Indian port sector Time to take stock of the situation ::Macquarie Research,

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Indian port sector
Time to take stock of the situation
Event
􀂃 We hosted Mr Rohit Chaturvedi, head of CRISIL's transport advisory services
for a call recently. While ports have emerged as one of the
few attractive opportunities in the infrastructure space, there are challenges
like competition for assets and slow progress on major port expansions. We
would like to caution against unbridled optimism regarding the space, given
project execution and traffic stabilisation takes a long time.
Impact
􀂃 Large opportunity driven by resource imports: Volume at Indian ports is
expected to increase at a 9% CAGR over next 4-5years, driven primarily by
coal and crude oil imports. Slow capacity expansion at major ports further
provides an opportunity for higher traffic growth at minor ports. Minor ports’
share of traffic is expected to increase from 36% in FY11 to 46% by FY16.
􀂃 Project award especially at major ports continues to be stuck: The
government’s National Maritime Development Program (NMDP) has led to
addition of only 270mn tons port capacity from FY08-11 (v/s total target of 1bn
tons from FY08-12). Poor connectivity, a lack of evacuation facilities and legal
issues has significantly slowed capacity addition at major ports.
􀂃 Competition for assets heating up, potentially driving down longer term
returns: Due to limited bidding opportunities, developers have been
aggressive in bidding even for regulated-return projects at major ports (PSA -
ABG offered 51% revenue share at JNPT’s 4th container terminal. Some
state governments have started moving away from negotiation route to
bidding model as demand for port assets remains high.
􀂃 Cash flow certainty driving port stocks’ performance; watch out for
excesses: Port stocks have done much better than other infra names over
the last one year, given greater certainty of cash flows. We are concerned that
the perceived ease in raising capital could lead to irrational bidding by players,
significantly lowering returns, similar to the power and highways sectors.
􀂃 Regulatory issues driven by turf-war between federal and provincial
governments: Recently, the Ministry of Shipping proposed to create a
common regulator for major and minor ports, but provincial governments are
against this proposal. Though the proposed regulation has a provision to
declare a minor port into a major port, it needs to be ratified by the parliament
and would also involve a long-drawn legal battle.
􀂃 Containerisation driven by economics; Mundra and Pipavav now viable
alternatives to JNPT: With rise in value, several commodities like iron ore
are now transported in containers vs cargo earlier. Mundra and Pipavav ports,
despite higher charges, have become viable alternates to JNPT, due to a lack
of handling capacity at JNPT, and their quicker turnaround and proximity to
the consuming markets of North India.
Outlook
􀂃 Excess competition warrants caution, GPPV top pick: While we see
strong volume growth potential for Indian ports, excess competition, especially
in the bulk space, warrants caution. GPPV is leveraged to growth in container
volumes on the West coast of India and we forecast strong FCF starting
CY11. While we like Mundra port’s core Indian assets, we remain cautious on
its overseas investments due to a lack of clarity.