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Key highlights
Consolidated revenue increased by 11.6% YoY (decline of 5.8% QoQ) to INR7.5bn in
2QFY11, 12.2% lower than our estimates. This was mainly on account of 23.6% QoQ
decline in shipping business to INR2.7bn on account of dry docking of three major
vessels during the quarter.
Revenue in Oilfields segment declined by 52% YoY to INR697m on account of reduced
day rates for its semi-submersible drilling rig during the quarter. However, revenue from
Port and Terminal services grew by 54.3% YoY to INR1.7bn with commissioning of
30mtpa dry bulk port at Hazira in May 2010.
EBIDTA declined marginally by 1.6% YoY from INR2.4bn in 2QFY10 to INR2.3bn in
2QFY11 on the back of 420bps margin decline to 31.1% mainly on account of 385%
YoY increase in dry dock to INR176m and 43.1% YoY increase in employee cost. EBIDTA
was lower by 22.1% than our estimates of INR3.0bn.
The company reported loss of INR189.6m at EBIT level in 2QFY11 compared to profit
of INR90.1m in 2QFY10, significantly below our expectations of INR231.7m mainly
due to dry-docking of vessels.
ESPL has reported profit on sale of ship at INR303.7m in 2QFY11 and currency gain of
INR129.6, adjusting for one-time items, the company has reported profits of INR110.1m.
Operational performance
Revenue from Fleet Operating and Charting division increased by 9.8% YoY (QoQ decline
of 23.5%) to INR2.75bn, while revenue from Surface Logistic reported an increase of 16.5%
YoY (QoQ decline of 2%) to INR2bn. Oilfield division comprises offshore and onshore
drilling; the division witnessed a revenue decline of 26.9% YoY (QoQ increase of 41.7%) to
INR988.2m. The poor performance was mainly due to lower rates (~USD225,000pd) for its
semi-submersible drilling rig "Essar Wildcat" during the quarter compared to high day
rates of ~ USD300,000pd in 1QFY10. However, full utilisation of rig in 2QFY11 compared
to lower working days (~40day) in 1QFY11 helped to gain QoQ growth. Port and Terminal
services recorded growth of 54.3% YoY (8.6% QoQ) from INR1.12bn in 2QFY10 to
INR1.73bn in 2QFY11 on account of additional cargo from new 30mtpa drybulk terminal
at Hazira, Gujarat started since May 2010. New bulk terminal handled 2.7mt cargo during
2QFY11 compared to 1QFY11 and expected to handle 10mt cargo in FY11.
Recent developments
The company had announced plans to separate its shipping, logistics and oilfields business
into a separate entity i.e Essar Shipping, while the existing entity will be renamed as Essar
Ports (shareholders' meeting is scheduled on November 30, 2010). As per the proposed
demerger scheme, Essar Shipping will issue one equity share for every three equity shares
they hold in the existing company.
The port division of ESPL has the current capacity to handle 76mtpa, which is planned to
increase to 158mtpa by FY13e. The separate entity for port business will enable it to follow
an independent growth path creating better value for stakeholders. The port business is
also expected to get a rerating in valuation in terms of higher earnings multiples (~12-15x)
compared to pure shipping company (8-10x). We expect the revenue from port business to
increase from INR4.13bn in FY10 to INR17.5bn in FY13e with a growth in EBIDTA from
INR3bn to INR13.2bn during the same period.
To become the second largest port by FY13e
ESPL has aggressive plans to become one of the largest private port operator in India with
total port capacity of 158 mtpa by FY13 compared to current capacity of 76mtpa with total
capital expenditure of INR85.2bn. After completion, liquid cargo handling capacity will
increase from 46mtpa to 58mtpa and drybulk capacity will reach to 100mtpa in FY13.
Valuation and recommendation
At the CMP of INR111, ESPL is trading at P/E of 29.2x and P/ BV of 0.8x, its FY12e
earnings. While prima facie this appears expensive, the sharp scale up of operations and
the long term business commitment from group companies offer strong predictability and
growth prospects. The ongoing capital expenditure of USD1.2bn in ports, USD440m in oil
drilling and USD610m in shipping would augment its asset base substantially and propel
its revenues and profits by a CAGR of 28.3% and 62% to INR63.4bn and INR5.7bn,
respectively, over the coming three years. We maintain our valuation based on SOTP valuation
with INR74 from port and terminal, INR32.7 from oilfield services and INR4.3 from shipping
and logistics business with a target price of INR111. However, we expect significant rerating
for port business after expected demerger and reiterate HOLD.
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