Infrastructure India More data points on Abbot Point port reassuring. ::Kotak Sec

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Infrastructure
India
More data points on Abbot Point port reassuring. We believe the current concerns
on MPSEZ revolve around the AUD1.8 bn acquisition of Abbot Point coal terminal. A
more detailed look at additional data points on the port reassures our conviction that the
acquisition is unlikely to be a value-losing deal as (1) recent rail link increases visibility of
additional business, (2) there are long-term established take-or-pay contracts, (3) there is
evidence of incremental mining plans. Reiterate our BUY rating on MPSEZ. Upgrade GPPL
to ADD (from REDUCE) on recent sharp correction as most risks get priced in.
Concerns possibly focused on Abbot Point – we revaluate and still come out reasonably assured
We believe MPSEZ’s AUD1.8 bn acquisition of Abbot Point coal terminal T1 in April 2011 is
unlikely to be a value-losing deal. Several factors/developments that reinforce this conviction are:
�� Recent opening (Dec 19) of the Goonyella rail link brings visibility of incremental business – Rio
Tinto and others have signed incremental rail take-or-pays for 9 MT in the past few days.
�� A government transaction document suggests that take-or-pay contracts are for full 50 MT (FY
ending June 2016), are long-term (majority minimum 15 years) and have no conditions
precedent (such as mining or rail) and provide full revenue visibility.
�� Evidence of incremental coal mining plans in Bowen basin on which Abbot Point T1 depends.
�� Abbot Point may be developed to 320 MT (T2-T7) out of which an additional 110 MT have
already been awarded, but that depends on Galilie basin (Adani, GVK-Hancock, company
owned by Mr. Clive Palmer mines are 495 km away) development; nevertheless T1 would have
a large margin of safety as the first operational asset.
�� Other comforting factors are (1) direct transparent transaction with government, (2) long-term
assets, providing flexibility (compared to relatively short road contracts in India) and (3) already
operational assets (handled volumes of 15 mn tons in FY2011; expect sharp jump from Jan ’12).
�� Refinancing may be a catalyst – It may be possible to refinance without equity investment
(based on letter of comfort, security of physical assets and bankable take-or-pay contracts).
Reiterate BUY on MPSEZ with a revised target price of Rs155
We revise our estimates on MPSEZ to Rs5.8 and Rs8.6 from Rs5.8 and Rs9.3 for FY2012 and
FY2013 respectively. Revision is based on slightly lower volume from Tata and Adani Power,
advance capex schedule (incremental container, bulk assets). Reiterate BUY with a revised target
price of Rs155 (from Rs175) based on (1) relatively acyclical business, (2) strong cash-flow
generation asset and (3) resilient competitive advantage from large operational asset. MPSEZ
trades at 10.9X EV/EBITDA and 3.9X P/B (for likely 30% unadjusted RoE).
Upgrade GPPL to ADD on recent sharp correction; most concerns likely to be already priced in
We upgrade GPPL to ADD (from REDUCE) with a revised TP of Rs63 (from Rs67) as (1) the recent
sharp correction (20% since end-Oct 2011) provides upside, (2) most concerns related to slowerthan-
expected volume growth and margin expansion seem to be already priced in, and (3) there is
potential upside from liquid volumes (from CY2013 onwards) not built into estimates.
We are positive on the business based on (1) attractive asset profile with good cash-flow
generation characteristics, (2) pick-up in container and bulk business operations with addition of
several new shipping lines, (3) improved balance sheet quality with lower debt levels post IPO and
(4) long-term potential to add capacity at the Pipavav port led by availability of a large waterfront.


Recent opening of Goonyella rail link brings visibility on incremental business
On December 19, QR National opened a new 69 km rail link between the Bowen basin and
Abbot Point, called the Goonyella to Abbot Point (Gap) rail line. Following the opening of
this line, two contracts have been signed between miners and rail operators to haul coal to
the Abbot Point terminal adding to the port’s volume visibility. These contracts are (1) Rio
Tinto signed a contract with QR National to transport 3 mtpa of coal from the Bowen basin
to Abbot Point terminal starting from Jan 2012 and (2) Australian private-sector domestic
coal producer Jellinbah Resources has signed a 10-year contract to haul up to 6 mtpa from
the Lake Vermont coal mine in the Bowen basin, to Abbot Point from Jan 2012. The Lake
Vermont contract will start with 2 mtpa next year and gradually increase to 6 mtpa by 2015.


Established take-or-pay contracts assure volumes of 50 mn tons in FY2016
Authoritative presentation by bankers (Rothschild, RBS and ML) that helped the Australian
government in the deal established following points about the take-or-pay contracts:
�� Take-or-pay contracts for 50 mn tons in FY2016. APCT signed take-or-pay contracts
for 20 mn tons in FY2011, gradually rising to 50 mn tons in FY2016.
�� No conditions precedent. There are no conditions precedent in the User Agreements
relating to external events such as mining developments or the availability of rail capacity.
�� Agreements are full take-or-pay. Users pay for the contracted capacity regardless of
whether coal is actually transported through APCT (subject to the Terminal owner not
being primarily at fault).
�� Agreements are long-term. All User Agreements (other than one short-term agreement)
have an initial term of at least 10 years, with the majority having a minimum term of at
least 15 years commencing on or after 2012.
�� Pricing recovery is faster. Even though utilization ramps-up to 50 mn tons capacity till
FY2016, the pricing regime in the User Agreements allows for recovery of the X50 capital
expenditure from July 1, 2012.


Big plans to expand Abbot Point terminal to 320 mn tons much beyond MPSEZ’s
50 mn tons, underlining the demand
The terminal (X50) leased to MPSEZ is only one of the terminals at the port and two
additional terminals are being planned at the same location with similar capacity, and four
more are in early stages of planning.
In April 2010, ‘preferred developer’ status was awarded to two more companies,, (1) BHP
Billiton for the T2 Terminal—plan to export up to 50 mtpa and (2) Hancock Coal Pty for the
T3 Terminal—plan to export up to 60 mtpa. Construction of these assets may commence in
2013 or so. Considering two years for construction to start (clearances are after awarding
preferred developer status) and another two to three years for completion, these assets may
not be ready before 2015-16 and till then Mundra’s Abbot Point terminal would have
advantage of being the only ready facility.


Despite these three assets, the government expects unmet demand for coal export facilities
at Abbot Point and that is why four more terminals are planned. The EOI process for these
additional four terminals is in progress. After this, clearances would be taken for
environment etc and the construction will start in 2015. Mundra may not take interest in
these as per our discussion.
Likely to be port of choice for Galilee basin coal resource as well; but present
asset does not depend on this
Galilee basin, where Adani Enterprises has bought coal mines from Linc Energy (AUD 3 bn),
is about 495 km away. Other companies that have large assets in this basin are Hancock
Coal (Alpha and Kevin Corner project – about 6 bn tons resource) and a company owned by
Mr. Clive Palmer (reportedly has a deal to export coal to China worth US$60 bn over 20
years). All the three companies plan to have separate rail links to the Abbot Point terminal
but they may agree on a common-user infrastructure.
Adani Energy’s Linc coal mines also have about 7-8 bn tons of resources. Adani had paid
US$455 mn upfront and the rest in royalties to acquire the asset. Adani may be able to mine
50-60 mn tons a year at peak from this mine. Royalty payment is AUD2/ton.
As per the Australian government plan, it seems Abbot Point is the designated terminal for
coal exports from Galilee basin. Galilee basin does not produce anything currently with only
Hancock digging out the first test truck recently from there.
Four bidders were in the fray, with one bid above MPSEZ’s bid
Contenders for the Abbot Point terminal were the Adani group, Canada's Brookfield
Infrastructure, Newcastle coal baron Mr. Nathan Tinkler and a Macquarie Bank consortium.
Queensland finance minister, Ms Rachel Nolan, said in an interview that Mr. Tinkler’s bid
was above Adani’s bid (i.e. at AUD1.9 bn against Adani’s AUD1.83 bn) but the government
chose not to consider that as the higher bid was made after bids had closed. This level was
well above the government’s initial expectations of AUD1.5 bn.
Refinance deal may be announced by mid-Jan; Mundra Port may not need to
put in equity
We believe that it may be possible for MPSEZ to refinance the acquisition through debt
without any equity investment (based on letter of comfort, security of physical asset and
bankable take-or-pay contracts).
The Australian tax structure does not allow tax deductibility of interest, if the capital
structure uses more than 75% debt on the part of debt that is above the 75% norm. This
clause may prompt MPSEZ to consider putting in some equity. However rough sense would
be that tax disadvantage on excess portion of debt in Australia is likely to be a much smaller
cost than the cost of putting that capital from India as equity. So, it may still go ahead with
100% debt. Letter of comfort from MPSEZ may be given, which is not formally a guarantee
but is widely relied on.
Asset may be self funded in four to five years and may not be a cash sink
We believe that if the asset generates AUD305 mn of revenues and EBITDA of AUD213 mn
in FY2016 (based on 50 mn tons of handled volumes and EBITDA margin of 70%), then the
port can be self funded in Australia itself. The Indian entity would not need to incur debt on
itself to finance the asset. The management said the company raised a mezzanine debt at
Libor + 200 bps or so and does not envisage equity investment from the parent in the asset.
This would be replaced with full term debt based on asset cash flows in about two years
from now.


Prima facie NPV of about AUD280 mn (Rs6/share)
Based on our rough valuation we arrive at a prima facie value of about AUD277 mn (about
Rs7/share for MPSEZ) for the investment. Key assumptions in our valuation include:
�� Volumes. Volumes of 20 mn tons in FY2011 and ramping up to 50 mn tons in FY2016,
leading to revenue of AUD305 mn and EBITDA of Rs213 mn (in line with the company’s
press release). Volumes remain constant post that. We have assumed 2% inflation in
revenue and costs throughout the life of the lease agreement. While the asset can
eventually be expanded to 80 MT, we have retained our volume assumptions at 50 MT
through the life of the asset.
�� Capital structure. We have assumed debt of AUD1.8 bn, interest cost of 3% in the first
two years (US Libor + 200 bps) and 7% thereafter (Australian 10 year yield of 5.5%
currently) with debt repayment of 15 years, starting from FY2016. We have not built in
any other capex to reach volumes of 50 MT.
�� Depreciation. We have assumed that AUD1.8 bn is depreciable gross block. We have
used a depreciation rate of 3.3% and tax rate of 30%. The tax rate may be lower
depending on corporate structuring possibilities.
�� Value is based on free-cash-flows to equity till FY2040.