Essar Ports :: Analysis of Jun-q cargo volumes ::JPMorgan

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Essar Ports
Overweight
ESRS.BO, ESRS IN
Analysis of Jun-q cargo volumes



Promise  to  ‘take  or  pay’  is  all  set  to  get  tested  in  Jun-q  post  weak  cargo
volumes at Hazira. We estimate 118% qoq PAT growth in 1Q following T/P
guidelines  applicable  for  FY12.  An  in-line  or  superior  set  of  results  could
reduce investor concerns around inter-group contracts.
 Essar  Oil  throughput  continues  at  high  rate. Essar  Oil  (covered  by
Pradeep Mirchandani) reported throughput of 3.62MMT in Jun-q, implying
a  utilization  of  135%.  As  per  our  O&G  team,  the  refinery  expansion  to
18MTPA  remains  largely  on  track,  with  the  company  planning  a  35  day
shutdown starting 18th Sep to integrate most new units. Start up activity of
the new units is expected to begin ~Dec-11. In light of this there appears to
be limited downside risk to our FY12 est. of 14.5MTPA each of crude and
product handling  at  Vadinar  Port. The  port accounts  for  62%  of  FY12
consol  EBITDA  estimate. ~77%  of  Vadinar  Port’s  revenue  is  assured
through take-or-pay contracts for storage or crude/products.
 Weak  volumes  at  Hazira,  take-or-pay  will  be  tested  in  Jun-q. Hazira
handled  2.8MMT  of  cargo  in  Jun-q,  well  below quarterly  run-rate  of
4.5MMT implied  by  T/P  agreement  with  Essar  Steel.  We  had  anticipated
delays  in  ramp-up  at  Essar  Steel  and  our  full-year estimates  assume  T/P
volumes for revenue calculation.
 Revised  T/P  contracts  to  drive  strong  growth  in  Jun-q:  Using  actual
throughput  for Vadinar Port and T/P guidelines we estimate Jun-q  revenue
of Rs2.7bn, up 41% qoq. We expect EBITDA margins to improve to ~76%
(up ~320bps YoY) as lighterage expenses are no longer required at Hazira.
We est. Jun-q PATAMI of Rs297mn, implying a 118% growth qoq.
 Reiterate OW and Mar-12 PT of Rs135. Essar Ports is trading at 9x FY13
EV/EBITDA  despite  our estimate  of 37% EBITDA CAGR over FY11-15.
The  markets  appear  to  be  sharply  discounting  the  company's  ability  to
execute  under  construction  projects  (~70MTPA  capacity)  and  secure
pending  environmental  clearances. Any  dilution  of  T/P  contract terms is  a
key  downside  risk  and  could  raise  investor  concerns  on  inter-group
transactions and lead to a further stock derating.