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.