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Essar Shipping Ports and
Logistics Ltd (ESRS.BO / ESRS IN)
INITIATION
Merchant cargo addition to diversify earnings
■
Initiate with OUTPERFORM rating: ESRS is the second-largest private
port operator in India and is set to more than double its port capacity in the
next two years. In the shipping business, ESRS operates its own ships and
rigs. We initiate on ESRS at OUTPERFORM with a target price of Rs108.
■
Strong expansions supported by long-term contracts. Essar Shipping
and Essar Ports are both at an inflection point currently and we expect steep
earnings growth in the next two years. The consolidated earnings should
grow at a CAGR of 110% over the next two years as contracted volumes at
the ports ramp up and new ships and rigs are deployed. The cyclicality is
reduced due to the presence of long-term take-or-pay contracts with the
Essar group companies. Essar Ports is now planning to grow beyond the
group expansion by tapping the merchant traffic. Merchant volumes are
expected to increase to one-fourth in the next three years from nil currently.
■
Upcoming demerger should lead to value unlocking. ESRS has obtained
approvals to be split into Essar Ports and Essar Shipping. We believe Essar
Ports should get more earnings visibility post demerger. Currently, we value
only one-third of incremental capacity as the concession agreement and
forest clearance is pending for Hazira II, Salaya and Paradip coal terminal. If
we were to include these, they would add Rs12 to our target price.
■
Ports account for 70% of our target price. We value the ports and
shipping businesses on FY13 earnings as the take-or-pay contracts with
group companies reduce near-term cyclicality. We value the ports business
at a regional port average multiple of 16x PE for FY13 and the shipping
business at 9x FY13 PE to derive our target price of Rs108. The reported
ROE is low as the oilfield acquisition in FY09 was paid through share
issuance and a goodwill of US$800 mn was created. Adjusted ROE in FY13
would be 11%.
Merchant cargo addition to diversify
earnings
Ports: capacity to double + shift to merchant cargo
Essar Ports is the second largest private port in India handling 40 mt volumes and is on its
way to more than double port capacity in the next two years to 158 mt. Volume ramp up at
the port has been steep due to the strong support of captive volumes from the Essar
group. We expect a traffic CAGR at the Essar Ports of 38% over the next two years
compared to volume growth of 10% for the major ports. The volume ramp up would further
accelerate as the port is now also focussing on tapping merchant cargo to grow beyond
group expansion. The merchant cargo volumes are expected to increase to almost onefourth
in the next three years from almost nil currently.
Currently, both Vadinar and Hazira ports operate under a take-or-pay contract with the
group companies. These are long-term contracts that are valid for 15 years. These inhouse
contracts are determined at arms length and are benchmarked with major ports.
Despite pricing being closer to major ports, Essar Ports have the highest margin among
the Indian ports. As merchant volumes ramp up, the margins should further improve as
merchant pricing at Hazira is 10% higher than contract pricing and 20% higher at Salaya.
Shipping: expansion across the fleet
The shipping business comprises three divisions: 1) Sea transportation, which provides
crude oil and dry bulk transportation services, 2) Surface logistics, which provides logistics
services from ships to ports, lighterage services and 3) Oilfield services, which provide
contract drilling services to oil and gas companies. The majority of clients for sea
transportation and surface logistics are group companies while almost 95% of the
revenues in the oil field services come from external customers.
Essar Shipping is expanding its fleet capacity across the three divisions. The fleet capacity
in sea transportation would expand by 64% in the next two years to 2.4 mn DWT. Oilfield
services, on the other hand, will almost double its capacity with the addition of two jack-up
rigs. As a result of the expansions, we expect a total earnings CAGR for Essar Shipping of
66% over the next two years. We have assumed the current rates to persist for the next
two years, and if day rates pick up, then our estimates have upside risk.
Initiate with OUTPERFORM; target price Rs108/share
Essar Shipping and Essar Ports are both currently at an inflection point and we expect
steep earnings growth in the next two years. Consolidated earnings should grow at a
CAGR of 110% over the next two years as contracted volumes at the ports ramp up and
new ships and rigs are deployed. We are comfortable valuing the port business on FY13
as the take-or-pay contracts with the group companies assure a strong volume ramp up.
Similarly, we value shipping on FY13 as long-term contracts on sea transportation reduce
near-term cyclicality. We value the ports division at the regional port multiple of 16x P/E for
FY13 and the shipping division at 9x FY13 PE to arrive at target price of Rs108. We have
not built in upside from Hazira II, Salaya and Paradip coal terminal, as the concession
agreement for the first two and forest clearances for Salaya and Paradip are pending.
Demerger into ports and shipping will provide investors with the option of either Essar
Ports or Essar Shipping, an option unavailable in the integrated company so far. The port
business has now turned profitable and has sufficient scale to be separated into a
standalone entity. Thus, we expect port earnings to gain more visibility post the demerger.
ESRS has obtained all the approvals but the record date has not been announced.
Leverage at both ports and shipping is high, but we are comforted by the long-term nature
of the contracts in both divisions. We do not expect equity dilution for the expansions as
internal cashflow is likely to be sufficient to fund equity capex
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Essar Shipping Ports and
Logistics Ltd (ESRS.BO / ESRS IN)
INITIATION
Merchant cargo addition to diversify earnings
■
Initiate with OUTPERFORM rating: ESRS is the second-largest private
port operator in India and is set to more than double its port capacity in the
next two years. In the shipping business, ESRS operates its own ships and
rigs. We initiate on ESRS at OUTPERFORM with a target price of Rs108.
■
Strong expansions supported by long-term contracts. Essar Shipping
and Essar Ports are both at an inflection point currently and we expect steep
earnings growth in the next two years. The consolidated earnings should
grow at a CAGR of 110% over the next two years as contracted volumes at
the ports ramp up and new ships and rigs are deployed. The cyclicality is
reduced due to the presence of long-term take-or-pay contracts with the
Essar group companies. Essar Ports is now planning to grow beyond the
group expansion by tapping the merchant traffic. Merchant volumes are
expected to increase to one-fourth in the next three years from nil currently.
■
Upcoming demerger should lead to value unlocking. ESRS has obtained
approvals to be split into Essar Ports and Essar Shipping. We believe Essar
Ports should get more earnings visibility post demerger. Currently, we value
only one-third of incremental capacity as the concession agreement and
forest clearance is pending for Hazira II, Salaya and Paradip coal terminal. If
we were to include these, they would add Rs12 to our target price.
■
Ports account for 70% of our target price. We value the ports and
shipping businesses on FY13 earnings as the take-or-pay contracts with
group companies reduce near-term cyclicality. We value the ports business
at a regional port average multiple of 16x PE for FY13 and the shipping
business at 9x FY13 PE to derive our target price of Rs108. The reported
ROE is low as the oilfield acquisition in FY09 was paid through share
issuance and a goodwill of US$800 mn was created. Adjusted ROE in FY13
would be 11%.
Merchant cargo addition to diversify
earnings
Ports: capacity to double + shift to merchant cargo
Essar Ports is the second largest private port in India handling 40 mt volumes and is on its
way to more than double port capacity in the next two years to 158 mt. Volume ramp up at
the port has been steep due to the strong support of captive volumes from the Essar
group. We expect a traffic CAGR at the Essar Ports of 38% over the next two years
compared to volume growth of 10% for the major ports. The volume ramp up would further
accelerate as the port is now also focussing on tapping merchant cargo to grow beyond
group expansion. The merchant cargo volumes are expected to increase to almost onefourth
in the next three years from almost nil currently.
Currently, both Vadinar and Hazira ports operate under a take-or-pay contract with the
group companies. These are long-term contracts that are valid for 15 years. These inhouse
contracts are determined at arms length and are benchmarked with major ports.
Despite pricing being closer to major ports, Essar Ports have the highest margin among
the Indian ports. As merchant volumes ramp up, the margins should further improve as
merchant pricing at Hazira is 10% higher than contract pricing and 20% higher at Salaya.
Shipping: expansion across the fleet
The shipping business comprises three divisions: 1) Sea transportation, which provides
crude oil and dry bulk transportation services, 2) Surface logistics, which provides logistics
services from ships to ports, lighterage services and 3) Oilfield services, which provide
contract drilling services to oil and gas companies. The majority of clients for sea
transportation and surface logistics are group companies while almost 95% of the
revenues in the oil field services come from external customers.
Essar Shipping is expanding its fleet capacity across the three divisions. The fleet capacity
in sea transportation would expand by 64% in the next two years to 2.4 mn DWT. Oilfield
services, on the other hand, will almost double its capacity with the addition of two jack-up
rigs. As a result of the expansions, we expect a total earnings CAGR for Essar Shipping of
66% over the next two years. We have assumed the current rates to persist for the next
two years, and if day rates pick up, then our estimates have upside risk.
Initiate with OUTPERFORM; target price Rs108/share
Essar Shipping and Essar Ports are both currently at an inflection point and we expect
steep earnings growth in the next two years. Consolidated earnings should grow at a
CAGR of 110% over the next two years as contracted volumes at the ports ramp up and
new ships and rigs are deployed. We are comfortable valuing the port business on FY13
as the take-or-pay contracts with the group companies assure a strong volume ramp up.
Similarly, we value shipping on FY13 as long-term contracts on sea transportation reduce
near-term cyclicality. We value the ports division at the regional port multiple of 16x P/E for
FY13 and the shipping division at 9x FY13 PE to arrive at target price of Rs108. We have
not built in upside from Hazira II, Salaya and Paradip coal terminal, as the concession
agreement for the first two and forest clearances for Salaya and Paradip are pending.
Demerger into ports and shipping will provide investors with the option of either Essar
Ports or Essar Shipping, an option unavailable in the integrated company so far. The port
business has now turned profitable and has sufficient scale to be separated into a
standalone entity. Thus, we expect port earnings to gain more visibility post the demerger.
ESRS has obtained all the approvals but the record date has not been announced.
Leverage at both ports and shipping is high, but we are comforted by the long-term nature
of the contracts in both divisions. We do not expect equity dilution for the expansions as
internal cashflow is likely to be sufficient to fund equity capex
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