strong Company has Medium - Looking for Appetite for expansion to Strong. Looking for port explored opportunities, but No geographical expansion locations within Tamil Nadu new locations locations on the East coast largely in sync with group plans and the East coast. strategy Medium No firm contracts for bulk cargo yet. Weak Predominantly in- Medium Strong on Partnering with new We also foresee need for a Very strong house customer focus as of container, but low on bulk customers/ developers tie-up with a shipping line now cargo partnerships. for the 7m tpa container terminal
3)
Traffic Growth. We believe that non-major ports will report strong cargo traffic growth. Among the four we cover in this report, MPSEZ, with massive capacity expansion and secured growth drivers, is likely to report the highest growth 31% traffic CAGR over FY17E. Essar Ports is likely to post lower growth at 22%, but with more secured cargo. We believe Marg is likely to benefit from a low base and relative lack of competition.
Fig 52 Cargo traffic growth

300 250 200 MT 150 100 52 50 0 MPSEZ FY11 cargo
264 31.0 168 98 39 9 Essar Ports FY14E cargo 16 GPPL FY17E cargo 22 130
35 33 30 25 20 16 15 10 22 5 15 Marg % growth FY11-17 27 5 0
4)
Financial Strength Cash flow and balance sheet. We prefer companies with adequate leverage and strong operating cash flows such as MPSEZ and Essar Ports as they will have the ability to fund their expansion. We are uncomfortable with highly leveraged companies such as Marg. GPPL has an under-leveraged balance sheet and has strong cash flow potential.
Fig 53 Cash flow and balance sheet comparison

(Rs m) Debt to Equity FY12 (x) Debt to Equity FY14E (x) Debt outstanding FY12E OCF FY12/14E FCF FY12/14E
MPSEZ 3.0 1.8 138,541 65,969 -107,344
Essar Ports 2.8 2.3 62,390 14,575 -22,306
GPPL 1.1 1.1 6,944 4,049 -1,140
Marg 4.2 5.1 26,379 6,905 -14,398
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India ports
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Appendix
Fig 54 Worlds largest ports by cargo (MT) Indian ports are small by global standards
Traffic in MT Rank 1 2 3 4 5 6 7 8 9 10 42 55 56 Port Shanghai Singapore Rotterdam Tianjin Ningbo-Zhoushan Guangzhou Qingdao Qinhuangdao Hong Kong Busan Kandla Chennai JNPT Country China Singapore Netherlands China China China China China China South Korea India India India 2007 561 484 401 309 472 341 265 246 245 244 65 57 56 2008 508 515 421 365 362 347 278 252 259 242 72 61 57 2009 506 472 387 381 372 364 274 244 243 226 80 61 61
Source: Standard Chartered Research, AAPA
Fig 55 Worlds largest ports by container cargo (TEU) JNPT has 44% of Indias container traffic, but is ranked 24 among global container ports
Traffic in TEU Rank 1 2 3 4 5 6 7 8 9 10 24 79 Port Singapore Shanghai Hong Kong Shenzhen Busan Guangzhou Dubai Ports Ningbo Qingdao Rotterdam JNPT Chennai Country Singapore China China China South Korea China United Arab Emirates China China Belgium India India 2008 30 28 24 21 13 11 12 11 11 11 4.2 1.7 2009 26 25 21 18 12 11 11 11 10 10 4.4 2.0
Source: Standard Chartered Research, AAPA
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India ports
17 June 2011
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India ports
17 June 2011
Company Section
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India Ports l 17 June 2011
Mundra Ports and SEZ

Gennext port
We initiate coverage on MPSEZ with an OUTPERFORM rating and price target of Rs201/sh. Mundra port is likely to become Indias largest port by FY14. Over FY11-17E, we estimate MPSEZ would post 31% cumulative traffic CAGR. We expect EBITDA CAGR of 47% to Rs41bn and net profit CAGR of 35% to Rs22bn over FY11-14E. The Abbot Point acquisition is value accretive, expands its global footprint and adds Rs27/sh to NAV. Premium valuation justified given volume and earnings growth, robust management and execution capability. Leaping forward. It is adding significant capacity at Mundra port: 1) a 60m tpa highly mechanised coal terminal, 2) another 3.2m TEU container capacity by FY14, 3) four bulk terminals totaling 20m tpa, and 4) 12.5m tonne second SPM. It is adding 110m tonnes of capacity at its other Indian ports Dahej, Hazira and Mormugao and 50m tonnes at Abbot Point by FY17.
OUTPERFORM (initiating coverage)

PRICE (as at 16 June 11)
PRICE TARGET
Rs152
Bloomberg code
Rs201
Reuters code
MSEZ IN
Market cap
MPSE.NS
12 month range
Rs303,615m (US$6,325m)
EPS est. change
Year end: March Sales (Rs m) EBIT (Rs m) EBITDA (Rs m) Pretax profit (Rs m) Earnings (Rs m) adjusted Diluted EPS (Rs ) adjusted Diluted EPS growth (%) adj. DPS (Rs ) DPS growth (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Div payout (%) Book value/share (Rs ) Net gearing (%) ROE (%) ROACE (%) FCF (Rs m) EV/Sales (x) EV/EBITDA (x) PBR (x) PER (x) Dividend yield (%)
Rs129 - 182
2013E
2013E 47,174 25,866 31,572 19,823 16,034 8.00 38.0 1.10 66.9 54.8 34.0 13.7 33 242 27.5 10.2 -1,840 9.6 14.4 4.6 18.9 0.7
2012E
2014E 60,648 34,822 40,931 28,175 22,431 11.20 39.9 1.20 67.5 57.4 37.0 10.7 43 180 29.8 12.6 6,821 7.4 10.9 3.6 13.5 0.8
Strong demand. We expect growth to be driven by industrialised Gujarat, containerisation in north India, captive SEZ demand, high-utilisation at major ports on the west coast and value-added efficient services provided by MPSEZ. The 3Cs: 1) container demand on the west coast to post growth of 6.6m TEUs over FY12-17, of which 33% is likely to come to MPSEZ, 2) coal demand of 48m tpa from 14GW of generation capacity coming up in the region, and 3) 11m tpa of crude import demand from Bhatinda refinery. Solid financials. We expect MPSEZ to sustain EBITDA margin of 67%+ and RoE of 25%+ over FY12-14E. Raising capacity to 350m tpa by FY17E would require capex of Rs198bn. We expect non-dilutive growth given the underleveraged balance sheet; we expect operating cash flow of >Rs20bn annually over FY12-17E. Valuations offer room for re-rating. MPSEZ trades at FY13 P/E, EV/EBITDA and PB of 19x, 14x and 4.6x, respectively. We expect net profit CAGR of 35% over FY1114E. Given growth momentum, robust management and execution capability, we initiate with OUTPERFORM and PT of Rs201/sh (62% contribution from Mundra port). Risks. Imposition of MAT on SEZ units might make it difficult to attract new units. Acquisition of new ports.
2011 2012E 20,001 36,969 10,606 19,975 12,994 25,388 10,036 14,014 9,142 11,617 4.56 5.80 31.0 27.1 0.90 1.00 65.0 68.7 53.0 54.0 45.7 31.4 19.7 17.2 21 26 102 301 23.9 24.9 12.9 12.0 3,965 -112,324 16.8 12.2 25.8 17.7 7.3 5.9 33.2 26.1 0.6 0.7
Source: Company, Standard Chartered Research estimates
Share price performance

190 180 170 160 150 140 130 120 Jun10 Sep10 Dec10 Mar11
MundraPortsandSEZ
BSESENSEX30INDEX(rebased)
Share price (%) Ordinary shares Relative to Index Relative to Sector Major shareholder Free float Average turnover (US$)
Source: Company, Bloomberg
-1 mth -3 mth -12 mth 9 15 7 11 16 4 Promoter share holding (77.5%) 23% 5,012,455
Gaurav Pathak
Shashikiran Rao
Shashikiran.Rao2@sc.com + 91 22 6755 9764
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Investment argument and valuation

With capacity addition at Mundra port, acquisition of Abbott Point (Australia) and capacity addition at Vishakapatnam, Dahej, Mormugao and Hazira, MPSEZs cumulative port capacity is likely to rise to 285m tonnes by FY14 and to 350m tonnes by FY17. MPSEZ will not just become the largest Indian port by FY14 but also likely achieve mega port status in terms of cargo and capacity by FY17. We recently visited its flagship asset, Mundra port, and were impressed with the pace of execution across the new terminals, adjacent power plants, and development work at the SEZ. We believe Mundra port would have enough demand and absorption capability to reach cargo traffic of 102m tonnes by FY14E and 155m tonnes by FY17E. Cumulative traffic across MPSEZs ports could reach 167m tonnes by FY14E and 264m tonnes by FY17E; 31% cargo CAGR. With most of the Rs198bn capex required for the expansion already arranged, the company is headed for non-dilutive growth, which could result in 45% and 35% CAGR in revenue and earnings, respectively, over FY11-14E.
Towards 350m tpa port capacity

Capacity to rise 3.5x to 350m tpa by FY17E across 6 locations Through organic expansion at Mundra port and expansion of newly acquired port capacities in India and Australia, MPSEZ is likely to have 350m tpa of port capacity by FY17 (see charts below). Fig 1 Location-wise capacity expansion
400 350 300 250 200 150 100 50 0 FY11 FY12E FY13E FY14E FY15E FY16E FY17E
Fig 2 Cargo-wise capacity expansion

400 350 300 MTPA 250 200 150 100 50 0 16 40 10 30 FY11 96 60 23 30 FY12E 70 23 45 FY13E 70 23 55 FY14E 127 152 152 70 23 85 FY15E 70 23 100 FY16E
FY16E
MTPA
152
160
70 23 100 FY17E
Mundra Dahej Mormugao
Hazira Vishakhapatnam Abbot Point
Container
Crude
General bulk
Coal
Traffic likely to grow from 52.3m tpa currently to 264m tpa by FY17, a CAGR of 31%
We expect traffic growth to be sustainable at these ports, and estimate traffic would grow from 52.3m tpa currently to 264m tpa by FY17, a CAGR of 31%. The large capacity and cargo expansion are driven by 1) acquisition of Abbot Point in Australia, 2) new coal/bulk terminals in Mundra and 3) new ports/terminals in four locations in India becoming operational. Fig 3 Location-wise traffic growth
300 250 200 MT MT FY12E FY13E FY14E FY15E FY16E FY17E FY11 150 100 50 0
Fig 4 Cargo-wise expansion of capacity

300 250 200 150 100 50 0 FY12E FY13E FY14E FY15E FY17E FY11
Mundra Dahej Mormugao
Hazira Vishakhapatnam Abbot Point
Container (LHS) General bulk (LHS)
Crude/ POL (LHS) Coal (LHS)
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Mundra port: Flagship port, sailing on 3C wave

Strong drivers: coal crude and container growth Mundra port is set to become the largest port in India by total cargo handled by FY14. We expect it to ride on the 3Cs, which will add about 65m tpa of assured bulk/crude cargo and another ~25m tpa of container cargo by FY14, thus increasing traffic at the port by more than 3x. Fig 5 Mundra Port capacity growth
200 150
Fig 6 Mundra cargo growth and utilisation

160 140 120 100 80 60 40 20 0 FY11 FY12E FY13E FY14E FY15E FY16E FY17E 120 100 80 60 40 20 0
MT
MT
100 50 0
FY11
FY12E
FY13E
FY14E
FY15E
FY16E
Coal (West basin terminal) Container (south port terminals) Crude General bulk Container (existing terminals)
FY17E
Container Bulk Utilisation (RHS) General/coal util (RHS
Crude/ POL Coal SPM util (RHS) Container util (RHS)
13.5GW of imported coal-fired power capacity in vicinity = 48m tpa of assured coal cargo
Coal: The west terminals of Mundra port have been developed as a specialised bulk handling zone. The 60m tpa mechanised coal handling terminal is nearing completion. Note that Tata Powers 4,000MW Mundra UMPP and Adanis 4,620MW power projects are progressing well and they could become fully operational by FY14-15. We estimate the immediate hinterland could host 14GW+ of power generation capacity, which will assure coal off-take of 48m tpa as shown below.
Generation capacity (MW) 1,320 1,320 1,980 4,000 1,600 3,300 13,520 Coal requirement (m tpa) 4.9 4.7 7.1 14.3 5.7 11.8 48.4
Fig 7 Power generation capacity and coal demand in the immediate hinterland
Power project Adani Power Mundra phase I Adani Power Mundra phase II Adani Power Mundra phase III Tata Power Mundra UMPP- phase I Tata Power Mundra UMPP- phase II Adani Power Badreshwar project Total
Completed COD Operational Partly Operational FY13/14 FY12/14 FY15/16 FY15/16
Crude: Mundra port currently has two SPMs, one for IOCs Panipat refinery (already in operation refining capacity expanded to 15m tpa from 12m tpa) and the other one for the 9m tpa HPCL-Mittal Energy Bhatinda refinery, which will together expand crude traffic to 18m tpa. The Bhatinda refinery is likely to double capacity to 18m tpa by FY15-16, which will further add to demand for Mundra port. Containers: We estimate additional container capacity requirement of 7m TEU (~85m tpa) over FY11-17 on the west coast, of which around 33%, i.e., 2.4m TEU (~30m tpa) will be met by Mundra port. We expect Mundra port to report significant container cargo growth given 1) lack of competition (only Pipavav port is adding capacity in the near term, we dont see any progress at JNPT yet), 2) capacity at Mundra is already available, two container terminals currently have utilisation of 60%, in addition to the expansion plans (refer section below) and 3) well-known advantages of proximity to the northern hinterland will be enhanced by progress on the dedicated freight corridor.
Container momentum strong at both terminals
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Infrastructure update at Mundra port We were impressed with the progress in infrastructure development at several locations at Mundra port. Fig 8 Mundra capacity details and status
Port Existing port Terminal type Adani container terminal Mundra international container terminal General bulk terminal 1 General bulk terminal 2 New bulk terminals SPM 1 SPM 2 South basin Container terminal No of berths 2 2 4 4 4 NA NA 4 Capacity m tpa/ Status/ pending work/ comments TEU 15/(1.25) Operational 15/(1.25) Operated by DP World, 10 10 20 12.5 12.5 40 Operational Operational Operational by FY13-14 Completed and in operation Competed about to become operational Piling work in progress Work on the marine side completed; 2 berths operational. Work ongoing for the third berth. Work for conveyors completed in stages and partly operational. 9GW operational power plants by FY14 To be developed in FY17/18 To be developed in FY17/18
West basin
Coal terminal
60
East basin North basin
Project cargo terminal Chemical cargo terminal
Source: Company Reports
Work in full flow on container as well as bulk terminals
Fig 9 Work in progress at new container terminals
Fig 10 West port coal conveyors
SEZ: Slow starter but infrastructure advantages likely to prevail The 33,000-acre Mundra SEZ is an integral part of Mundra port, as units located in the SEZ help create additional demand for cargo traffic. However, pick-up in activity has been slow. Furthermore, with the government proposing to impose MAT on SEZ units, it will be difficult to attract new manufacturing units to the SEZ. In the medium to long run we believe land availability and excellent infrastructure advantages will attract investments into the zone. Already, as much as 2,900 acres have been leased out and units are operational.
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SEZ taking off but slowly, 31,000 acres still available
Fig 11 Mundra SEZ details and status

Project Maruti Export terminal Adani agri-park Adani Wilmar Bharat Forge-Alstom Thermax Tata Power Adani Power Apparel park OCCL
Source: Company reports
Status/ CoD Operational Under construction Operational Under construction Operational Under construction Partially completed 11 units operational Under construction
Type of work Washing/ painting
Cargo requirement RO-RO (General/ Bulk terminal) Export Bulk (General cargo terminal) Edible oil manufacturing Bulk (General cargo terminal) Power equipment manufacturing Project cargo Power equipment manufacturing Project cargo Power generation Coal/ project cargo Coal/ project cargo Container cargo Liquid cargo
Power generation Textile Tank farms
Adani groups trading capabilities synergic for MPSEZ

The Adani group is Indias largest importer of coal and has coal reserves in Indonesia and Australia. MPSEZ has taken on the task of building requisite port infrastructure to import and export coal. We expect MPSEZ to add 160m tpa of capacity at newer locations by FY17, of which ~98m tpa will be dedicated coal infrastructure (see table below). Fig 12 MPSEZ diversifying locations
Port Dahej Hazira Mormugao Vishakapatnam Abbott, Australia Total capacity beyond Mundra
Source: Company, Standard Chartered Research
Terminal General dry bulk coal/ container/ MP Coal terminal Coal terminal Coal terminal
Operational capacity (m tpa) FY11 20 0 0 0 20 40 FY14E 20 25 12 0 50 107 FY17E 20 70 12 8 50 160
Among these projects, two have significant advantages. Abbot Point, Australia Located in northeast Australia in Queensland province, the AUD1.8bn/ 50m tpa port recently acquired by MPSEZ is close to Australias coal exporting zone. The port, which was developed by the Australian government, has take-or-pay agreements with several producers till 2030 and hence provides annuity streams, which takes care of the AUD1.8bn acquisition cost funded entirely through debt. In addition, we see a strategic fit for the Adani group, as the port is one of the closest ports to Adani groups coal mines in Carmicheal, Australia. The mine, which has a resource of 7.8bn tonnes, is expected to produce 60m tpa of coal by FY23, predominantly for exports. Key features of the ports economics are summarised below:
Secured TOP volume going up from 21m tonnes in FY11 to 50m tonnes in FY17E, revenue increasing from AUD126m to AUD350m by FY17E Market pricing of port tariffs post FY18 Assuming management control in FY16/17 and increasing the capacity of the port to 80m tpa, the capex to be funded from internal accruals
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Assured TOP volumes and revenues till 2030
Fig 13 Port of Abbot Point location
Fig 14 Abbot Point TOP volume

60 50 40 MT 30 20 10 0 FY11 FY12E FY13E FY14E FY15E FY16E FY17E 400 350 300 250 200 150 100 50 0
TOP cargo (MT) (LHS) TOP revenues (AUD m) (RHS)

Source: Google Maps, Standard Chartered Research Source: Standard Chartered Research estimates
Hazira port MPSEZ has won a construction/operation concession for 35 years to construct 13 container/ coal/ general cargo terminals at the port, which is owned 74:26 by Shell Gas and Total Gaz (France). Its advantage over Pipavav is its hinterland traffic as it lies on the Delhi-Mumbai corridor, which is already well connected with the northern hinterland. We believe this is a strategically prime location for a container port. The master plan for the port is at the discussion stage and according to current indications 1.5km of the total 5.5km of waterfront available will be developed in the first phase, which will enable it to handle 40m tpa of cargo (mix of bulk and container cargo) going up to 70m tpa by FY17. Hazira has good potential with strong industrialisation Fig 15 MPSEZs Gujarat port locations
Source: Google Maps, Standard Chartered Research
Hazira port is being developed as a non-crude extension to the existing Shell terminal. Therefore, it already has a 1,000 metre long channel, a turning radius of 600 metres, a dredged depth of 12 metres and draft of 16 metres.
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Other ports Dahej Dahej port was originally developed as an LNG import terminal by Petronet LNG. Adani had entered into a 74:26 JV to develop a 20m tpa bulk cargo terminal, which commenced operations in December 2010. The port is strategically located to the north of Hazira, deeper inside the Gulf of Khambat and caters to cargo in the industrialised zones around Bharuch and Baroda as its primary hinterland and cargo from Ahmedabad and Indore as its secondary hinterland. We expect the port to report steady pick-up in traffic, with 4.5m tpa in FY12 rising to 12m tpa in FY14 and full capacity utilisation by FY19.
Mormugao MPSEZ is developing a 12m tpa mechanised coal berth in Mormugao port (a major port), which will cater to coal demand from existing and new iron/steel units in the hinterland around Goa, Maharashtra and North Karnataka. Being in a major port, the tariffs here are regulated by TAMP and MPSEZ will be sharing 20% of the revenue under the terms of the concession agreement. Vishakapatnam MPSEZ recently won a concession to develop an 8m tpa mechanised coal berth in Vishakapatnam port (a major port), which will cater to coal demand of the power plants coming up in the vicinity. Like Mormugao, the tariffs here are regulated by TAMP and MPSEZ will be sharing 40% of the revenue under the terms of the concession agreement.
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Valuation
To value MPSEZ, we use SOTP and value individual ports on DCFE. We have used 13% cost of equity across the ports and ascribed 5% conglomerate discount to cumulative value. Mundra port contributes 63% to total valuation Fig 16 DCF and SOTP valuation
Business Mundra Port Abbot Point Hazira SEZ Dahej Terminal Mormugao Adani Logistics Vishakapatnam Total Price target
Source: Standard Chartered estimates
Valuation (Rs m) 264,725 55,017 46,653 30,969 20,144 3,533 2,063 1,086
Value/ share (Rs) 132 27 23 15 10 2 1 1 212 201
Capacity m tpa (FY14-17E) 178 50 25 20 12 8
Rs m/m tpa 1,491 1,100 1,866 1,007 294 136
424,189
402,979
The valuation implies a P/E of 25x, EV/EBITDA of 17x and P/B of 6x to our consolidated FY13 estimates. Given 35% earnings CAGR over FY11-14, 47% EBITDA CAGR, EBITDA margins more than 66% and RoE of 27%, we believe valuations are justified. Furthermore, MPSEZ has cash RoE of 37% and trades at 18x FY13 cash EPS on our implied price target. P/E 25x FY13E, EV/EBITDA 18x at price target is attractive given high growth and RoEs Fig 17 Valuation scenarios
FY11 Ratios at price target Rs201 Diluted price earnings ratio Diluted price to cash earnings ratio EV/EBITDA Price to book value Ratios at current price Rs152 Diluted price earnings ratio Diluted price to cash earnings ratio EV/EBITDA Price to book value RoE Cash RoE
FY12E 34.7 23.6 21.6 7.8 26.1 17.8 17.7 5.9 24.9 36.5
FY13E 25.1 18.5 17.5 6.2 18.9 14.0 14.4 4.6 27.5 37.2
FY14E 18.0 14.1 13.4 4.7 13.5 10.6 10.9 3.6 29.8 37.9
44.0 34.9 33.5 9.6 33.2 26.3 25.8 7.3 23.9 30.2
We expect earnings to grow 8x between FY08 and FY13, but the current stock price is still about 40% lower than the FY08 peak. We believe the valuation correction is done, and it is now trading at the lower end of its PE band despite 35% earnings CAGR over FY11-14E. Fig 18 Earnings growth of 8x from FY08 to FY13, share price fitting into the band
300 250 200 Rs 150 100 50 0 May-08 May-09 May-10 May-11 Mar-08 Mar-09 Mar-10 Nov-07 Nov-08 Nov-09 Nov-10 Sep-08 Sep-09 Sep-10 Mar-11 Jul-08 Jul-09 Jan-08 Jan-09 Jan-10 Jul-10 Jan-11
Share price
Source: Bloomberg, Standard Chartered estimates
14x
20x
26x
32x
38x
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Key Risks
SEZ is critical for MPSEZ: Less than 10% of the 33,000-acre SEZ has been taken up to date. MPSEZ has demarcated zones for different types of industries, but there has not been progress. Capex hindering high interest rates and MAT imposed on the units could dampen demand. Future acquisition/greenfield expansion on the east coast of India by MPSEZ could impact the company negatively or positively depending on the bid structure, cost and traffic dynamics.
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Financials
We expect MPSEZ to generate over Rs56bn in net operational cash over FY12-14, driven by 45% revenue and 35% net profit growth over FY11-14E. MPSEZ enjoys mature RoE of 25%, which we expect to improve to 30% driven by improved margins from Abbot Point. 35% EPS CAGR likely over FY1114 Fig 19 OCF and revenue
70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 FY10 FY11 FY12E FY13E FY14E 90 80 70 60 50 40 30 20 10 0
Fig 20 EPS
12 10 % 8 Rs 6 4 2 0 FY10 FY11 FY12E FY13E FY14E 70 60 50 30 20 10 0 % 40
Rs m
Operating cash flow (LHS) Revenues (LHS) Revenue Growth (RHS)

EPS (LHS)
EPS growth (RHS)
Fig 21 Return ratios

35 30 25 20 15 10 5 0 FY10 FY11 FY12E FY13E FY14E %
Fig 22 EBITDA margin

70 69 68 67 % 66 65 64 63 62 FY10 FY11 FY12E FY13E FY14E FY14E
RoE
RoCE
Fig 23 Net debt to equity

3.5 3.0 2.5 2.0 x
Fig 24 Asset turnover

0.30 0.25 0.20 0.15 0.10 0.05 0.00 x
1.5 1.0 0.5 0.0 FY10 FY11 FY12E FY13E FY14E
FY10
FY11
FY12E
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Fig 25 Profit and loss statement (Rs m)

Year end: Mar Operating income (sales) Port income SEZ income Other ports Subsidiaries Operating expenses EBITDA % margins Depreciation & amortisation Gross interest Other income Recurring PBT Add: extraordinaries Less: Taxes --Current Tax --Deferred Tax Net Income (reported) Recurring net income
FY10 14,955 5,293 9,663 64.6 1,868 559 321 7,556 (220) 601 80 521 6,760 6,979
FY11 20,001 7,007 12,994 65.0 2,388 880 309 10,036 9,142 9,142
FY12E 36,969 21,891 3,142 10,097 1,839 11,582 25,388 68.7 5,413 6,396 436 14,014 2,472 2,472 11,617 11,617
FY13E 47,174 28,298 3,348 15,529 1,989 15,602 31,572 66.9 5,706 6,425 381 19,823 3,626 3,626 16,034 16,034
FY14E 60,648 34,096 4,674 21,878 2,153 19,717 40,931 67.5 6,109 7,171 524 28,175 5,362 5,362 22,431 22,431
Fig 26 Balance sheet (Rs m)

As at end Mar Assets Total current assets of which cash & cash eqv. Total current liabilities & provisions Net current assets Investments of which Strategic/Group Other Marketable Net fixed assets Goodwill Total assets Liabilities Borrowings Deferred tax liability Others Preference share capital Equity share capital Face value per share (Rs) Reserves & surplus* Less: Misc. Exp. n.w.o. Net worth Total liabilities
FY10 17,191 9,997 5,494 11,698 2,219 697 1,523 67,682 29 81,629
FY11 16,747 8,828 6,112 10,636 2,132 609 1,523 72,532 85,299
FY12E 22,012 7,513 9,689 12,323 2,105 583 1,523 193,061 207,489
FY13E 25,744 6,633 12,856 12,888 2,097 575 1,523 209,116 224,102
FY14E 32,389 7,979 13,183 19,206 2,095 572 1,523 219,233 240,534
37,062 2,817 6,389 28 4,007 2 30,504 0 34,538 81,629
33,811 2,796 5,973 28 4,007 2 37,842 0 41,877 85,299
146,054 3,484 5,694 28 4,007 2 47,456 0 51,491 207,489
148,449 3,987 5,414 28 4,007 10 61,286 0 65,321 224,102
144,403 4,335 5,135 28 4,007 10 81,313 0 85,348 240,534
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Fig 27 Cash flow statement (Rs m)

Year end: Mar Operating cash flow Working capital changes Capital commitments Free cash flow Cash flow from investing activities Issue of share capital Inc (Dec) in borrowings Dividend paid Chg. in cash & bank balance
FY10 9,048 -1,380 -17,775 -10,107 189 -16,790 8,105 1,603 -2,925
FY11 11,221 -107 -7,149 3,965 309 0 -3,251 1,803 -1,198
FY12E 16,594 -3,003 -125,915 -112,324 436 0 112,242 2,003 -1,315
FY13E 21,359 -1,445 -21,754 -1,840 381 0 2,395 2,204 -880
FY14E 28,016 -4,972 -16,223 6,821 524 0 -4,046 2,404 1,346
Fig 28 Ratios
Year end: Mar Per Share Data (Rs) EPS(basic recurring) Diluted recurring EPS Recurring cash EPS Dividend per share (DPS) Book value per share (BV) Growth Ratios (%) Operating income EBITDA Recurring net income Diluted recurring EPS Diluted recurring CEPS Valuation Ratios (x) P/E P/CEPS P/BV EV / EBITDA EV / Operating income EV / Operating FCF Operating Ratio Personnel expenses / revenue Other Income / PBT (%) Effective tax rate (%) NWC / total assets (%) D/E Ratio (x) Return/Profitability Ratio (%) Recurring net income margins RoCE RoNW Dividend payout ratio Dividend yield EBITDA margins
FY10 3.4 3.5 4.4 0.8 17.2 25.2 31.6 61.4 61.4 52.7 43.5 34.3 8.8 35.0 22.6 44.1 4.0 4.2 7.9 2.1 1.3 45.7 11.0 21.9 23.0 0.5 64.6
FY11 4.6 4.6 5.8 0.9 20.9 33.7 34.5 31.0 31.0 30.3 33.2 26.3 7.3 25.8 16.8 30.2 4.0 3.1 8.7 2.1 1.0 45.0 12.9 23.9 19.7 0.6 65.0
FY12E 5.8 5.8 8.5 1.0 25.7 84.8 95.4 27.1 27.1 47.7 26.1 17.8 5.9 17.7 12.2 33.1 2.4 3.1 17.6 2.3 3.0 31.1 12.0 24.9 17.2 0.7 68.7
FY13E 8.0 8.0 10.9 1.1 32.6 27.6 24.4 38.0 38.0 27.7 18.9 14.0 4.6 14.4 9.6 22.8 2.0 1.9 18.3 2.8 2.4 33.7 10.2 27.5 13.7 0.7 66.9
FY14E 11.2 11.2 14.2 1.2 42.6 28.6 29.6 39.9 39.9 31.3 13.5 10.6 3.6 10.9 7.4 19.4 1.8 1.9 19.0 4.7 1.8 36.7 12.6 29.8 10.7 0.8 67.5
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Company profile
Mundra Port and SEZ is part of the Adani group, which has interests in power generation and transmission, coal trading and mining, gas distribution, port and oil & gas exploration. The group includes Adani Enterprises, which is Indias largest importer of coal and one of the largest trading houses, and Adani Power, one of the largest power generators in the private sector. MPSEZ was promoted in 1997 to develop the Mundra port and the special economic zone in the Kutch district of Gujarat. In a short span of 13 years, it has become the 7th largest port and the largest private sector port in India. Fig 29 Shareholding pattern
Promoter 78%
FII 10% DII 4%
Others 8%
Source: BSE
Fig 30 Management
Name Designation Background The companys Executive Chairman and founder of the Adani Group has over 25 years of varied business experience. Under his leadership, the Adani Group has Gautam Adani Chairman and Managing Director emerged as a diversified Energy and Logistics conglomerate with interests in Power Generation & Transmission, Coal Trading & Mining, Gas Distribution, Oil & Gas Exploration, along with Ports and Special Economic Zones
Source: Company
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Essar Ports
Gaining size
We initiate coverage with an OUTPERFORM rating and price target of Rs190/sh. It offers discounted valuations on the back of strong traffic and earnings growth. Essar Ports capacity is likely to reach 168m tpa by FY17E, making it one of Indias largest ports. Around 28% of its capacity is locked into take-or-pay contracts with Essar group companies with a minimum revenue guarantee of Rs12bn per year over FY12-15E. We expect 36% traffic CAGR to FY14E, leading to 38% EBITDA and 131% net profit CAGR over FY11-14E. We estimate EBITDA margin of 70%+ going forward. Captive demand from group companies. Essar Ports handles the cargo requirements of Essar group companies (Essar Oil and Essar Steel), which are likely to generate total cargo demand of 85m tpa. The company has entered into take-or-pay (TOP) agreements for 47m tpa of cargo with them, resulting in an annuity stream of Rs12bn/year.

PRICE TARGET
Rs106
Bloomberg code
Rs190
Reuters code
ESRS IN
Market cap
ESRS.NS
12 month range
Rs44,362m (US$991m)
EPS est. change
Rs101.55 - 194.70
2012E
2011E 7,327 3,656 5,340 592 333 0.81 -150.3 0.00 72.9 49.9 4.5 0.0 53 204 2.2 5.3 -17,235 11.9 16.4 2.0 130.6 0.0
2012E 10,180 5,333 7,515 2,047 1,409 3.44 323.3 0.00 73.8 52.4 13.8 0.0 57 278 6.2 4.9 -18,624 10.4 14.1 1.9 30.9 0.0
2013E
2013E 15,467 8,532 11,396 4,022 3,016 7.36 114.0 0.00 73.7 55.2 19.5 0.0 64 262 12.2 7.1 -2,657 7.0 9.5 1.7 14.4 0.0
2014E 19,597 10,641 14,037 5,139 4,114 10.03 36.4 0.00 71.6 54.3 21.0 0.0 74 230 14.5 8.8 -1,025 5.6 7.8 1.4 10.6 0.0
Amongst the largest port owner/operators. Essar Ports capacity is likely to reach 168m tpa by FY17E from the current 67m tpa. The company is adding capacity at four locations: Vadinar (SPM/POL with 34m tpa operational, expanding to 45m tpa), Hazira (dry bulk/container, 30m tpa operational, expanding to 50m tpa), Salaya (bulk/container terminals under construction, 20m tpa) and Paradip (coal and iron ore terminals under construction, 34m tpa). High margin and high traffic growth. Given a high proportion of crude cargo and mechanisation, Essar Ports enjoys healthy margins of >70%, which we believe is sustainable. With secured bulk cargo traffic under TOP arrangements and good port locations, we expect traffic to post 36% CAGR over FY11-14E to 98m tpa. Valuation. Our sum-of-the-parts NAV of the four ports is Rs111bn or Rs271/sh; our price target based on 30% discount to NAV is Rs190. The stock is trading at FY13E PE, EV/EBITDA and PB of 14x, 9.5x and 1.7x, respectively. We expect 39% revenue and 131% earnings CAGR over FY11-14E; expect cash RoE of 22% over FY12-14E. Risks. Lack of external customers increases the dependence on the performance of group companies for cargo growth. Essar Ports DE ratio is slightly high at 2.6x FY13E; however, given the Rs14bn cumulative net operating cash flow over FY12-14E (gross debt of Rs69bn in FY13E), we believe the company is well funded.
Gaurav Pathak

200 190 180 170 160 150 140 130 120 110 100 Jun10 Sep10 EssarPorts
Dec10
Mar11
-1 mth -3 mth -12 mth -29 -20 -19 -29 -21 -25 Promoter share holding (83.0%) 17% 537,270
Shashikiran Rao
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Essar Ports, which emerged from the de-merger of Essar Shipping and Ports Ltd, is amongst the largest port operators in the private sector with 67m tpa port capacity at two locations (Vadinar and Hazira). Its total capacity is likely to increase to 168m tpa (in four locations) by FY17. Essar Ports mostly caters to bulk and crude cargo, however, captive demand of 85m tpa from group companies (Essar Oil and Essar Steel) benefits it significantly. Essar Ports has take-or-pay contracts with group companies to handle 10m tpa in FY11, which is to rise to 47m tpa by FY17, translating into secure annuity revenue stream of Rs7bn in FY11 going up to Rs16m in FY17. Because of low cargo handling and operational costs, Essar Ports enjoys EBITDA margins of above 70%. We believe Essar Ports trades at a steep discount to MPSEZ and ascribe a price target of Rs190, which is a 30% discount to our NAV estimate of Rs111bn (Rs273/sh).
Amongst the largest port operators bulk and crude to lead

Capacity CAGR of 28%, traffic CAGR 22% over FY11-17E Essar Ports is expanding its cargo capacity at three standalone ports on the west coast and two terminals on the East coast. It is poised to raise capacity from 67m tpa in FY11 to 168m tpa by FY16, making it the second-largest port operator in the private sector after MPSEZ. Based on captive traffic growth (refer section below) from the Essar group, we expect cargo traffic to reach 98m tonnes by FY14, 36% CAGR over FY11-14E and 130m tonnes by FY17, 22% CAGR over FY11-17E. Fig 1 Essar Ports: capacity
180 160 140 120 100 80 60 40 20 0 34 MT 30 50 54 FY17E
Fig 2 Essar Ports traffic growth

140 120 100 80 60 40 20 0 2 34 18 FY12E 6 5 40 25 FY13E 11 8 45 25 FY14E
34 20 20 40 45 FY14E 30 40 54 FY15E
34 30 40 54 FY16E
MTPA
12 10 48 27 FY15E
14 14 50 30 FY16E
15 14 50 33 FY17E
10 30 44 FY12E
20 30 45 FY13E
Vadinar
Hazira
Salaya
Paradip
General bulk Coal
Crude/ liquid Iron ore
Containers
Fig 3 Essar port locations: Vadinar and Salaya
Fig 4 Essar port location: Hazira
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Captive demand leading to growth

47m tpa capacity and Rs16bn revenue committed under TOP Essar Ports currently operates from two locations, Vadinar and Hazira, which have captive linkages with Essar group companies Essar Oil and Essar Steel. The linkages guarantee Essar Ports take-or-pay contracts for 47m tpa of cargo traffic by FY17, which translates into minimum revenue of Rs16bn (see charts below). Fig 5 Take-or-pay off-take
11.2 11.2 11.2 7.8 50 40 TOP MTPA 10.8 6.0 30 20 10 10 0 FY11 FY12E FY13E FY14E FY15E FY16E FY17E 1.7 3.5 TOP revenues in Rs m 3.0 2.5 2.0 1.5 25 25 25 25 25 1.0 0.5 0.0 TOP kl
Fig 6 Take-or-pay revenue

17,000 14,000 11,000 8,000 5,000 2,000 FY11 FY12E FY13E FY14E FY15E FY16E FY17E Salaya -1,000
10.8
10.8
18
Hazira (LHS) Salaya (LHS)
Paradip (LHS) Vadinar (RHS)
10.8
Vadinar (RHS)
Hazira (LHS)
Paradip
Vadinar port 58 m tpa and Hazira port 30 m tpa operational
Vadinar Port Essar Oil: Vadinar port, which handles all the cargo for Essar Oils refinery, has adequate infrastructure to handle refinery expansion, which will be completed over FY1213. The port already has a 27m tpa SPM, which handles crude imports, and two product berths of 7m tpa each. It also has 7m tpa of rail and road gantries and 5m tpa of product handling capabilities, which we have not incorporated into our capacity calculations to ensure parity with other port operators. It is also expanding the existing terminal to handle an additional 12m tpa of liquid cargo traffic. Essar Oil has already planned phase II of its expansion to raise capacity to 38m tpa, which may materialise only post FY15-16. If this happens, then Vadinar port would expand beyond our current estimates. Fig 8 Vadinar port capacity
38 70 60 MTPA 50 40 30 20 10 FY11 FY12E FY13E FY14E FY15E FY16E FY17E 5 7 7 7 27 5 7 7 7 27 12 5 7 7 7 27 12 5 7 7 7 27 12 5 7 7 7 27 12 5 7 7 7 27 12 5 7 7 7 27
Fig 7 Essar Oil capacity expansion

40 35 30 MTPA 25 20 15 10 5 0 FY13E# FY16E^ FY11 FY14E FY15E FY12E* FY17E 18 14 20 20 20 38
SPM Gantries*
Prod berth-I Inter. Prod berth
Prod berth-II Liq term exp
Source: Standard Chartered Research estimates * Phase I ; # Phase I optimisation; ^ Phase II
Source: Standard Chartered Research estimates * Not included in our capacity calculation
Essar Steel Hazira port. Essar Steel already has a 5m tpa steel plant at Hazira. For this plant, the Hazira port handles iron ore imports (from the East coast), coking coal imports and hot rolled and cold rolled steel exports. Total traffic from these segments is likely to be 10m tpa in FY11. The steel plant is being expanded to 14m tpa by FY13 and therefore Essar Ports has a TOP commitment capacity of 18m tonnes and 25m tonnes for FY12 and FY13, respectively.
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Fig 9 Essar Steel capacity expansion

40 35 30 25 20 15 10 5 0 12 10 12 11 9 1 FY11 8 FY12E 13 FY13E 11 FY14E 11 FY15E 13 FY16E 16 FY17E 14 16 18 18 8 6 4 2 0
Fig 10 Hazira port capacity

60 50 Capacity 10 40 10 30 20 30 10 0 FY11 FY12E FY13E FY14E FY15E FY16E 30 12 FY16E 14 20 FY16E FY17E 30 14 14 20 FY17E FY17E 30 30 30 30 40 40 10 10 10
non-captive bulk (LHS) Captive (LHS) ESL prod. (RHS)
Container (LHS) ESL capacity (RHS)
MTPA
MT
Bulk
Container
Essar Power Salaya. Essar Power, another Essar group company, is building a 2 x 600MW coal-fired power generation plant at Salaya, which should become operational in Aug/Dec 2012. It plans to expand capacity to 2,520MW by FY15. Essar Power imports coal from its own mines in Mozambique and Indonesia and has entered into a TOP agreement with Salaya port to handle the coal. Fig 12 Salaya port capacity/ traffic
35 30 25 MW MT 20 15 10 5 0 FY11 FY12E FY13E FY14E FY15E 14 20 Coal FY15E 8 11 20 30
Fig 11 Essar Power captive demand

16 14 12 10 8 6 4 2 0 FY11 2,520 1,860 1,200 600 2 FY12E 5 FY13E FY14E FY15E FY16E FY17E 7 10 10 3,000 2,500 2,000 1,500 10 1,000 500 0
MTPA
Salaya coal demand
Salaya Power capacity
Salaya Port capacity

Salaya traffic
Salaya and Paradip projects have Essar group customer base
Essar Steel Paradip port. Essar Steel is setting up a 12m tpa integrated pelletisation facility at Paradip, where Essar Ports is building two terminals, one for iron ore and the other for coal, using the PPP route. The iron ore terminal will export pelletised iron ore to Essar Steels Hazira unit. This terminal has entered into a TOP with Essar Steel to export up to 10.8m tpa of iron ore pellets by FY14. The coal terminal will import coal primarily for external customers operating power plants in the region. Fig 14 Paradip terminal capacity
40 35 30 25 20 15 10 5 0 FY11 FY12E
Fig 13 Paradip traffic mix

35 25 MT 20 15 10 5 0 FY11 2 FY12E 5 6 FY13E 11 FY14E 8 10 14 FY16E 15 14 14 30
Capacity MTPA
20
20
12 FY15E
FY13E Iron ore
Iron ore
Coal
FY17E
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46
Valuation
We value Essar Ports at a 30% discount to DCFE using post tax earnings adjusted for depreciation, working capital changes and capex. In line with our view that the sector is a low risk investment, we use market beta of 0.9 to derive cost of equity of 13%. This implies a value of Rs190/sh as shown in the table below. Fig 15 Essar Ports valuation
Valuation (Rs m) Vadinar Hazira Salaya Paradip Parent debt NAV Discount to NAV (%) Target valuation
NAV (FY12E in Rs m) 34,669 59,907 19,085 5,778 8,200 111,238 30 77,867
Value per share (Rs) 85 146 47 14 20 271 190
Port capacity in FY14 ( MTPA) 45 40 20 20
Rs/MTPA 766 1498 954 289
EV/EBITDA at 13x on FY13E at target price
The valuation implies a P/E of 55x, EV/EBITDA of 19x and P/B of 3.3x on our consolidated FY12 estimates, which is steep at first glance. But, factoring in 39% revenue and 131% earnings CAGR over FY11-14E with expected cash RoE of 22% over FY12-14E, valuations look attractive. Fig 16 Valuation ratios at price target
FY11 Ratios at target price Rs190 Diluted Price Earning Ratio Diluted price to cash earnings ratio EV/EBITDA Price to Book Value Ratios at current price Rs104 Diluted Price Earning Ratio Diluted price to cash earnings ratio EV/EBITDA Price to Book Value RoE Cash RoE
FY12E 55.3 21.7 18.7 3.3
FY13E 25.8 13.2 12.5 3.0
FY14E 18.9 10.4 10.2 2.6
233.9 38.6 22.8 3.6
130.6 21.6 16.4 2.0 2.2 13.2
30.9 12.1 14.1 1.9 6.2 15.9
14.4 7.4 9.5 1.7 12.2 23.7
10.6 5.8 7.8 1.4 14.5 26.5
Risks
Internal cargo concentration Because of the high concentration of Essar group cargo, Essar Ports performance depends heavily on the expansion plans of group companies Essar Oil, Essar Steel and Essar Power. Despite the take-or-pay contracts, project commissioning poses a risk to volume off-take. Competition from emerging Gujarat ports for external traffic We believe Essar Ports key port is Hazira given that it can be expanded 2-3x from current capacity, whereas the other three projects are likely to hit peak capacity in the first couple of years of operation. Essars Hazira port will face stiff competition from Adanis Hazira port, especially for coal and container traffic.
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Financials
Essar Ports is likely to post revenue CAGR of 39% and earnings CAGR of 131% over FY11-14E given new port capacity coming on stream, increase in off-take from Essar group companies and improving operating and financial leverage, in our view. This is also likely to improve RoE and RoCE over the same period. Fig 17 OCF and revenue
25,000 20,000 Rs m 15,000 30 10,000 5,000 0 FY11 FY12E FY13E FY14E 15 0 60 45 % Rs
Fig 18 EPS
12 10 8 6 4 2 0 FY11 FY12E FY13E FY14E 400 300 200 100 0 -100 -200 %

EPS (LHS)
EPS growth (RHS)

16 14 12 10 8 6 4 2 0 FY11 FY12E FY13E FY14E

80 75 70 % 65 60 55 50 FY11 FY12E FY13E FY14E FY14E
RoE
RoCE

3.00 2.50 2.00 1.50 1.00 0.50 0.00 FY11 FY12E FY13E FY14E x

0.25 0.20 0.15 x 0.10 0.05 0.00 FY11 FY12E FY13E
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Year end: Mar Operating income (sales) Growth Operating expenses EBITDA % margins Depreciation & amortisation Gross interest Other income Recurring PBT Add: Extraordinaries Less: Taxes - Current tax - Deferred tax Less: Minority interest Net income (reported) Recurring net income
FY11E 7,327 0 1,987 5,340 72.9 1,684 3,064 0 592 0 132 0 0 0 333 333
FY12E 10,180 39 2,665 7,515 73.8 2,182 3,409 124 2,047 0 638 0 0 0 1,409 1,409
FY13E 15,467 52 4,071 11,396 73.7 2,864 4,646 136 4,022 0 1,006 0 0 0 3,016 3,016
FY14E 19,597 27 5,560 14,037 71.6 3,396 5,653 150 5,139 0 1,025 0 0 0 4,114 4,114

As at end Mar Assets Total current assets of which cash & cash eqv. Total current liabilities & provisions Net current assets Investments of which Strategic/Group Other marketable Net fixed assets of which intangibles Capital work-in-progress Goodwill Total assets Liabilities Borrowings Deferred tax liability Minority interest Equity share capital Face value per share (Rs) Reserves & surplus* Less: Misc. exp. n.w.o. Net worth Total liabilities
FY11E 5,250 800 6,850 -1,600 680 680 0 53,020 0 20,350 14,470 66,570
FY12E 8,430 2,248 7,525 905 680 680 0 71,872 0 10,054 14,470 87,927
FY13E 13,446 4,052 9,146 4,299 680 680 0 75,819 0 11,147 14,470 95,268
FY14E 16,054 4,152 11,589 4,465 680 680 0 80,742 0 5,381 14,470 100,357
44,690 0 0 4,100 10 0 17,780 21,880 66,570
64,638 0 0 4,100 10 0 19,189 23,289 87,927
68,963 0 0 4,100 10 0 22,205 26,305 95,268
69,938 0 0 4,100 10 0 26,319 30,419 100,357
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Fig 25 Cash Flow Statement (Rs m)

Year end: Mar Operating cash flow Working capital changes Capital commitments Free cash flow Cash flow from investing activities Issue of share capital Buyback of shares Inc (Dec) in borrowings Dividend paid Extraordinary Items Chg. in cash & bank balance
FY11E 1,708 -7,863 -11,080 -17,235 0 0 -184 16,669 0 0 12,353
FY12E 1,165 -1,058 -18,732 -18,624 124 0 0 19,948 0 0 1,448
FY13E 5,816 -1,590 -6,884 -2,657 136 0 0 4,325 0 0 1,804
FY14E 7,593 -66 -8,552 -1,025 150 0 0 975 0 0 100
Fig 26 Ratios
Year end: Mar Per Share Data (Rs) EPS (basic recurring) Diluted recurring EPS Recurring cash EPS Dividend per share (DPS) Book value per share (BV) Growth Ratios (%) Operating income EBITDA Recurring net income Diluted recurring EPS Diluted recurring CEPS Valuation Ratios (% YoY) P/E P/CEPS P/BV EV / EBITDA EV / Operating income EV / Operating FCF Operating Ratio Raw material/sales (%) SG&A/sales (%) Other income / PBT (%) Effective tax rate (%) NWC / total assets (%) Inventory turnover (days) Receivables (days) Payables (days) D/E Ratio (x) Return/Profitability Ratio (%) Recurring net income margins RoCE RoNW Dividend payout ratio Dividend yield EBITDA margins
FY11E 0.8 0.8 4.9 0.0 53.4 68.4 63.5 -147.2 -149.3 215.0 130.6 21.6 2.0 16.4 11.9 -5.1 27.1 0.0 0.0 22.3 -3.6 44.2 180.4 1,902.8 2.0 4.5 5.3 2.2 0.0 0.0 72.9
FY12E 3.4 3.4 8.8 0.0 56.8 38.9 40.7 323.3 323.3 78.1 30.9 12.1 1.9 14.1 10.4 -5.7 23.0 0.0 6.1 31.2 -1.5 85.7 152.5 979.1 2.8 13.7 4.9 6.2 0.0 0.0 73.8
FY13E 7.4 7.4 14.3 0.0 64.2 51.9 51.6 114.0 114.0 63.7 14.4 7.4 1.7 9.5 7.0 -40.8 24.2 0.0 3.4 25.0 0.3 86.1 147.0 747.3 2.6 19.3 7.1 12.2 0.0 0.0 73.7
FY14E 10.0 10.0 18.3 0.0 74.2 26.7 23.2 36.4 36.4 27.7 10.6 5.8 1.4 7.8 5.6 -106.6 26.6 0.0 2.9 19.9 0.3 90.2 158.7 680.6 2.3 20.8 8.8 14.5 0.0 0.0 71.6
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Company profile
Essar Ports, earlier Essar Shipping and Logistics (ESPL), was formed after spinning off the shipping and oil field services businesses of the company (under Essar Shipping). As part of the de-merger scheme, for every three shares of ESPL, two shares of Essar Ports and one share of Essar Shipping was swapped. The company belongs to the Essar group, which is a conglomerate that has interests in steel, oil & gas, power, shipping and engineering services. Essar Ports handles all the captive ports and storage assets of the group. Fig 27 Shareholding pattern
Promoter 84%
FII 8% DII 0% Others 8%
Fig 28 Management
Name Designation Background Founder/ Chairman of the Essar Group Rajiv Agarwal is a chartered accountant with over 25 years experience in various levels of the Essar group, was the MD of Essar Rajiv Agarwal Managing Director Shipping and Ports since August 2010. He was earlier Executive Director of Essar Shipping between 1998 and 2002 and the CEO of Mobile Store prior to joining Essar Shipping and Ports
Source: Company
Shashi Ruia Chairman
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Gujarat Pipavav Ports

Steady growth in traffic and margins
We initiate coverage with an IN-LINE rating and price target of Rs71/sh. GPPL scores high on qualitative parameters; however, valuations look expensive; trades at CY12E PE and EV/EBITDA of 31x and 15x. GPPL benefits significantly from its parent APMM, one of the worlds largest port and container operators. GPPL is well-located close to JNPT with good access to the hinterlands of Saurashtra and north India. We expect healthy cargo CAGR of 11% over CY10-13E. EBITDA margin is likely to improve to 52% in CY13E from 16% in CY09. Strong parentage. APMM (AP Moller Maersk) is one of the worlds largest port operators, with CY10 revenue of US$56bn. It operates 50 terminals in 34 countries; in CY10, APM Terminals handled 32m TEUs with revenue of >US$4.3bn. Strong parentage provides GPPL 1) alignment with international shipping routes, 2) professional and experienced management and 3) best in class governance and business practices.
IN-LINE (initiating coverage)

PRICE TARGET
Rs64
Bloomberg code
Rs71
Reuters code
GPPV IN
Market cap
GPPL.NS
12 month range
Rs27,637m (US$617m)
EPS est. change
Year end: December Sales (Rs m) EBIT (Rs m) EBITDA (Rs m) Pretax profit (Rs m) Earnings (Rs m) adjusted Diluted EPS (Rs ) adjusted Diluted EPS growth (%) adj. DPS (Rs ) DPS growth (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Div payout (%) Book value/share (Rs ) Net gearing (%) ROE (%) ROACE (%) FCF (Rs m) EV/Sales (x) EV/EBITDA (x) PBR (x) PER (x) Dividend yield (%)
Rs46.00 - 69.85
2012E
2010 2,839 535 1,027 -655 -655 -1.5 -61.4 0.00 36.2 18.8 -23.1 0.0 17 108 -12.5 4.2 -1,031 11.6 32.1 3.7 -41.2 0.0
2011E 3,473 1,179 1,669 424 424 1.0 -164.6 0.00 48.1 34.0 12.2 0.0 18 109 5.6 8.1 47 9.5 19.7 3.5 63.7 0.0
2013E
2012E 4,419 1,734 2,247 889 889 2.1 109.8 0.00 50.8 39.2 20.1 0.0 20 110 10.8 10.7 -607 7.5 14.8 3.1 30.4 0.0
2013E 5,342 2,214 2,783 1,222 1,222 2.9 37.5 0.00 52.1 41.4 22.9 0.0 23 107 13.2 12.1 -580 6.3 12.1 2.7 22.1 0.0
Healthy cargo growth. We expect GPPL to post strong growth in cargo traffic 21% CAGR over CY10-13E. Traffic growth is likely to be driven by 1) APMM group contributes over 50% of container traffic, 2) location advantage with access to hinterlands of Saurashtra and north India, 3) closeness to JNPT (150 nautical miles) to receive spill over traffic particularly from parents Gateway terminal in JNPT and 4) robust demand for coal (from upcoming units in the region) and for containers from north and western India. Margin expansion. We expect significant improvement in operating leverage. EBITDA margin is likely to improve from 16% (CY09) to 52% (CY13E) and EBITDA to post 39% CAGR over CY10-13E, in our view. Net profit margin is likely to rise from 12% in CY11E to 23% in CY13E. Other large private ports have EBITDA margin of 65-70% and NPM of 25-30%. Valuation. We value GPPL at Rs30bn or Rs71/sh. The stock is trading at CY12E PE, EV/EBITDA and PB of 30x, 15x and 3.1, respectively; we expect earnings CAGR of 70% over CY11-13E. GPPL has solid management and cargo growth, however, we do not expect significant upside. Key risks. Competition for bulk cargo from local ports and lack of captive bulk cargo customers. We have not factored in cargo from power plants being set up in the region.
Gaurav Pathak

70 65 60 55 50 45 40 Sep10 Dec10 GujaratPipavavPorts Mar11 Jun11
-1 mth -3 mth -12 mth 11 11 45 11 9 33 Promoter share holding (43.0%) 57% 404,795
Shashikiran Rao
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Gujarat Pipavav Ports (GPPL) operates the strategically-located Pipavav port, which is at the entry point to the Gulf of Khambat (Gujarat) with unique access to the rich and fast-growing hinterland of Saurashtra (all the other major/minor ports are located in Kutch and a few private ports are located in south Gujarat). GPPL benefits from its parent AP Moller Maersk group, which has helped raise container volume at the port. The port is slated to rapidly expand its container capacity from 0.6m TEU to 1.3m TEU. We expect container traffic to increase at 21% CAGR over CY10-13E and 16% CAGR over CY10-16E. Since commissioning, the port has reported low utilisation (54% at the container terminal and 40% at the bulk cargo terminal) resulting in low EBITDA margins (36% in CY10). With rising cargo growth, however, we expect utilisation to rise to 70%+ at the container terminal and to 80%+ at the bulk cargo terminal, enabling EBITDA margin to improve to 52% by CY13E.
Impressive parentage
Part of one of the largest shipping/ terminal management group in the world APM Terminals, part of the global logistics group AP Moller Maersk, acquired 43% of GPPL, thereby taking operational control of the company. The Maersk group is one of the big four of the container shipping business. APMM had CY10 revenue of US$56bn; it operates 50 terminals in 34 countries. In CY10, APM Terminals handled 32m TEUs with revenue of >US$4.3bn. GPPL is one of the few full-fledged ports owned by APMM. Strong parentage offers critical advantages:
Provides critical mass of container cargo from the APMM group (~50% container traffic) and helps attract container traffic from other shipping lines as container routes move towards Pipavav port. In addition, APMM already operates the 1.8m TEU Gateway container terminal at JNPT; traffic delayed there due to congestion could move to Pipavav port. Pipavav is about 150 nautical miles and 10 hours from JNPT and thereby shipping lines can route their surplus cargo handled at JNPT into Pipavav without any significant change to existing routes. It also provides Pipavav professional and experienced management, and inculcate the best of business and corporate practices.
Good location
Strategically located at the entry point of the Gulf of Khambat Pipavav port is strategically located at the entry point of the Gulf of Khambat, and is the largest port in the Saurashtra region of Gujarat. This gives Pipavav good access to the fast-growing hinterland. We believe competition for this market will not arise any time soon, as the proposed ports in the vicinity Chhara, Mahuva and Sutrapada are still on the drawing board. However, the port is at a disadvantage vis--vis south Gujarat ports such as Hazira, Dahej and (the proposed) Dholera as they have better connectivity to the north Indian hinterland. That said, Pipavav port is well connected via a 269km long dedicated broad gauge railway link. The port site benefits from two small islands off the coast, which act as natural breakwaters for the port. In addition, no rivers discharge silt in the vicinity, hence, we believe that future dredging costs would be lower. The port has already achieved a draft of 14 metres in its channel. We noted that the port has not invested in a dredger, because it has found little need for dredging due to low sedimentation.
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Only private sector port in Saurashtra
Fig 1 Pipavav vis--vis JNPT and Mundra
Fig 2 Pipavav port
Fig 3 Pipavav mechanized bulk cargo terminal
Fig 4 Pipavav container terminal
Much needed container traffic expansion

We estimate container traffic in India would increase to 273m tonnes by FY17 from 131m tonnes in FY10, which will translate into container demand of 21m TEU from 11m TEU. With over 67% of incremental demand coming from the west coast, we expect new container capacity demand of 7m TEU on the west coast. JNPT, which handles close to 90% of the container traffic on the west coast, is planning to add 57m tpa (~4m TEU) of handling capacity, but we do not expect it to become operational before FY16. We believe that this shortfall (~4m TEU) will be met by Mundra and Pipavav ports with a larger share moving to Mundra. Will benefit from delay in capacity expansion at JNPT Currently, the companys approved expansion plan is to raise container capacity to 1.3m TEU by FY13 through expansion of the container handling area. However, given the demand profile and from our assessment of the waterfront available for marine expansion, we believe that the company is in a position to add two more container berths to take capacity up to 2.5m TEU by CY16 (see charts below).
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Fig 5 Container cargo capacity demand

300 mtpa 250 200 150 100 50 0 FY11 FY12E FY13E FY14E FY15E FY16E FY17E 15 30
Fig 6 Pipavav capacity growth

40 35 30 25 20 15 10 5 0 CY11 CY12E CY13E CY14E CY15E CY1618E
TEU
Container traffic Container traffic Container traffic Container traffic
(MTPA) pan-India (MTPA) non-major ports (TEU) pan-India (TEU) minor ports
mtpa
(post phase II) Dry bulk Liquid
(post phase III) Container
Source: Standard Chartered Research estimates, company reports
Since 2009, when the new container terminal became operational, port operations have risen to 3.5m tonnes of bulk cargo capacity (70% capacity utlisation) and container run rate of 0.5m TEU (83% utilisation). By CY17, with further expansion, we expect the port to handle container traffic of 1.6m TEU (15% CAGR over CY10-17E) and bulk traffic of 7.5m tonnes (12% CAGR over CY10-17E). APM Terminals has been a magnet for container traffic Fig 7 Growth in cargo post APM takeover
160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 09-Q1 09-Q2 09-Q3 09-Q4 10-Q1 10-Q2 10-Q3 10-Q4 11-Q1 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0
Fig 8 Growth in cargo by category

25 20 mtpa
TEU
MT
15 10 5 0 2012E 2013E 2014E 2015E 2016E 2017E 2010 2011
Container (TEU) (LHS) Bulk cargo (MT) (RHS)

Bulk cargo (MT) (RHS) Container MT

Solid infrastructure
Terminal is fully mechanised The container terminal is fully mechanised and professionally managed. It has five reach stackers and 18 rubber tyred gantry (RTG) cranes. GPPL has two mechanised bulk berths (with a conveyor belt from the berth to the storage yard). We believe its infrastructure is adequate for three to four years of growth. We thus believe the port is poised for strong traffic growth, which we estimate at 21% CAGR over CY10-13E for container traffic (0.9m TEU from 0.47m TEU) and 16% CAGR over CY10-13E for bulk cargo traffic (5.9m tpa from 3.4m tpa)
Weak on bulk cargo

Unlike larger port players such as MPSEZ and Essar Ports, GPPL does not have any captive customers for bulk cargo because of which bulk cargo traffic has been growing slowly. The company, however, is negotiating with four power projects that import coal to secure coal handling. In addition, the company is negotiating with Aegis to revitalize the 2m tpa liquid cargo berth. If these initiatives come through, the companys bulk cargo traffic could increase by about 13m tonnes by FY15.
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Bulk captive cargo potential currently is small and tentative
Fig 9 Potential power plants captive to the port

Potential customer Cargo type Coal Coal Coal Coal LPG Generation capacity (MW) 2400 1000 NA NA NA Potential traffic Client project status (MTPA) Equipment order 7.6 placed. Financial closure achieved Financial closure 3.2 achieved NA Not much progress NA 2.0 Contract status COD In negotiation with GPPL NA No negotiation
Videocon Torrent/ GPCL Patel Engineering Sintex Aegis/ Shell
FY14 FY14/15 NA NA FY12/13
Not much progress No negotiation Berth ready/ Tankages In negotiation under construction over storage
Source: Company reports, Standard Chartered Research estimates
EBITDA margin likely to improve as operating leverage kicks in

Given longer-than-expected project execution and slow pick-up in cargo volume, utilisation at the port has been low, resulting in a low EBITDA margin 36% in CY10. With utilisation likely to stabilise at 70%+ for container traffic and 80%+ for bulk traffic by CY14, we expect the company to report an EBITDA margin of 53% by CY13. The company broke-even at the net income level for the first time in Q4 2010 and we expect it to report net margin of 20% in CY12-14E. EBITDA margins likely to stabilise around 53% as utilisation stabilises between 7080% Fig 10 EBITDA margins progress
60 40 20 % 0 -20 -40 -60 -80 CY08 CY09 CY10 CY11 CY12E CY13E CY14E
Fig 11 Utilisation progress

140 120 100 % 80 60 40 20 0 CY08 CY09 CY10 CY11 CY12E CY13E CY14E CY15E CY16E CY17E
EBITDA Margins
Recurring Net Income Margins
Container berth
Bulk berth
Valuation
We value GPPL using the DCFE method, using post tax earnings adjusted for depreciation, working capital changes and capex. In line with our view that the sector is a low risk investment with high cash flow visibility, we ascribe a cost of equity of 13%. Our DCFE assumes a concession period until 2028 and terminal value to be received at the end of the concession period. The terminal value is an average of the depreciated book value of the asset and fair value of business obtained by DCFE. We value the port at Rs30bn or Rs71/sh. High terminal value due to short concession period (2028) Fig 12 Valuation
Valuation (Rs m) NPV Pipavav Rail Corp Terminal value Total value Price target
NAV (CY12E in Rs m) 16,440 1,600 12,107 30,147
Value per share (Rs) 39 4 29 71 71
Our valuation implies a P/E of 34x, EV/EBITDA of 16x and P/B of 3.5x to our consolidated CY12 estimates. We expect margin turnaround to be visible in CY13.
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Valuations do not offer upside
Fig 13 Valuation ratios at price target

CY11E Ratios at price target Rs71 Diluted Price Earning Ratio Diluted price to cash earnings ratio EV/EBITDA Price to Book Value Ratios at current price Rs64 Diluted Price Earning Ratio Diluted price to cash earnings ratio EV/EBITDA Price to Book Value RoE Cash RoE
CY12E 33.8 21.4 16.2 3.5
CY13E 24.6 16.8 13.3 3.0
CY14E 26.1 16.8 11.7 2.7
71.0 32.9 21.5 3.9
63.7 29.5 19.7 3.5 5.6 12.1
30.4 19.2 14.8 3.1 10.8 17.0
22.1 15.1 12.1 2.7 13.2 19.3
23.4 15.1 10.8 2.4 11.0 17.0
Risks
Short concession period According to the concession agreement between Gujarat Maritime Board (GMB) and GPPL, the concession for port operations will expire in 2028. There is no provision for an extension of the contract, unlike in other concession agreements, including those for the Mundra and Hazira ports (which were signed later). Given that the port started handling traffic in 2008, that gives GPPL only about 20 years of assured operations, which raises some concern about the sustainability of future capex and growth. We believe that GMB may be willing to renegotiate the concession agreement to bring it in line with the other port concessions. However, in case GMB does not renegotiate the concession agreement, GPPL is entitled to depreciated replacement value of the asset. Intense competition in bulk cargo in Saurashtra; no long-term commitments Though bulk cargo demand in Gujarat is strong, traffic is distributed across many ports. Pipavav has to tie up long term contracts, especially for coal. GPPL is negotiating with some proposed power plants, but this would be a long drawn process and we do not factor the additional cargo from these coming before CY14. Furthermore, we believe GPPLs pricing power in charging tariff on bulk cargo will be driven more by market forces. Lack of captive ecosystem Unlike MPSEZ and Essar Ports, which benefit from captive ecosystem created through the SEZ (Mundra) or large group projects (Essar), GPPL does not have a captive ecosystem to generate and sustain incremental demand.
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Financials
Likely 24% and 39% revenue and EBITDA growth over CY1013E We expect strong 21% and 33% revenue and EBITDA growth over CY10-13E. We estimate that EBITDA margin would improve to 52% by CY13. Nevertheless, earnings are likely to be constrained by high interest costs and high depreciation due to the limited concession life. We thus expect the asset to continue to have low return ratios over CY11-13E. Fig 14 OCF and revenue
6,000 4,500 Rs m % 3,000 1,500 0 -1,500 CY09 CY10 CY11E CY12E CY13E 0 30 Rs 15 45
Fig 15 EPS
4 3 2 1 0 -1 -2 -3 -4 -5 CY09 CY10 CY11E CY12E CY13E 150 100 50 -50 -100 -150 -200 % CY13E CY13E 0

EPS (LHS)
EPS growth (RHS)

20 10 0 %

60 50 40 % 30 20 10
-10 -20 -30 -40 CY09 CY10 CY11E CY12E CY13E
0 CY09 CY10 CY11E CY12E CY12E
RoE
RoCE

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 CY09 CY10 CY11E CY12E CY13E x

0.30 0.25 0.20 0.15 0.10 0.05 0.00 CY09 CY10 CY11E x
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Year end: December Operating income (sales) Growth Operating expenses EBITDA % margins Depreciation & amortisation Gross interest Other income Recurring PBT Add: extraordinaries Less: Taxes - Current tax - Deferred tax Less: Minority Interest Net income (reported) Recurring net income
CY09 2,207 32 1,862 345 15.6 458 1,157 7 -1,263 0 -1 -1 0 0 -1,262 -1,262
CY10 2,839 29 1,812 1,027 36.2 493 1,271 81 -655 0 0 0 0 0 -655 -655
CY11E 3,473 22 1,804 1,669 48.1 490 853 98 424 0 0 0 0 0 424 424
CY12E 4,419 27 2,172 2,247 50.8 513 962 117 889 0 0 0 0 0 889 889
CY13E 5,342 21 2,559 2,783 52.1 569 1,121 129 1,222 0 0 0 0 0 1,222 1,222

As at end: December Assets Total current assets of which cash & cash eqv. Total current liabilities & provisions Net current assets Investments of which Strategic/Group Other marketable Net fixed assets of which Intangibles Capital work-in-progress Goodwill Total assets Liabilities Borrowings Deferred tax liability Minority interest Equity share capital Face value per share (Rs) Reserves & surplus* Less: Misc. Exp. n.w.o. Net worth Total liabilities
CY09 1,711 798 1,526 186 830 830 0 12,986 0 156 0 14,002
CY10 2,848 1,949 1,253 1,595 830 830 0 12,907 0 304 0 15,332
CY11E 3,732 2,632 1,380 2,352 830 830 0 13,111 0 783 0 16,294
CY12E 4,606 3,206 1,580 3,026 830 830 0 14,391 0 1,674 0 18,247
CY13E 5,462 3,770 1,719 3,743 830 830 0 15,910 0 2,153 0 20,483
10,891 0 0 3,149 10 7,731 -7,769 3,111 14,002
7,973 0 0 4,236 10 11,440 -8,317 7,359 15,332
8,511 0 0 4,236 10 11,440 -7,893 7,782 16,294
9,576 0 0 4,236 10 11,440 -7,004 8,671 18,247
10,590 0 0 4,236 10 11,440 -5,782 9,893 20,483
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Year end: December Operating cash flow Working capital changes Capital commitments Free cash flow Cash flow from investing activities Issue of share capital Buyback of shares Inc (Dec) in borrowings Dividend paid Extraordinary Items Chg. in cash & bank balance
CY09 -242 -818 -3,846 -4,906 7 0 -306 3,476 0 0 -854
CY10 -450 -433 -149 -1,031 81 1,087 0 -2,918 0 0 1,036
CY11E 878 -113 -717 47 98 0 0 538 0 0 683
CY12E 1,402 -161 -1,848 -607 117 0 0 1,064 0 0 574
CY13E 1,769 -196 -2,153 -580 129 0 0 1,014 0 0 564
Fig 23 Key ratios

Year end: December Per Share Data (Rs) EPS (basic recurring) Diluted recurring EPS Recurring cash EPS Dividend per share (DPS) Book value per share (BV) Growth Ratios (%) Operating income EBITDA Recurring net income Diluted recurring EPS Diluted recurring CEPS Valuation Ratios (% YoY) P/E P/CEPS P/BV EV / EBITDA EV / Operating income EV / Operating FCF Operating Ratio Raw material/sales (%) SG&A/sales (%) Other income / PBT (%) Effective tax rate (%) NWC / total assets (%) Inventory turnover (days) Receivables (days) Payables (days) D/E Ratio (x) Return/Profitability Ratio (%) Recurring net income margins RoCE RoNW Dividend payout ratio Dividend yield EBITDA margins
CY09 -4.0 -4.0 -2.6 0.0 9.9 31.9 171.1 86.7 104.8 188.3 -15.9 -24.9 6.4 87.5 13.7 -6.1 66.0 0.0 -0.5 0.1 -4.4 8.7 24.0 300.8 3.5 -57.0 -0.8 -36.5 0.0 0.0 15.6
CY10 -1.5 -1.5 -0.4 0.0 17.4 28.6 198.1 -48.1 -61.4 -85.0 -41.2 -165.8 3.7 32.1 11.6 -32.0 49.1 0.0 -12.4 0.0 -2.3 11.3 32.9 208.2 1.1 -22.4 4.2 -12.5 0.0 0.0 36.2
CY11E 1.0 1.0 2.2 0.0 18.4 22.3 62.5 -164.6 -164.6 -661.3 63.7 29.5 3.5 19.7 9.5 693.1 38.4 0.0 23.1 0.0 -1.7 15.2 34.4 184.5 1.1 11.9 8.1 5.6 0.0 0.0 48.1
CY12E 2.1 2.1 3.3 0.0 20.5 27.2 34.6 109.8 109.8 53.5 30.4 19.2 3.1 14.8 7.5 -54.9 36.9 0.0 13.2 0.0 -1.0 16.1 33.8 172.2 1.1 19.6 10.7 10.8 0.0 0.0 50.8
CY13E 2.9 2.9 4.2 0.0 23.4 20.9 23.9 37.5 37.5 27.7 22.1 15.1 2.7 12.1 6.3 -58.3 36.3 0.0 10.6 0.0 -0.1 16.9 34.6 162.9 1.1 22.3 12.1 13.2 0.0 0.0 52.1
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Company profile
Gujarat Pipavav Ports (GPPL) is the only listed subsidiary of APM Terminals, which is one of the largest terminal operators in the world and part of the AP Moller Maersk group. APM Terminals took control of the company by acquiring stakes over FY01-05. GPPL operates the Pipavav port, which was the first private sector port concession to be signed in India in Sep 98. The concession agreement is valid for 30 years until 2028. The original promoters of the company, Gujarat Maritime Board and Seaking Infrastructure, exited the company in 1998 and 2005, respectively. Fig 24 Shareholding pattern
DII 12% FII 16% Others 30%
Promoter 42%
Source: Company, Standard Chartered Research Estimates
Fig 25 Management
Name Designation Background Managing Director of APM Terminals Pipavav since January 2009. Prakash Tulsiani Managing Director He is a qualified chartered accountant and company secretary and has been with the Maersk group since 1993. He headed the Gateway terminals project in JNPT between 2005 and 2009. Has over 30 years experience in the shipping industry and has Ravi Gaitonde COO been with the AP Moller Maersk group since 1985. Heads the Pipavav port operations. Hariharan Iyer
Source: Company
CFO
Has been with the AP Moller Maersk group for over 25 years in various positions in finance and accounting.
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Marg
Steaming ahead
We initiate coverage on Marg with an OUTPERFORM rating and price target of Rs163. Margs Karaikal port has a key competitive advantage only private port with access to Tamil Nadus hinterland. The ports capacity is likely to reach 21m tpa by Oct 11, with potential to ramp-up to 40m tpa by FY17E. Strengths in EPC and real estate are likely to help Marg tide over near term cash flow and execution risks. Despite high debt (D/E of 4.9x), we believe the current price discounts these concerns but not the intrinsic value of the assets. Distinctive port with rapidly expanding capacity. Margs Karaikal port is the only private sector port with access to Tamil Nadus hinterland and is likely to remain so in the foreseeable future. Given robust coal and other bulk cargo demand, it is expanding capacity to 21m tpa by FY12 with traffic reaching 15m tpa by FY14E (44% traffic CAGR FY1114E). The port is well connected via rail and road networks providing better access to hinterland cities. With the Chennai and Tuticorn ports running at 86% and 104% utilisation, Karaikal should benefit from spill over traffic and its efficient services. It has a low royalty structure, enjoys EBITDA margins of 50-60% and RoCE of 14-15%+.

PRICE TARGET
Rs96
Bloomberg code
Rs163
Reuters code
MRGC IN
Market cap
MARG.NS
12 month range
Rs3,666m (US$82m)
EPS est. change
Rs91 - 234
2012E
2011E 9,197 1,904 2,556 218 176 4.6 48.2 2.18 0.0 27.8 20.7 1.9 47.1 124 482 4.5 8.8 -8,692 2.9 10.4 0.8 20.7 2.3
2012E 10,210 2,149 3,149 407 304 7.7 65.5 2.18 0.0 30.8 21.0 3.0 28.4 159 423 5.5 6.5 -5,050 3.0 9.6 0.6 12.5 2.3
2013E
2013E 14,643 3,117 5,276 524 366 9.2 20.2 2.18 0.0 36.0 21.3 2.5 23.7 166 511 5.7 7.5 -5,975 2.5 6.8 0.6 10.4 2.3
2014E 18,171 4,104 7,015 1,162 792 20.0 116.6 2.18 0.0 38.6 22.6 4.4 10.9 184 506 11.4 7.7 -3,373 2.2 5.6 0.5 4.8 2.3
Steady real estate and EPC segment. Construction at Margs Swarnabhumi SEZ is in full swing; it sold 90 acres and leased 0.1m sq ft. The 1.8m sq ft Marg Junction mixeduse retail/commercial project is likely to become operational in FY13. Marg Properties has high brand recognition in the Chennai residential market. We estimate the NAV of these businesses to be Rs7.7bn. The EPC segment, with a Rs33bn order book (70% in-house), is valued at Rs3.5bn. Debt remains a key concern. Debt has doubled to Rs24bn between FY09 and FY11; it includes Rs11bn of port debt (increasing to Rs15bn by FY13). Another Rs10bn of real estate and corporate debt has lower certainty on cash flows. Unless port traffic and real estate projects achieve critical operating levels, there will be low clarity on the debt schedule, leading to a high discount on asset value. Valuation. Our SOTP value for Marg is Rs435/sh or Rs17bn: Karaikal Port Rs13bn, real estate Rs7.7bn and EPC Rs3.5bn. We ascribe a 25% conglomerate discount and a 50% leverage discount to arrive at our Rs163/sh price target. We expect an asset re-rating as the port and SEZ show better performances.

240 220 200 180 160 140 120 100 80 Jun10 Sep10 MargConstruction
Dec10
Mar11
-1 mth -3 mth -12 mth 3 -8 -42 5 -7 -43 Promoter share holding (49.8%) 50% 426,598
Gaurav Pathak
Shashikiran Rao
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Marg is a conglomerate with infrastructure and real estate assets that have passed the investment phase and are ready to generate cash flows, yet is available at a steep discount to its SOTP value. The prime asset is the Karaikal port, which is currently the only private sector port with access to Tamil Nadus hinterland. The ports capacity is poised to grow 3x in FY12 to 21m tpa. We have ascribed it an NAV of Rs13bn. Marg has achieved sizeable brand recognition for its Chennai residential/commercial projects as well as Swarnabhumi SEZ (90kms from Chennai). We were pleasantly surprised witnessing the execution of these projects and conservatively expect the NAV of the projects to be Rs7.7bn. On the flip side, concerns over high leverage (Rs24bn or D/E of 4.9x) remain and a potential dilution at the port or the parent level to reduce leverage is possible. This makes Marg a high-risk and high-return play with asset significantly under valued on leverage concerns.
Karaikal port as a unique asset

Margs Karaikal port has a strong competitive advantage: it is the only private sector Minor port with ample access to the Tamil Nadu hinterland. The Tamil Nadu maritime board has not allowed any private sector commercial port to become operational and has restricted approvals only to captive ports. In addition, the three major ports in Tamil Nadu (Ennore, Chennai and Tuticorin) are operating at 90%+ capacity utilisation with turnaround times in excess of 5-6 days. Their expansion plans have been slow to take off. Karaikal, as a private sector port located in Pondicherry which is the mid-point between Chennai and Tuticorin, helps fill this void. Uniquely positioned to capture Tamil Nadu hinterland demand Fig 1 Karaikal port: unique locational advantage
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Rapid capacity expansion

By October 2011, we expect Marg to increase capacity to 21m tpa from 7m tpa currently, with the addition of two new mechanised coal-handling berths. Currently, the port has two multi-purpose berths and one offshore vessel berth. Capacity expansion to 40m tpa by FY17 Fig 2 Capacity projection FY11-17E
45 40 35 30 25 20 15 10 5 0
Fig 3 Capacity addition in phases

Phase IIB (2012-15) 47% Phase I (2006-09) 13%
MTPA
6 2.5 6 16 16 7 FY11 7 FY12E 16 7 FY13E 16 7 FY14E 13 FY15E
6 2.5 16
6 2.5 16
16 FY16E
16 Phase IIA (2009-11) 40% FY17E
General cargo
Coal
Liquid
Container
Capacity could reach 40m tpa by FY17 Post the completion of phase 2, the company believes the marine infrastructure aspects draft, hydro channel and breakwater will be adequate to support the master plan capacity of more than 40m tpa. We are assuming peak capacity of 40m tpa by FY17. To pursue that, the company is working on:

Breakwater extension for phase 3 Increase of draft to 14 metres for phase 2 (subsequently to be increased to 16 metres for phase 3 to handle capesize vessels, especially container vessels)
Additional berths, storage and surface transport facilities can be added in phase 3 at relatively lower incremental capex. The figure below summarises the future capacity expansion under the master plan. Fig 4 Karaikal port: berth and transport additions as per the master plan
Source: Company
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We visited the site and were impressed with the progress of construction and operations. Fig 5 Karaikal port dredging in progress for new berth Fig 6 Karaikal port ships on existing berth
Strong cargo pick-up: good prospects for coal

In FY11, the first full year of operations, Karaikal port logged 4.8m tonnes of traffic (80%+ capacity utilisation). We expect coal demand to drive growth at the port. Currently, over 85% (3.3m tonnes) of the cargo is coal imports and with the addition of two mechanized coal berths we expect it to rise to 20m tpa by FY17, 5x growth from FY11. Berth utilisation 80%+ currently Fig 7 Cargo projection FY11-17E
30 25 20 MT 15 10 5 0 1 4 FY11 1 7 FY12E 1 2 9 FY13E 1 1 2 11 FY14E 1 1 3 14 2 1 3 2 2 3 MTPA
Fig 8 Coal demand in the hinterland

70 60 50 40 30 20 FY16E FY17E 6 4,242 27 43 54 59 14,872 12,212 9,092 6 7 14,872 16,000 7 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 FY14E FY15E FY16E FY17E MW
17
20
FY15E
1,582 5 10 1,100 5 4 13 6 4 0 FY11 FY12E FY13E
Coal
General Cargo
Liquid
Container
In the immediate future, we expect the hinterlands coal requirement and the Chennai ports inability to handle additional demand growth as its main advantages. We estimate that close to 14GW of coal-fired generation capacity is coming up in Nagapattinam, Cuddalore, Thiruvavur and Mettur. Port handling demand for coal for these projects will have to be met either by captive jetties or Karaikal port. We believe that Karaikal port offers an economical option as it saves transportation costs for these projects. However, we recognise that many of these projects are in early stages of planning and may take time to materialise.
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14GW power projects planned but may take time to materialise
Fig 9 Power generation capacity coming up in the immediate hinterland

Project Tannex Power OPG Power Generation ACC Nagai Power UDI Infrastructure Tridem Power NSL ETA Star Patel Power SRM Energy (Spice Energy) MALCO Cuddalore Powergen Sindya Power Estimated demand
Location Cuddalore Thiruvarur Coimbatore Nagapattinam Nagapattinam Tirukkuvalai Nagapattinam Nagapattinam Nagapattinam Cuddalore Mettur Cuddalore Nagapattinam
Capacity (MW) Year 110 77 75 330 2,000 2,000 1,320 1,000 1,000 1,800 1,050 1,320 800 1,000 13,882 FY11 FY12 FY12 FY12 FY13 FY13 FY13 FY14 FY14 FY14 FY14 FY15 FY15 FY15
Coal (MTPA) 0.4 0.3 0.3 1.3 8.0 8.0 5.3 4.0 4.0 7.2 4.2 5.3 3.2 4.0 55.5
Project Tannex Power OPG Power Generation ACC Nagai Power UDI Infrastructure Tridem Power NSL ETA Star Patel Power SRM Energy (Spice Energy) MALCO Cuddalore Powergen Infrastructure Leasing & Fin Sindya Power Estimated demand
Infrastructure Leasing & Fin Cuddalore
Fertiliser and project cargo showing high value near-term upside In addition to coal, Karaikal port has also been getting the following small but high-margin cargo
Fertiliser: Karaikal port is one of the designated ports for import of fertilisers. While the imports are of seasonal nature, the realisations are high at Rs400-500/tonne. The company has set up bagging and storage facilities to smoothen imports. Project imports/ exports: With large power, cement and fertiliser plants coming up in the hinterland, Karaikal port has been handling equipment imports for these investments. In addition, BHEL Thiruchirapalli has been routing all its exports through Karaikal. Cement: The hinterland also has several cement units with emerging coal demand of 5.9m tpa, which adds to demand for coal in Karaikal port.
Impressive property development

Marg has become an established brand in the real estate market in Chennai and it has worked to capitalise on this recognition in three segments Swarnabhumi SEZ project, residential projects in Chennai and other cities and commercial projects in Chennai. We visited Swarnabhumi and the Chennai mall project and are satisfied with the companys strategy and progress. We estimate the NAV of the three projects and other land bank to be Rs7.7bn as shown in the table below. Real estate NAV Rs7.8bn, developable area 70m sq ft Fig 10 Real estate and urban infrastructure NAV
Project Marg Properties Digital zone 1/ Marg square Marg Junction/ Riverside mall Type Residential Commercial Commercial/ retail/ hospitality SEZ Saleable area 40.0 1.4 1.5 NAV NAV/sq ft 1,700 779 2,859 43 556 1,873 Comments 800 acres in and around Chennai and SEZ Mixed property under development 7.28 acres 613 acres (312 acres Light Engineering & 300 acres Multi Services SEZ)
Marg Swarnabhumi Total area leased/ land bank
26.7 69.6
2,412 7,749
90
Urban infrastructure project (Swarnabhumi): In the urban infrastructure division, the company is developing an integrated city named Swarnabhumi, which is a notified SEZ about 90kms 66
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from Chennai. The 22m sq ft project is being positioned as a locational alternative to Chennai, comprising two SEZs (one light engineering SEZ and one services SEZ) and a nonprocessing zone comprising residential units and educational institutions. We visited the site and are impressed with the concept and execution on the ground. In our assessment, we note the following progress: 1. 2. 3. Music school in the non-processing zone operational Land lease/sale for several engineering units completed One complex with high- to mid-income residential units (~Rs2,500/sq ft) was ready, while lower-end housing (~Rs1,600/ sq ft) was under construction Fig 12 Marg Swarnabhumi projection
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 1.2 1.1 1.1 1.1 1.1 0.8 6,690 1.4 1.2 1.0 0.8 0.6 3,425 2,175 2,374 2,603 2,863 3,137 0.5 0.4 0.2 0.0 FY13E FY14E FY15E FY16E m sq ft
Fig 11 Marg Swarnabhumi land usage

Resi. Hub 67% Light Eng. SEZ 13%
Multi Services SEZ 20%
Rs m
FY11
Sales value (LHS)

Source: Standard Chartered Research Source: Standard Chartered Research
FY12E
Sales schedule (RHS)
Residential (Non-SEZ): Nested partly in Marg Properties and partly in the parent company, this unit is developing residential units principally in Chennai (and in some other tier II and III locations). Chennai Commercial: Marg has a small commercial portfolio in Chennai, comprising interests in three operational office buildings and one new mixed use project Marg Junction. Marg Junction is a 1.8m sq ft retail cum hospitality cum office space, strategically located in Chennais IT corridor along the Old Mahabalipuram Road (OMR). We visited the site and were impressed by the progress. The project comprises 1m sq ft of mall retail space (of which 0.7m sq ft is leasable space, the only mall space in this part of Chennai), 0.49m sq ft of hotel and branded service apartment space (in a tie-up with Shangrila, again the only star hotel in OMR) and 0.17m sq ft of office space. Given the location advantage, we see strong lease prospects for the projects; we expect annuity revenue of Rs1.3bn from the project starting FY13 (Rs900m from the mall). The mall has already secured several anchor tenants such as Hypercity, Shoppers Stop and PVR.
Valuation
We value Marg on a sum-of-the-parts basis using the DCFE method for the Karaikal port, NAV for real estate and P/E for the construction business, which implies a value of Rs163/sh for the stock as shown in the table below.
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Valuation attractive even after 50% discount factor for balance sheet overleverage
Fig 13 DCF and SOTP valuation

Project Port SEZ Seekinapukkam Riverside Mall Real estate projects Construction business Leased assets Net Debt in Marg standalone Total NPV Conglomerate discount Discounted value Risk adjustment for balance sheet leverage PT
Source: Standard Chartered Estimates
Valuation (Rs m) Valuation (Rs/sh) 13,763 2,412 2,859 1,700 3,536 779 -7,500 17,213 25% 12,910 50% 6,455 163 326 362 63 75 45 93 20 -189 435
MTPA/ m sq ft 21 27 1.7 42
Rs/ MTPA (Rs/ m sq ft) 655 90 1,682 40
The valuation implies a P/E of 21x, EV/EBITDA of 10x and P/B of 0.9x to our consolidated FY12 estimates, which look attractive. We are expecting 65% earnings CAGR over FY11-14E. We, therefore, feel that FY12-14E numbers are good indicators of the companys valuation vis-a-vis improving earnings potential as summarised in the table below. Stock looks attractive on cash EPS Fig 14 Valuation scenarios
FY11E Ratios at price target Rs163 Diluted price earnings ratio Diluted price to cash earnings ratio EV/EBITDA Price to book value Ratios at current price Rs97 Diluted price earnings ratio Diluted price to cash earnings ratio EV/EBITDA Price to book value RoE Cash RoE
Source: Standard Chartered Estimates
FY12E 21.2 21.2 10.1 0.9 12.5 2.9 9.6 0.6 5.5 24
FY13E 17.7 17.7 7.2 0.8 10.4 1.5 6.8 0.6 5.7 39
FY14E 8.2 8.2 5.9 0.7 4.8 1.0 5.6 0.5 11.4 53
35.1 35.1 11.2 1.2 20.7 4.4 10.4 0.8 4.5 21
Risks: debt, progress on restructuring, EPC
Debt burden may lead to dilution: Margs consolidated debt burden currently is a high Rs24bn, which translates into a debt equity ratio of 3.3x, which is worrying. We expect debt to rise further as phase 2 of Karaikal port heads to completion. The table below shows the structure of the debt.
We are especially concerned about the debt at the parent level as we expect EBITDA in the EPC segment to decline once Karaikal port is completed. Fig 15 Debt breakdown
Unit Karaikal Port EPC Mall Dredger SEZ (Swarnabhumi) Marg (parent company) Total
Debt (Rs m) 11,000 2,600 1,300 1,300 3,200 5,000 24,400
Comments Total debt by end of phase 2 likely to be Rs15bn Advances
To be transferred to Marg Properties
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Progress on restructuring: Marg continues to have a fairly complex structure with a mix of multiple unrelated business streams. The company intends to incubate each of the businesses first and then possibly list them as separate entities to reduce the holding company discount at Marg parent level. However, currently we believe that only Karaikal port will be ready for listing in the near future. Therefore, we expect the company to have a large discount to the NAV valuation of the company. EPC profile: Margs EPC revenue continues to be predominantly from in-house projects (70%+), which in turn is predominantly from construction of the Karaikal port and real estate projects. The company has been trying to expand its footprint into external construction contracts. The company has developed capabilities for dredging and other marine services, which it intends to utilise for external contracts. The companys growth in EPC will be driven by its ability to secure a strong external order book over the next 2-3 years.
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Financials
We expect Margs consolidated earnings to remain volatile as many of its projects will remain in start-up phase and these projects will come up for interest cost expensing (vs capitalisation). Most of the assets will achieve stabilisation by FY14. Over FY11-14E, we expect earnings to post 65% CAGR and overall margin to improve from ~23% to 38% as ports and real estate form a larger component of revenue. Consolidated earnings CAGR 65%, RoE improving to 12% Fig 16 OCF and revenue
20,000 15,000 Rs m 10,000 5,000 0 -5,000 FY10 FY11E FY12E FY13E FY14E 450 400 350 300 250 200 150 100 50 0
Fig 17 EPS
25 20 % Rs 15 10 5 0 FY10 FY11E FY12E FY13E FY14E 140 120 100 60 40 20 0 % 80

EPS (LHS)
EPS growth (RHS)

12 10 8 % 6 4 2 0 FY10 FY11E FY12E FY13E FY14E

45 40 35 30 25 20 15 10 5 0 FY10 FY11E FY12E FY13E FY14E FY14E
RoE
RoCE

6.0 5.0 x 4.0 3.0 2.0 1.0 0.0 FY10 FY11E FY12E FY13E FY14E

0.5 0.5 0.4 0.4 0.3 0.3 0.2 0.2 0.1 0.1 0.0 FY10 FY11E FY12E FY13E
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Year end: Mar Operating income (sales) Growth Operating expenses EBITDA % margins Depreciation & amortisation Gross interest Other income Recurring PBT Add: extraordinaries Less: Taxes - Current tax - Deferred tax Less: Minority Interest Net income (reported) Recurring net income
FY10 3,644 420 2,817 827 15.5 180 445 242 444 0 325 0 0 0 119 119
FY11E 9,197 152 6,641 2,556 11.6 652 1,930 245 218 0 -13 -13 0 0 176 176
FY12E 10,210 11 7,061 3,149 12.0 1,000 2,012 269 407 0 45 45 0 0 304 304
FY13E 14,643 43 9,367 5,276 12.0 2,158 2,890 296 524 0 75 75 0 0 366 366
FY14E 18,171 24 11,156 7,015 0.0 2,911 3,268 325 1,162 0 276 276 0 0 792 792

As at end Mar Assets Total current assets of which cash & cash eqv. Total current liabilities & provisions Net current assets Investments of which Strategic/Group Other marketable Net fixed assets of which intangibles Capital work-in-progress Goodwill Total assets Liabilities Borrowings Deferred tax liability Minority interest Equity share capital Face value per share (Rs) Reserves & surplus* Less: Misc. Exp. n.w.o. Net worth Total liabilities
FY10 11,053 1,415 3,617 7,436 51 26 25 13,353 0 7,346 0 20,840
FY11E 11,972 1,369 4,327 7,644 3,851 3,851 0 17,953 0 5,827 0 29,448
FY12E 13,641 1,870 5,178 8,463 4,851 4,851 0 21,777 0 5,457 0 35,091
FY13E 18,385 1,504 7,200 11,185 5,851 5,851 0 23,817 0 4,194 0 40,852
FY14E 22,519 1,570 8,623 13,896 5,851 5,851 0 25,105 0 7,212 0 44,852
17,248 0 426 272 10 791 0 3,166 20,840
24,248 0 481 380 10 884 0 4,719 29,448
28,248 0 538 396 10 1,102 0 6,304 35,090
33,648 0 621 396 10 1,381 0 6,583 40,852
36,848 0 715 396 10 2,086 0 7,289 44,852
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Year end: Mar Operating cash flow Working capital changes Capital commitments Free cash flow Cash flow from investing activities Issue of share capital Buyback of shares Inc (Dec) in borrowings Dividend paid Extraordinary Items Chg. in cash & bank balance
FY10 14 -2,071 -5,411 -7,468 217 16 0 6,969 -83 0 459
FY11E 647 -262 -9,077 -8,692 270 108 0 7,000 -83 0 -45
FY12E 1,101 -328 -5,824 -5,050 269 16 0 4,000 -86 0 500
FY13E 2,321 -3,098 -5,199 -5,975 296 0 0 5,400 -86 0 -366
FY14E 3,483 -2,657 -4,199 -3,373 325 0 0 3,200 -86 0 66
Fig 25 Ratios
Year end: Mar Per Share Data (Rs) EPS(basic recurring) Diluted recurring EPS Recurring cash EPS Dividend per share (DPS) Book value per share (BV) Growth Ratios (%) Operating income EBITDA Recurring net income Diluted recurring EPS Diluted recurring CEPS Valuation Ratios (% YoY) P/E P/CEPS P/BV EV / EBITDA EV / Operating income EV / operating FCF Operating Ratio Raw material/sales (%) SG&A/sales (%) Other income / PBT (%) Effective tax rate (%) NWC / total assets (%) Inventory turnover (days) Receivables (days) Payables (days) D/E Ratio (x) Return/Profitability Ratio (%) Recurring net income margins RoCE RoNW Dividend payout ratio Dividend yield EBITDA margins
FY10 3.1 3.1 7.9 2.0 83.3 420.0 579.6 116.0 116.0 145.1 30.7 12.2 1.2 23.6 5.3 -9.0 64.2 0.0 54.5 73.2 28.9 399.1 280.1 330.3 4.9 3.1 1.4 4.4 63.9 2.1 22.7
FY11E 4.6 4.6 21.8 2.0 124.1 152.3 209.0 48.2 48.2 176.7 20.7 4.4 0.8 10.4 2.9 -2.5 66.9 0.0 111.9 -6.0 21.3 186.0 174.6 210.6 4.8 1.9 8.8 4.5 43.1 2.1 27.8
FY12E 7.7 7.7 32.9 2.0 159.2 11.0 23.2 72.4 65.5 51.1 12.5 2.9 0.6 9.6 3.0 -3.1 64.2 0.0 66.1 11.2 18.8 185.1 173.9 237.6 4.2 2.9 6.5 5.5 26.1 2.1 30.8
FY13E 9.2 9.2 63.7 2.0 166.2 43.4 67.5 20.2 20.2 93.6 10.4 1.5 0.6 6.8 2.5 -3.8 60.4 0.0 56.5 14.4 23.7 162.7 155.3 234.5 5.1 2.4 7.5 5.7 21.7 2.1 36.0
FY14E 20.0 20.0 93.5 2.0 184.0 24.1 33.0 116.6 116.6 46.7 4.8 1.0 0.5 5.6 2.2 -2.6 58.4 0.0 28.0 23.8 27.5 174.7 165.2 252.7 5.1 4.3 7.7 11.4 10.0 2.1 38.6
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Company profile
Marg, incorporated in 1994 and which went public in 1995, is a diversified company with interests in construction/EPC, infrastructure and real estate. In infrastructure, it is present in a gamut of services including marine (ports, dredging, etc.), airports, etc. In real estate, the company is developing properties primarily in Chennai and close to its SEZ in Seekinakuppam. Fig 26 Shareholding pattern
FII 14% DII 7%
Promoter 49% Others 30%
Source: BSE
Fig 27 Management
Name Designation Chairman and Managing Director Background GRK Reddy, a first generation entrepreneur, promoted GRK Reddy Marg Ltd in 1994 and has been the driving force of the company since. He is a post graduate in commerce and a honorary from Kellogg School of Management
Source: Company
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Disclosures appendix
Global disclaimer
The information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch, Standard Chartered Securities (India) Limited and/or one or more of its affiliates (together with its group of companies, SCB) and the research analyst(s) named in this report. SCB makes no representation or warranty of any kind, express, implied or statutory regarding this document or any information contained or referred to in the document.
DISCLOSURES INCLUDING THOSE REQUIRED BY THE UNITED STATES

The research analysts responsible for the content of this research report certify that:
The view expressed and attributed to the research analyst or Analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and No part of his or her compensation and other benefits was, is or will be directly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts. Our ratings are under constant review.
Additional information with respect to any securities referred to herein will be available upon request. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES. Disclosures Appendix Where disclosure date appears below, this means the day prior to the report date. All share prices quoted are the closing price for the business day prior to the date of the report, unless otherwise stated.
Company Mundra Ports and SEZ As at the disclosure date, the following applies:
Mundra Ports and SEZ - current rating is: OUTPERFORM
190 180 170 160 150 140 130 120 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11
Source: FactSet prices / SCB ratings and price targets
Company Essar Ports As at the disclosure date, the following applies:
Essar Ports - current rating is: OUTPERFORM
200 190 180 170 160 150 140 130 120 110 100 May 10
Jun 10
Jul 10
Aug 10
Sep 10
Oct 10
Nov 10
Dec 10
Jan 11
Feb 11
Mar 11
Apr 11
May 11
Jun 11
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Company Gujarat Pipavav Ports As at the disclosure date, the following applies:
Gujarat Pipavav Ports - current rating is: IN-LINE
75 70 65 60 55 50 45 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11
Company Marg As at the disclosure date, the following applies:

Marg Construction - current rating is: OUTPERFORM Marg
240 220 200 180 160 140 120 100 80 May 10
Jun 10
Jul 10
Aug 10
Sep 10
Oct 10
Nov 10
Dec 10
Jan 11
Feb 11
Mar 11
Apr 11
May 11
Jun 11
Company Petronet LNG As at the disclosure date, the following applies:
Petronet LNG - current rating is: OUTPERFORM

07/03/11 OP : Rs147.00 27/04/11 OP : Rs151.00
160 150 140 130 120 110 100 90 80 70 May 10
Jun 10
Jul 10
Aug 10
Sep 10
Oct 10
Nov 10
Dec 10
Jan 11
Feb 11
Mar 11
Apr 11
May 11
Jun 11
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Company ACC Ltd As at the disclosure date, the following applies:
ACC Ltd - current rating is: OUTPERFORM

20/09/10 26/04/11 OP : Rs1123.00 OP : Rs1170.00 1,200 1,150 1,100 1,050 1,000 950 900 850 800 May 10 Jun 10 Jul 10 Aug 10 Sep 10
Oct 10
Nov 10
Dec 10
Jan 11
Feb 11
Mar 11
Apr 11
May 11
Jun 11
Company Bharat Forge Limited As at the disclosure date, the following applies:
Bharat Forge Limited - current rating is: OUTPERFORM

06/01/11 OP : Rs450.00
460 440 420 400 380 360 340 320 300 280 260 May 10
Jun 10
Jul 10
Aug 10
Sep 10
Oct 10
Nov 10
Dec 10
Jan 11
Feb 11
Mar 11
Apr 11
May 11
Jun 11
Recommendation Distribution and Investment Banking Relationships

% of covered companies currently assigned this rating % of companies assigned this rating with which SCB has provided investment banking services over the past 12 months
OUTPERFORM IN-LINE UNDERPERFORM
62.8% 28.8% 8.4%
15.3% 10.6% 8.3%
Research Recommendation Definitions The total return on the security is expected to outperform the relevant market index by 5% or more OUTPERFORM (OP) over the next 12 months The total return on the security is not expected to outperform or underperform the relevant market IN-LINE (IL) index by 5% or more over the next 12 months The total return on the security is expected to underperform the relevant market index by 5% or UNDERPERFORM (UP) more over the next 12 months SCB uses an investment horizon of 12 months for its price targets. Terminology
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Country-Specific Disclosures If you are receiving this document in any of the countries listed below, please note the following: United Kingdom and European Economic Area: Standard Chartered Bank is authorised and regulated by the Financial Services Authority. This communication is not directed at Retail Clients in the European Economic Area as defined by Directive 2004/39/EC. Nothing in this document constitutes a personal recommendation or investment advice as defined by Directive 2004/39/EC. Australia: The Australian Financial Services Licence for Standard Chartered Bank is Licence No: 246833 with the following Australian Registered Business Number (ARBN: 097571778). Australian investors should note that this document was prepared for wholesale investors only (as defined by Australian Corporations legislation). Hong Kong: This document is being distributed in Hong Kong by, and is attributable to, Standard Chartered Bank (Hong Kong) Limited which is regulated by the Hong Kong Monetary Authority. India: This document is being distributed in India by Standard Chartered Securities (India) Limited which is a SEBI registered broker and a member of the Bombay Stock Exchange Limited and The National Stock Exchange of India Limited. Singapore: This document is being distributed in Singapore by Standard Chartered Bank Singapore Branch only to accredited investors, expert investors or institutional investors, as defined in the Securities and Futures Act, Chapter 289 of Singapore. Recipients in Singapore should contact Standard Chartered Bank Singapore Branch in relation to any matters arising from, or in connection with, this document. United States: Except for any documents relating to foreign exchange, FX or global FX, Rates or Commodities, distribution of this document in the United States or to US persons is intended to be solely to major institutional investors as defined in Rule 15a-6(a)(2) under the US Securities Act of 1934. All US persons that receive this document by their acceptance thereof represent and agree that they are a major institutional investor and understand the risks involved in executing transactions in securities. Any US recipient of this document wanting additional information or to effect any transaction in any security or financial instrument mentioned herein, must do so by contacting a registered representative of Standard Chartered Securities (North America) Inc., 1 Madison Avenue, New York, N.Y. 10010, US, tel + 1 212 667 0700. WE DO NOT OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS EITHER (A) THOSE SECURITIES ARE REGISTERED FOR SALE WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION AND WITH ALL APPROPRIATE U.S. STATE AUTHORITIES; OR (B) THE SECURITIES OR THE SPECIFIC TRANSACTION QUALIFY FOR AN EXEMPTION UNDER THE U.S. FEDERAL AND STATE SECURITIES LAWS NOR DO WE OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS (i) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL ARE PROPERLY REGISTERED OR LICENSED TO CONDUCT BUSINESS; OR (ii) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL QUALIFY FOR EXEMPTIONS UNDER APPLICABLE U.S. FEDERAL AND STATE LAWS. GENERAL DISCLAIMER The information on this document is provided for information purposes only. It does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices or any representation that any such future movements will not exceed those shown in any illustration. The stated price of the securities mentioned herein is as of the date indicated and is not any representation that any transaction can be effected at this price. While all reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors of fact or for any opinion expressed herein. The contents of this document may not be suitable for all investors as it has not been prepared with regard to the specific investment objectives or financial situation of any particular person. Any investments discussed may not be suitable for all investors. Users of this document should seek professional advice regarding the appropriateness of investing in any securities, financial instruments or investment strategies referred to in this document and should understand that statements regarding future prospects may not be realised. Opinions, forecasts, assumptions, estimates, derived valuations and price target(s) contained in this document are as of the date indicated and are subject to change at any time without prior notice. The value and income of any of the securities or financial instruments mentioned in this document can fall as well as rise and an investor may get back less than invested. Future returns are not guaranteed, and a loss of original capital may be incurred. Foreign-currency denominated securities and financial instruments are subject to fluctuation in exchange rates that could have a positive or adverse effect on the value, price or income of such securities and financial instruments. 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India Ports - Gateways To India

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l Equity Research l India l Infrastructure l

Important disclosures can be found in the Disclosures Appendix

Ports: preferred infrastructure investment

Growth riding on 3Cs coal, containers and crude

High utilisation here to stay

Strategic rating scorecard

Appendix Company section

Power Medium Medium Medium Medium Weak Weak Weak Medium

131 310 899

189 423 1,240

273 535 1,648

Source: Standard Chartered Research estimates

MPSEZ a clear winner on asset quality

Valuations not factoring in growth

MPSEZ Essar Ports GPPL Marg

Source: Standard Chartered Research estimates

Sustainable, strong earnings growth

Source: Companies, Standard Chartered Research estimates

Inherently high EBITDA margins

263 272 201 177 156 134 205

Essar Ports FY14E EBITDA/MT

GPPL FY17E EBITDA/MT

Essar Ports FY14E EBITDA margin

GPPL Marg FY17E EBITDA margin

Essar Ports and Marg look significantly under valued on PEG

Fig 9 PEG ratio (current and implied)

*** For GPPL FY12E corresponds to CY11E and so on.

MPSEZ Essar Ports GPPL *** Marg

Cash earnings significantly higher than reported profit

Fig 11 Cash EPS 15-25% higher that book EPS

Fig 12 Cash RoE FY12-14E

Fig 13 RoE over FY12-14E

Cash RoE FY13E

Source: Standard Chartered Research estimates

Source: Standard Chartered Research estimates

Inexpensive in market value and replacement value

2,629 2,232 1,926 48 1,267 36 873 2,156 44 1,861

80 70 60 50 40 30 20 10 0 EV/ installed capacity (LHS) (FY14E) %

Sector likely to continue trading at premium PB multiples

Source: Standard Chartered Research estimates

Fig 16 PB and implied PB valuation

Price target (Rs) 201 190 71 163

price (Rs) 152 106 64 96

India comparative valuations

Cargo traffic FY12E Cargo traffic FY14E

12 68 3.0 3.2 2,232 1,575

EBITDA margin (%) Gross D/E

Interest coverage (EBIT/Gross debt) EV/MTPA (FY12E) EV/MTPA (FY14E)

Global comparative valuation

Ports preferred infrastructure investment

Regulatory environment for investments

Weak: Margins 35-40%+; mature RoE in 10-18%.

Benign regulatory environment

Maritime Agenda projects 11% cargo growth during FY11-20

Fig 21 Trade growth

Cargo volume likely to post 11% CAGR over FY11-17E

Fig 22 Historical cargo growth

Fig 23 Future cargo growth

Cargo handled historical

Captive ecosystem to drive cargo growth at minor ports

Growth riding on 3Cs coal, containers and crude

3Cs as cargo traffic driver

Fig 25 POL handled by ports