Ports - A port of entry; sector update:: Edelweiss, PDF link

The Indian ports sector is on the cusp of a renewed growth phase largely due to an intense focus on transportation economics, legacy issues at government-owned ports, and rising demand for minerals and goods. Besides, Indian GDP has a subtle linkage to global trade; hence, we expect the weakening global economy to have a muted impact on the country’s cargo growth. With capacity addition at major ports lagging due to delayed approvals/bid-outs by the government, more proficient private ports are reaping the benefits. Initiate coverage on Essar Ports with ‘BUY’, Gujarat Pipavav Port with ‘REDUCE’ and maintain our ‘BUY’ recommendation on Adani Ports.

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Soaring consumption to steer port capacity addition

Seaborne trade accounts for ~90% of global trade in terms of volume (~70% in value) due to its cheap economics. Typically, port traffic grows at 1.5-2.0x of the GDP growth rate which India has not realised so far on a sustained basis. Even in its best growth decade between 2002 and 2012, cargo grew by only ~9.2% (CAGR) compared to the average GDP growth of ~7.7. However, a largely import-driven trade coupled with higher containerisation offers vast growth prospects which could be enhanced further by a rising bulk cargo trade and increase in vessel sizes. With mere 1.1bn tonnes port capacity, India is expected to see sustained growth in port demand and, therefore, capacity addition triggered by soaring consumption of imported fuel/minerals as well as general cargo (led by container cargo growth).

Private sector, minor ports to chart growth map

Due to higher handling costs, ocean transportation in India is ~70% more expensive than the US, according to a study by McKinsey. This can be ascribed to higher capacity utilisation at government-owned ports (at ~80% plus) and the resultant longer turnaround time (~2-3x of international benchmarks), though India’s private sector ports are far more efficient. Thus, the private sector is expected to take lead in driving government’s ambitious target of more than doubling port capacity to 2.7bn tonnes from 1.1 bn tonnes through a mix of greenfield projects as well as brownfield expansion (terminals) in existing ports.

Outlook: Robust potential; initiate coverage on Essar Ports, GPPL

We believe that the Indian port sector will create greater investment opportunities due to its massive growth prospects, a decoupled model (muted impact from volatile global trade), scope for efficiency improvement, and a potentially large captive consumer base. Regulatory intervention and delay in approval/clearances are major risks. Based on current valuations we initiate coverage on Essar Ports with ‘BUY’ recommendation (TP of INR 110/share), Gujarat Pipavav Port  with ‘REDUCE’ recommendation (TP of INR43/share) and maintain ‘BUY/SO’ recommendation/rating (TP of 158/share) on Adani Ports.

Ports - A port of entry; sector update