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Transport infrastructure
Action
Domestic ports and logistics companies have underperformed over the past year
on the back of a sluggish global economy. However, we expect the base effect and
a modest pick-up in the global economy to help deliver mid-teen growth, and prefer
CCRI and MSEZ on the theme. Airports are likely to benefit from rising air traffic,
while return of risk-taking and clarity on regulatory issues along with land
monetisation should drive up GVK, which is our preferred pick to GMR.
Catalysts
Continued strength in port traffic is the key to MSEZ and CCRI, while non-aero
revenue and real-estate monetisation will drive growth at GVKP, in our view.
Anchor themes
Pick-up in industrial activity will likely lead to a turnaround in EXIM traffic, benefiting
port entities and container logistics companies. Similarly, an improving
macroeconomy will benefit air traffic and related revenue streams at airports.
Global recovery to lead modest growth
Recovery in the economy to pave way for EXIM traffic growth
After initial signs of a recovery in the domestic manufacturing and construction
sectors in early 2010, IIP numbers reflect a slowdown in 2H2010. Historically,
EXIM traffic growth numbers have mirrored IIP growth trends, which is a clear
measure of economic activity levels. The logistics sector has also been affected,
in line with the IIP slowdown in 2010.
2011 to be aided by a global recovery, albeit modest
Coupled with a lower base effect and a modest pick up in the global economy,
we expect traffic growth of above 15% in 2011F, which should drive earnings
growth for the transport sector. We believe companies operating in the ports
space and those directly involved in container cargo will benefit from the
expected surge in traffic in 2011. Our top picks in the space are Container Corp
of India and Mundra Port & SEZ.
Recovery to benefit traffic at airports as well
Traffic at privatised metro airports grew 15-30% p.a. until CY08 before the
recession. Following two years of negative growth, the sector has again
witnessed a sharp revival in 2010, with air traffic soaring to new highs. However,
more than air traffic itself, the lone airport developers (GMR and GVK) are also
exposed to regulatory risks in the airport business, delays in real-estate
monetisation and revival in their power pipeline. We prefer GVK Power &
Infrastructure to GMR Infrastructure given the former’s relatively undervalued
power portfolio and Mumbai real-estate holdings.
Return of risk-taking is the key for infrastructure conglomerates
Even as air traffic numbers have surprised positively for most of 2010, we believe
it is just one of the several things that need to fall into place for the airport sector
in India; the others being regulatory approvals for a shift to the RoCE model for
aero-revenues, monetisation of real estate and commercialisation of several
potentially lucrative non-aero revenue contracts such as advertisement, retail
shops, etc. We believe the market is now adjusting to these realities; we had
highlighted this in our earlier notes in 2009 (Crash landing, 25 March, 2009).
Simultaneously, the infrastructure developers as an asset class appear to have lost
their appeal due to risk aversion. In our view, the progress on GVKP’s power portfolio
is exciting, even though its Mumbai land bank value remains undiscovered, as yet. We
believe the return of risk-taking will be an important driver of stock prices in this asset
class.
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