India Ports_Gateways to India

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Important disclosures can be found in the Disclosures AppendixAll rights reserved. Standard Chartered Bank 2011 http://research.standardchartered.com

l Equity Research l India l Infrastructure l 17 June 2011

India portsGateways to India

Our analysis of India’s infrastructure investment opportunities brought forth a major surprise. Our qualitative andquantitative parameters favour neither roads nor airports, but rather, ports, and in particular, private sector ports.We found out that, unlike other infra segments, private ports operate within a benign regulatory environment, besidesweak competition, supportive tariff flexibility, high entry barriers, healthy cash flows and strong cargo growth drivers.

Demand for port infrastructure is driven by the 3Cs: coal, containers and crude. We believe huge coastal coal-fired power plants – we project new capacity of 30GW in the next five years – and new cement/steel units willrequire coal imports of 358m tonnes per year. Container infra demand is rising as usage increases and currentports reach capacity. So, too, crude demand is fuelled by rising economic growth. We expect a surge in coalimports at 20% CAGR, containers at 13% and crude at 6% over FY11-17. Against this compelling growthbackdrop, our study shows capacity at public ports will fall far short of demand. We expect private ports to step

into the gap. We identified our top picks, Essar Ports and MPSEZ, using our eight-factor strategic rating scorecard. Essar Ports

rates strongly for its captive demand and significant valuation upside, while MPSEZ scores for high traffic growth,operational excellence and strong execution capability. Marg is a high-risk, high-return play with high traffic growthbut high leverage. GPPL has strong management and operational/financial leverage but limited valuation upside.

Mkt cap Price PT EPS (Rs) EPS CAGR (%) P/E (x) EV/EBITDA (x)Ticker Rec (US$bn) (Rs) (Rs) FY12E FY13E FY11-14E FY12E FY13E FY12E FY13E

MPSEZ MSEZ IN OP 6.3 152 201 5.8 8.0 35 26 19 18 14Essar Ports ESRS IN OP 0.9 106 190 3.4 7.4 131 31 14 14 10GPPL* GPPV IN IL 0.6 64 71 1.0 2.1 70 64 30 20 15Marg MRGC IN OP 0.1 96 163 7.7 9.2 65 13 10 10 7*FY12E corresponds to CY11E and so on. Share price as of 16 June 2011.Source: Company, Bloomberg, Standard Chartered Research estimates

Gaurav [email protected]+91 22 6755 9674

Shashikiran [email protected]+91 22 6755 9764



India ports l 17 June 2011

l Equity Research l 2

SCout is Standard Chartered’s premium equity researchproduct that offers S trategic , Collaborative , Original ideas on Universal and Thematic opportunities

Contents

Investment summary 3

Valuations not factoring in growth 5

Sustainable, strong earnings growth 6

Cash earnings significantly higher than reported profit 7

Inexpensive on market value and replacement value 8

India comparative valuation 10

Global comparative valuation 11

Ports: preferred infrastructure investment 12 Benign regulatory environment 13

Maritime Agenda projects 11% cargo growth over FY11-20 13

Captive ecosystem to drive cargo growth at minor ports 14

Growth riding on 3Cs – coal, containers and crude 15 3Cs as traffic driver 15

Increasing containerisation 16

High utilisation here to stay 17 Capacity addition at major ports not keeping pace 17

Capacity addition at private ports just meeting current requirements 18

Minor ports benefiting from weakness at major ports 19

Container capacity lagging demand 19 Strategic rating scorecard 22

Qualitative scorecard 22

Quantitative scorecard 25

Appendix 27

Company section

Mundra Port and Special Economic Zone 30

Essar Ports 43

Gujarat Pipavav Ports 52

Marg 62





Investment summaryPrivate sector ports – most preferred India infrastructure investment. In our detailedproprietary analysis of India’s infrastructure investment opportunities, private ports score muchbetter than other infrastructure sectors on most parameters. Private ports benefit from a benignregulatory environment as they are regulated by state governments that have been encouragingport investments through progressive policies. The competitive scenario, too, is much better asinefficient government ports struggle to add capacity. Unlike other sectors, private ports havegreater flexibility and certainty in charging tariffs. The sector has high entry barriers and offersscalability and natural first-mover advantages.

Fig 1 – Private ports score strongly when compared with other infrastructure investmentsCriterion Ports (private) Roads (BOTs) Power Airports (BOTs)Regulatory environment Strong Medium Medium WeakEntry barriers Strong Weak Medium Strong First mover advantage Strong Weak Medium Strong

Competition Strong (low) Medium Medium Strong Tariff flexibility Strong Weak Weak Weak Traffic growth Strong Strong Weak StrongScalability Strong Medium Weak MediumRate of returns Strong Medium Medium WeakSource: Standard Chartered Research

3Cs – coal, crude and containers – to drive traffic growth. Containers, crude and coalcurrently form 67% of India’s total cargo traffic and are likely to continue to be the key growthdrivers, going forward. Private ports have been especially strong in attracting crude importdemand. While the petroleum, oil and lubricants (POL) segment mainly drove cargo traffic overFY04-10, we believe coal will be the main driver in future. We expect 20% coal cargo traffic

CAGR over FY11-17, given that 30GW of coal-fired power generation capacity will come on lineduring FY12-17, which would require imported coal.

Fig 2 – Key drivers of traffic growthCargo demand (m tpa) CAGR

(%)Non-major/ private port

cargo (m tpa)CAGR

(%)Cargo type Key driverFY11 FY14E FY17E FY11-17E FY11 FY14E FY17E FY11-17E

Coal30GW of coal-firedcapacity coming upover FY12-17

119 223 358 20 46 116 218 30

Crude +POL

60m tpa of refinerycapacity additionover FY12-17

340 405 482 6 152 208 267 10

ContainersGrowing economyIncreasing

containerisation

131 189 273 13 22 41 68 21

Others Iron-ore/ fertiliser/ agriculture 310 423 535 10 74 107 149 12

Total cargohandled 899 1,240 1,648 11 294 471 702 16

Source: Standard Chartered Research estimates

High capacity utilisation here to stay – overcapacity not a concern. Our analysis of capacityadditions suggests there is little need for concern about overcapacity. Capacity utilisation at majorports is 88%, with those on the west coast significantly over-extended – Mumbai, JNPT andKandla are running at 125%, 100% and 96% utilisation. Even a moderate estimate of 11% cargogrowth over FY11-17 would require a 2x capacity increase. Nevertheless, our study showsgovernment ports lag demand requirements while private ports just about meet the demand. Weexpect major ports to run at >90% utilisation over FY11-17 and private ports to run at 70-80%.

Private ports score better than other infrastructure assets on all counts

11% cargo CAGR over FY11-17E driven by 3Cs. Non-major ports to corner major share





Strategic rating scorecard. We introduce our proprietary scorecard, which evaluates companiesusing four qualitative and four quantitative parameters. Our structured assessment takes in acompany’s intrinsic strengths and weaknesses, with an eye on long-term growth potential.

Our four qualitative parameters are: 1) Location; 2) Ecosystem; 3) Competition; and 4) Parentage.

Our four quantitative parameters are: 1) Capacity – Buffer and Efficiency; 2) Execution Capability;3) Traffic Growth; and 4) Financial Strength – Cash Flow and Balance Sheet.

We used a four-point scorecard: 4 – Very Strong; 3 – Strong; 2 – Medium; and 1 - Weak. Ourscorecard shows that MPSEZ has the best long-term growth potential; it scored 26 out of 32points. Next comes Essar Ports (24), followed by GPPL (18) and Marg (15).

Fig 3 – Assessing ports – MPSEZ and Essar Ports score highLocation Ecosystem Competition Parentage Capacity Execution Traffic

growthFinancialstrength

OverallScore

MPSEZ 3.1 3.0 3.0 3.0 3.5 4.0 3.0 3.5 26.1Essar Ports 2.5 3.1 3.0 3.0 2.5 3.0 4.0 2.5 23.6GPPL 2.5 1.3 2.0 4.0 2.0 2.0 2.0 2.5 18.3Marg 2.5 1.7 2.0 1.0 1.5 2.0 3.0 1.5 15.2Source: Standard Chartered Research estimates

Our top picks are MPSEZ and Essar Ports. We favour MPSEZ (MSEZ IN, PT Rs201) for itsstrong traffic growth, location/scale advantages and bulging ecosystem. We believe its valuationhas not factored in long-term growth potential. Essar Ports (ESRS IN, PT Rs190) benefits fromlocational advantage and strong demand from group companies. It is significantly under-valued,in our view.

Marg (MRGC IN, PT Rs163) is a small-cap, high-risk, high-return play. While we find the stock

accessible at attractive valuations, we do not like the fact that the company is over-leveraged andcritically dependent on high growth in cargo volume (coal-driven) and a substantial pick-up in realestate projects. We find Gujarat Pipavav Ports (GPPV IN, PT Rs71) an interesting play on operatingand financial leverage. It promises strong container traffic growth and has excellent parentage in theAP Moller Maersk group. However, we do not think it offers enough valuation upside.

MPSEZ a clear winner on asset quality





Valuations not factoring in growthDespite expensive near-term multiples, we believe the stocks look attractive, as currentvaluations do not factor in strong potential earnings growth. We present below the operationaland earnings drivers that support our positive sector view.

Sustainable, strong earnings growth

Sector traffic growth is significantly high, driven by the 3Cs – coal, crude andcontainers. We expect MPSEZ, GPPL, Essar Ports and Marg to report 31%, 16%,22% and 33% traffic growth over FY11-17, respectively.

We expect 10-20% improvement in realisations over FY11-17 as traffic volumeincreases utilisation.

Cash earnings significantly higher than reported profit

Our estimates show cash EPS is 15-25% higher that book EPS.

Our estimates show cash RoEs are 10-20% higher than book RoEs.

Inexpensive in market value and replacement value

The sector trades at a modest EV/tonne of 1.5-2.5x on replacement value despitestrong traffic growth and high RoCE. Furthermore, the historical cost of construction issignificantly lower than replacement cost, leading to higher PB.

Valuation methodology – DCFE for port assetsWe use a sum-of-the-parts method to value the companies under our coverage. We value portassets using DCFE, summing up the discounted post-tax cash flow arrived during the concessionperiod. All other assets are valued independently.

We use port tariffs that are in line with existing tariff structures and assume 3% yoy tariff andcost escalation.

We estimate traffic growth in each cargo segment based on a port's dynamics. Pan India, weestimate FY11-17 cargo CAGR of 6% for crude, 20% for coal, 13% for container and 11%overall. We assume private ports will grow faster, with 16% CAGR during the period.

We use 13% cost of equity to discount cash flows for port assets. We put a 8.5% risk free rate,5% market premium and 0.9 as market beta. Given the low variability in project cash flows,our market beta is less than one.

We use different conglomerate discounts to factor in qualitative differences between the

companies to arrive at our price targets.The table below summarises our valuation and price targets for the companies, based onSOTP/DCF.

Fig 4 – SOTP valuation

CompanyCapacity

m tpa(FY14)

DCFEportsvalue

(Rs bn)

Otherassets

(Rs bn)

Totalvalue

(Rs bn)

Valuation /share (Rs)

Discount(%)

Pricetarget

(Rs)Comments

MPSEZ 285 391 33 424 212 5 20162% value contributed by 175m tonneMundra port; 50m tonne Abbot port and40m tonne Hazira contribute 14% each

Essar Ports 125 111 0 111 271 30 190 50% contribution from 40m tonne Haziraport and 28% from 45m tonne Vadinar port

GPPL 23 30 0 30 71 0 71 Single asset - Pipavav port 23m tpa byCY13

Marg 21 13 4 17 359 25 16372% contribution from 21m tonne Karaikalport. We are attaching a further 50%balance sheet leverage risk to Marg






Sustainable, strong earnings growthTraffic growth to be significantly highWe believe traffic growth is likely to remain strong, primarily driven by the 3Cs – coal, crude and

container. We expect MPSEZ, GPPL, Essar Ports and Marg to report 31%, 16%, 22% and 33%traffic growth over FY11-17E, respectively. We expect revenue and earnings growth to tracktraffic growth.

Fig 5 – Current traffic and traffic growth (m tonnes)

52 399 5

168

98

16 15

264

130

22 27

0

50

100

150

200

250

300

MPSEZ Essar Ports GPPL Marg

M T

FY11 cargo FY14E cargo FY17E cargo

Source: Companies, Standard Chartered Research estimates

Operating leverage likely to improve going forwardThe sector inherently has high EBITDA margins and benefits from economies of scale. Weexpect the ports to report EBITDA margin of around 50-70%, depending on cargo mix andcapacity utilisation. As traffic volume increases, we expect significant improvement in EBITDAdue to better realisation and utilisation.

Fig 6 – EBITDA/tonne of the ports

249

105134

156

263

145

187 177

272

174201 205

0

50

100

150

200

250

300


R s / M

T

FY11 EBITDA/MT FY14E EBITDA/MT FY17E EBITDA/MT Source: Standard Chartered Research estimates

Fig 7 – EBITDA margins

65 69

47 50

70 72

55 53

71 73

57 55

0

10

20

30

40

50

60

70

80


%

FY11 EBITDA margin FY14E EBITDA margin FY17E EBITDA margin


Traffic growth is likely

to remain strong

Inherently high EBITDA margins

EBITDA improvement from higher volume and mechanisation





PE and implied PEThe stocks look expensive on near-term P/E multiples, but factoring in strong, sustainableearnings growth we believe there is significant valuation upside. Essar Ports and Marg looksignificantly under valued on PEG (PE/earnings growth).

Fig 8 – PE and implied PE valuationCurrent Price PE (FY12E) PE (FY14E)

Company price (Rs) target (Rs) Current price Implied @PT Current price Implied @PTMPSEZ 152 201 26x 35x 14x 18xEssar Ports 106 190 31x 55x 11x 19xGPPL *** 64 71 64x 71x 22x 25xMarg 96 163 13x 21x 5x 8x*** For GPPL FY12E corresponds to CY11E and so on.


Fig 9 – PEG ratio (current and implied)Company PEG (FY12E)

Current price (Rs) Price target (Rs) @current price Implied @PTMPSEZ 152 201 0.7x 1.0xEssar Ports 106 190 0.2x 0.4xGPPL *** 64 71 0.9x 1.0xMarg 96 163 0.2x 0.3x*** For GPPL FY12E corresponds to CY11E and so on.


EV/EBITDA multiplesGiven the high interest and depreciation costs in the initial years, we believe EV/EBITDAmultiples give a better comparison on relative multiples.

Fig 10 – EV/EBITDA multiplesCompany Current Price EV/EBITDA

(FY12E)EV/EBITDA

(FY14E)EBITDA

CAGR

Price (Rs) Target (Rs) @currentprice

Implied@TP

@currentprice

Implied@TP FY11/14E

MPSEZ 152 201 18x 22x 11x 13x 47

Essar Ports 106 190 14x 19x 8x 10x 38

GPPL *** 64 71 20x 22x 12x 13x 39

Marg 96 163 10x 10x 6x 6x 40*** For GPPL FY12E corresponds to CY11E and so on.


Cash earnings significantly higher than reported profit

Given the higher depreciation in the initial years, cash earnings and the corresponding cashRoEs are significantly higher that book RoEs. We believe the sector should command premiumvaluations given the healthy cash flows.

Fig 11 – Cash EPS 15-25% higher that book EPSDiluted EPS (Rs) Cash EPS (Rs) Price to Cash EPS PT to Cash EPSCompany Current

price(Rs)

Pricetarget

(Rs) FY12E FY14E FY12E FY14E FY12E FY14E FY12E FY14E

MPSEZ 152 201 5.8 11.2 8.5 14.2 17.8 10.6 23.6 14.1Essar Ports 106 190 3.4 10.0 8.8 18.3 12.1 5.8 21.7 10.4GPPL *** 64 71 1.0 2.9 2.2 4.2 29.5 15.1 32.9 16.8Marg 96 163 7.7 20.0 32.9 93.5 2.9 1.0 5.0 1.7*** For GPPL FY12E corresponds to CY11E and so on.


Essar Ports and Marg look significantly under valued on PEG

Companies looking healthy on cash RoEs





Fig 12 – Cash RoE FY12-14E Fig 13 – RoE over FY12-14E

36

1612

24

37

2417

393826

19

53

0

10

20

30

40

50

60

MPSEZ EssarPorts

GPPL Marg

%

Cash RoE FY12E Cash RoE FY13ECash RoE FY14E

25

6 6 6

27

12 11

6

30

15 13 11

0

5

10

15

2025

30

35

MPSEZ EssarPorts

GPPL Marg

%

RoE FY12E RoE FY13E RoE FY14E

Source: Standard Chartered Research estimates Source: Standard Chartered Research estimates

Inexpensive in market value and replacement value

Despite strong traffic growth and high RoCEs, the sector trades at a modest EV/tonne of ~1.5-2.5x on replacement value of greenfield capacity, which ranges between Rs800/tonne andRs1,100/tonne.

Fig 14 – EV/tonne of installed capacity vs traffic growth over FY11-14E

2,232

1,267

2,629

2,156

8 7 3

1 , 9 2 6

1 , 5 7 5

1 , 8 6 1

48

36

21

44

0

500

1,000

1,500

2,000

2,500

3,000


R s / t o n n e

01020304050607080

%

EV/ ins talled capac ity (LHS) (FY12E) EV/ ins talled capacity (LHS) (FY14E)Traffic CAGR (RHS) (FY11-14E)


Furthermore, the sector trades at high PB multiples given that historical cost of construction issignificantly lower than replacement cost, particularly for MPSEZ. We believe the sector wouldcontinue to trade at premium PB multiples given high earnings growth, strong cash earnings andhigher replacement value.

Fig 15 – Gross block/tonne of installed capacity over FY12E/14E

984806

2,114

1,071811

698

1,125905

0

500

1,000

1,500

2,000

2,500


R s / t o n n e

Gross block/MT (FY12E) Gross block/MT (FY14E)


Sector trades at a modest EV/tonne of ~1.5-2.5x on replacement value

Sector likely to continue trading at premium PB multiples





Fig 16 – PB and implied PB valuationCurrent Price PB (FY12E) PB (FY14E)

Company price (Rs) target (Rs) @currentprice

Implied@PT

@currentprice

Implied@PT

MPSEZ 152 201 5.9x 7.8x 3.6x 4.7xEssar Ports 106 190 1.9x 3.3x 1.4x 2.6xGPPL 64 71 3.5x 3.9x 2.7x 3.0xMarg 96 163 0.6x 1.0x 0.5x 0.9x






India – comparative valuationsFig 17 – Comparative valuation

Mundra Port and SEZ Essar Ports GPPL *** Marg

ValuationPrice (Rs) 152 106 64 96Target price (Rs) 201 190 71 163Book value per share (Rs) 26 57 18 159Market capitalisation (US$bn) 6.3 0.9 0.6 0.1Total fixed assets (Rs m) 193,061 71,872 13,111 21,777Net worth (Rs m) FY12E 51,491 23,289 7,782 6,304Debt (Rs m) FY12E 146,054 64,638 9,576 28,248Cash (Rs m) FY12E 7,513 2,248 2,632 1,870Traffic (MTPA)Port capacity FY12E 202 84 13 14Port capacity FY14E 285 125 23 21Container (%) 19 8 7 0Dry Bulk (%) 73 56 93 100Liquid Bulk (%) 8 36 0 0Cargo traffic FY12E 98 54 11 8Cargo traffic FY14E 168 98 16 15Container (%) 15 1 63 3Dry Bulk (%) 75 53 35 92Liquid Bulk (%) 11 46 2 5CAGR traffic growth FY11/FY14E 48 36 21 44CAGR traffic growth FY14/FY17E 16 10 11 22Earnings Rs m (FY12E)Revenue 36,969 10,180 3,473 10,210Revenue CAGR (FY11-14E, %) 45 39 23 25Port revenues 31,988 10,180 3,473 2,533SEZ/ other revenues 3,142 0 0 7,678EBITDA 25,388 7,515 1,669 3,149Port EBITDA 22,769 7,515 1,669 59PAT 11,617 1,409 424 304PAT CAGR (FY11-14E, %) 35 131 70 65RatiosP/E (FY12E) 26.1 30.9 63.7 12.5P/BV (FY12E) 5.9 1.9 3.5 0.6EV/EBITDA (FY12E) 17.7 14.1 19.7 9.6Asset turnover 0.3 0.1 0.2 0.3RoE (%) # 27 11 10 8RoCE (%) # 12 7 10 7EBITDA margin (%) # 68 73 50 35Gross D/E 3.0 2.8 1.1 4.2Interest coverage (EBIT/Gross debt) 3.2 1.6 1.5 1.2EV/MTPA (FY12E) 2,232 1,267 2,629 2,156EV/MTPA (FY14E) 1,575 873 1,454 1,861#3-year average FY12-14E. ***FY12E corresponds to CY11E and so on; PAT CAGR is for CY11-13E.Prices as of 16 June 2011.Source: Standard Chartered Research estimates





Global comparative valuation

A comparison of India’s private ports with major port asset owners across the world shows thatIndian private ports have higher RoE and higher earnings growth, leading to higher near-termmultiples, which in the long run return to the global average.

Fig 18 – Global comparisonPort developers Ticker Price

Target Rating Country Market cap(US$bn)

RoE(TTM) P/B (x) PE (x) EV/EBITDA (x)

% 1FY 2FY 3FY 1FY 2FY 3FY

Hutchison Port Holdings** HPHT SPEQUITY NA NA Singapore 7.3 4.4 0.8 25 22 20 14.2 12.3 11.2

Port Of Tauranga Ltd** POT NZEQUITY NA NA New

Zealand 1.0 5.8 2.2 26 23 21 14.0 13.1 12.2

DP World Ltd** DPW DUEQUITY NA NA Dubai 10.5 5.0 1.4 26 20 17 12.9 11.5 10.3

Dalian Port (Pda) Co Ltd** 2880 HKEQUITY NA NA Hong

Kong 2.3 7.9 7.2 86 77 70 11.0 9.6 9.1

Tianjin Port Co Ltd**600717 CH

EQUITY NA NA China 2.1 8.0 8.6 90 77 64 8 7 7Mundra Port and SEZ MSEZ IN 201 OP India 6.3 27.4 5.9 26 19 14 18 14 11Essar Ports ESRS IN 190 OP India 0.9 11 1.9 31 14 11 14 10 8GPPL GPPV IN 71 IL India 0.6 10 3.5 64 30 22 20 15 12Marg MRGC IN 163 OP India 0.1 8 0.6 13 10 5 10 7 6Note 1FY – current financial for all the operators, 2FY and 3FY - two subsequent financial years. Share price data as of 16 June 2011

Source: **Bloomberg consensus, Standard Chartered Research estimates





Ports – preferred infrastructure investmentIn our detailed proprietary analysis of India’s infrastructure investment opportunities, private portsscore much better than other infrastructure sectors on most parameters. Private ports benefitfrom a benign regulatory environment as they are regulated by state governments that have beenencouraging port investments through progressive policies. The competitive scenario, too, ismuch better as inefficient government ports struggle to add capacity. Unlike other sectors, privateports have greater flexibility and certainty in charging tariffs. The sector has high entry barriersand offers scalability and natural first-mover advantages.

Fig 19 – Ports vs. other infrastructure asset classes Criterion Ports (minor/private) Roads (BOTs) Power Airports (BOTs)

Regulatoryenvironment forinvestments

Strong: Minor ports areregulated by state governmentsthat have been encouragingprivate port investmentsthrough progressive policies.

Medium: All roadconcessions awarded byNHAI or state agencies areunder heavy scrutiny andthe awarding process hasbeen slow.

Medium: Plethora ofregulating bodies andgovernment intermediation invarious aspects. But, off-takeagreements are welldocumented.

Weak: Existing privatesector BOTs tightlyregulated on all aspects:capex, tariff, etc.Regulations evolving withgreat scope for uncertainty.

Entry barriers

Strong: Availability of goodmarine locations with naturaldraft and placid waters.Hinterland connectivity islimited and hence favorsincumbents.

Weak: Technical andfinancial constraints forbidding for projects are low,leading to competitionbetween large and localdevelopers.

Medium: New entrantsemerging as powergenerators. Getting projectswith requisite approvals andlinkages difficult.

Strong: 150 km barrier fornew airports makescompeting airports difficult.AAI controls most airportsoffering little scope forgood new investments

First-moveradvantage

Strong: Post setting up aprivate port, most maritimeboards do not allow anotherport within a stipulated distanceof an existing port.

Weak: Competition islocalised and each newproject has different trafficand execution dynamics.

Medium: Project executionmanageable but longgestation period requiresstronger balance sheets.

Strong: High skillrequirement for projectexecution, making it difficultfor new entrants.

Competition

Strong (Low): Major ports arenot expanding capacity to keeppace with demand, benefitingprivate ports.

Medium: Few good projectson offer and aggressivecompetition resulting in highbids.

Medium: Dominated by largeprivate and governmentgenerators.

Strong (Low): Exclusivefor the captive city. Littlecompetition from publicsector

Tariff flexibility

Strong: Minor port tariffs, notregulated by TAMP,constrained only bycompetition.

Weak: Toll rates regulatedunder concessionagreement.

Weak: Tariffs/ rate of returnsregulated by PPAs. Merchantrates market dependent.

Weak: Tariffs/ rate ofreturns will be regulated byAERA.

Traffic growth

Strong : Linked to GDP growthand location dynamics of keycargos.

Strong : Linked to localeconomic and traffic growthof each stretch.

Weak: Units generateddependent on capacity,offtake requirement and PLF.

Strong : Linked to GDPgrowth and domestic &foreign passenger traffic forthe city.

Scalability

Strong: Post high initial coston marine infrastructure,subsequent berth additions atlower capex. Port generatesown demand as ecosystemevolves.

Medium: No capacityexpansion possible.However, variable cost perpassenger falls withincremental traffic.

Weak: Marginal capacityexpansion possible onvariable cost.

Medium: Successivephases typically have highcost. Demand constrainedby growth in the city

Rate of returnsStrong: Margins 60%+; matureRoE is 20-25%.

Medium: Margins 80-85%;mature RoE 12-20%.

Medium: Margins 50-60%;mature RoE 14-18%.

Weak: Margins 35-40%+;mature RoE in 10-18%.

Source: Standard Chartered Research

(1) State governments can concession airports, not serviced by AAI airports, but these are largely in tier III cities. Do not have any captive traffic and hence not very lucrative.

(2) The Central government has slackened airport privatisation, barring Navi Mumbai airport, we do not see any lucrative airport investment opportunity in the near future.

(3) We might see some acceleration in NHAI ordering in the near future, but contracting over the past one year has been very slow

(4) For the port sector, coastal regulations and environmental clearances also come under the Central government.





Benign regulatory environment

All major (government) ports are regulated by The Major Port Trusts Act, 1963 and the TariffAuthority for Major Ports (TAMP). The Major Port Trusts Act has a provision to constitute portauthorities/trusts at major ports and to vest them with administrative and management control ofthe ports. TAMP was constituted in April 1997 to provide an independent authority to regulate alltariffs, both vessel related and cargo related. TAMP has jurisdiction only over major port trustsand private terminals therein. Minor or private ports are regulated by the respective statemaritime boards, and are free to formulate tariff charges. This scenario has benefited privatesector ports, providing them with greater flexibility.

The Indian government plans to introduce a new Port Regulatory Authority (PRA) Bill inParliament in the next session; the Bill seeks to bring all ports (including private sector ports)under a common regulatory body, which will fix tariffs and monitor performance. We believe thiscould impact private ports as 1) it will give government ports more flexibility to fix tariffs and helpstreamline operations, 2) state regulators will have the freedom to prescribe tariff rates but they

will have to follow the common guidelines issued by the Ports Regulatory Authority Bill, 3) theauthority will monitor performance at all ports and frame performance norms, 4) the regulatoryauthority will have powers to call for information, investigate, and inspect the books or otherdocuments of any port authority or private operator and 5) the regulator will have the power totake action against port operators, including powers to cancel licences and/or levy huge penalties.All the maritime states will have to establish similar Ports Regulatory Authorities, which wouldregulate private ports in the state, failing which these ports would be regulated by the PRA.

We believe that most state governments, who are in favor of private ports given the economicbenefits to their respective states, would safeguard the interests of the private ports and thesanctity of the concession agreements. We hence expect the benign regulatory scenario to bemaintained.

Maritime Agenda projects 11% cargo growth during FY11-20

The shipping ministry‘s Maritime Agenda 2020, which is to replace the current National MaritimeDevelopment Project, foresees 11% cargo demand growth over FY10-20 if India is to sustaincurrent GDP growth rate of 8-9%.

Fig 20 – Cargo growth scenarios Fig 21 – Trade growth

600800

1,0001,2001,4001,6001,8002,000

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

F Y 1 6 E

F Y 1 7 E

%

Pessimistic( 6% GDP growth)Middle case (9% GDP growth)Optimistic case (11% GDP growth

0200400600800

1,0001,2001,400

2 0 0 0 - 0 1

2 0 0 1 - 0 2

2 0 0 2 - 0 3

2 0 0 3 - 0 4

2 0 0 4 - 0 5

2 0 0 5 - 0 6

2 0 0 6 - 0 7

2 0 0 7 - 0 8

2 0 0 8 - 0 9

2 0 0 9 - 1 0

2 0 1 0 - 1 1

2 0 1 1 - 1 2 E

2 0 1 2 - 1 3 E

2 0 1 3 - 1 4 E

2 0 1 4 - 1 5 E

2 0 1 5 - 1 6 E

2 0 1 6 - 1 7 E

U S D b n

Exports Imports Merchantile trade

Source: Crisil, Standard Chartered Research est., Maritime Agenda Source: RBI, Maritime Agenda

Over the past 20-year and 10-year periods, India’s mercantile trade in monetary terms has grownat 12.9% and 20.2%, respectively. At the other end, India’s port traffic has grown at 9.1% over thepast 20 years and at 9.7% over the past 10 years. We expect cargo traffic in volume terms togrow at 11% CAGR over FY11-17E with traffic at private ports growing at 16%.

Minor or private ports regulated by state

maritime boards and free to formulate tariff charges

New Port Regulatory Authority (PRA) Bill to bring all ports under a common regulatory body

Cargo volume likely to post 11% CAGR over

FY11-17E





Fig 22 – Historical cargo growth Fig 23 – Future cargo growth

0100200300400500600700800900

1 9 9 0 - 9 1

1 9 9 2 - 9 3

1 9 9 4 - 9 5

1 9 9 6 - 9 7

1 9 9 8 - 9 9

2 0 0 0 - 0 1

2 0 0 2 - 0 3

2 0 0 4 - 0 5

2 0 0 6 - 0 7

2 0 0 8 - 0 9

M T

Cargo handled historical

8991,022 1,126 1,240

1,3651,500 1,648

0300

600900

1,200

1,5001,800

F Y 1 1

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

F Y 1 6 E

F Y 1 7 E

M T

Cargo at major portCargo at minor portTotal cargo handling demand

Source: Crisil, Standard Chartered Research est., Maritime Agenda Source: Crisil, Standard Chartered Research est., Maritime Agenda

Captive ecosystem to drive cargo growth at minor ports

Minor ports are developing captive ecosystems to drive traffic growth. Captive ecosystems attractmore industrial and manufacturing units, leading to incremental traffic growth.

Coastal coal-fired power generation units: Over 30GW of coal-fired power generationcapacity is likely to be added over FY12-17E, which would necessitate additional coal importof 230m tpa on a pan-India level. A large part of this capacity is being set up near minor portsalong with rail-merry go-round (MGR) or conveyor belt linkages with the ports.

Expansion in ferrous/non-ferrous/cement manufacturing capacity : Our materials teamexpects 35m tonnes of ferrous capacity and 54m tonnes of cement capacity to be added overFY12-17E, which would necessitate additional import of 111m tpa of thermal/coking coal. Inaddition, iron ore export is a major driver for several minor ports.

Parentage: Apart from regional traffic and traffic from captive ecosystems, ports with strongparentage also generate significant cargo from the promoter group. MPSEZ, Dhamra, Essarand Pipavav have benefited from strong parentage.

SEZ and industrial zones . Our visits to Mundra SEZ and Essar Ports impressed us, giventhe amount of industrial activity in the region. The creation of SEZs and industrial zones havehelped bring in new manufacturing units, creating incremental traffic.

Hinterland growthManufacturing growth in the hinterland is pushing cargo volume towards minor ports, as majorports fail to add capacity. Gujarat’s ports benefit from their proximity to the northern hinterland onthe west coast. The Delhi-Mumbai corridor, India’s busiest cargo route, could potentially have adedicated freight corridor by FY16-17. This would improve connectivity to hinterland locations,further boosting cargo flow from the hinterland. south India’s hinterland, especially on the Eastcoast, has good connectivity to the ports. We expect industrialisation in the south to providefurther impetus to container, bulk and project cargo.





Growth riding on 3Cs – coal, containers and crudeThe 3Cs – coal, containers and crude – are likely to drive strong 16% traffic CAGR over FY11-17E at private/non-major ports, in our view. Our analysis indicates that coal imports are likely topost 20% CAGR over FY11-17E, amid rising demand from coastal power plants andsteel/cement units. Nevertheless, capacity addition at government ports is likely to fall far short ofdemand, with private ports stepping in to fill in the gap.

Coal would be the primary cargo growth driver. We estimate that 30GW of coal-fired powergeneration capacity is coming up, necessitating 230m tpa of additional coal imports by FY17.Of this, around 149m tpa will be tied to respective ports under long-term contracts.

Container growth will be driven by better connectivity to north India/regional hinterlands,increasing industrialisation and containerisation of bulk cargo.

Crude demand will be dependent on increase in refining capacity and greater crudeconsumption. However, growth in crude will only benefit a few select ports with contractedrefining cargo.

3Cs as cargo traffic driver

Containers, crude and coal currently form 67% of total cargo traffic and are likely to remain keygrowth drivers going forward. Private ports have been especially good at attracting crude importdemand. They currently handle 54% of total POL traffic into the country, and we expect it to risewhen the Bhatinda refinery is commissioned. While POL was the main driver of traffic growthbetween FY04 and FY10, we believe coal will be the main driver in future.

Fig 24 – Crude/POL demand Fig 25 – POL handled by ports

1 6 8 1 6 8

1 8 0 1 9 6

2 2 0 2 2 0

2 7 0 2 8 8

1 5 3 1 7 2

1 8 1 1 8 6

1 8 5 2 0 9 1 8 5

1 9 5

0

100

200

300

400

500

600

2 0 0 9 - 1 0

2 0 1 0 - 1 1

2 0 1 1 - 1 2 E

2 0 1 2 - 1 3 E

2 0 1 3 - 1 4 E

2 0 1 4 - 1 5 E

2 0 1 5 - 1 6 E

2 0 1 6 - 1 7 E

M T

Crude imports POL Exports/ imports

1 7 5

1 8 0 1 8 6

1 9 1 1 9 7

2 0 3 2 0 9

1 4 5 1 5 2

1 7 4 1 9 0

2 0 8 2 2 6

2 4 6 2 6 7

2 1 5

0

100

200

300

400

500

600

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

F Y 1 6 E

F Y 1 7 E

M T

POL handled in non-major portsPOL handled in major ports

Source: Crisil, Standard Chartered Research estimates Source: Standard Chartered Research estimates

We estimate that India needs to increase its coal imports at a CAGR of 20% to 358m tpa by FY17from 122m tpa in FY11 to cater to demand from the power, steel and cement industries. Of theincremental demand of 230m tpa, 142m tpa will be absorbed by the power industry and 88m tpaby the others. New capacity addition will clearly be the main driver of this growth. By FY17, Indiawill have 37GW of power generation capacity completely dependent on imported coal (from zeroin end-FY10 and about 7GW by end-FY12).

The 3Cs likely to drive strong 16% traffic

CAGR over FY11-17E at private ports

Containers, crude and coal currently form 67% of total cargo traffic

POL traffic to reach 483m tpa by FY17





Fig 26 – Coal import demand Fig 27 – Coal traffic major/ minor ports

0

100

200

300

400

2 0 1 0

2 0 1 1

2 0 1 2 E

2 0 1 3 E

2 0 1 4 E

2 0 1 5 E

2 0 1 6 E

2 0 1 7 E

M T

0

10

20

30

40

G W

Thermal coal (others)Coking coalThermal coal imports (power)Imported coal capacity (GW)

7 3 8 0 8 9 9 8

1 0 8 1 1 8

1 3 0 4 6 7 1 9 9 1 1 6 1 4 6 1 7 5 2 1 8

0

100

200

300

400

F Y 1 1

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

F Y 1 6 E

F Y 1 7 E

M T

Coal handled (minor ports)Coal handled (major ports)

Source: Standard Chartered Research Estimates, Coal vision 2025 Source: Standard Chartered Research estimates

In FY11, major and non-major ports handled coal imports in the ratio of 54:44. With massive coal-handling capacities coming up at private sector ports, we expect non-major ports to handle about70% of coal imports in future (excluding coal terminals operated through the PPP route in majorports).

Fig 28 – Dedicated coal terminal addition over FY12-17EPort Expected date of

completionDedicated coal

capacity (MTPA) Status

Paradip FY13 14 Development under BOTEnnore FY14 8 -Tuticorin FY17/18 14 Yet to be awardedVishakapatnam FY13/14 14 Being developed under BOT routeNew Mangalore FY16 6 Yet to be awardedMormugao FY14 10 Being developed under BOT route

Mundra FY12 60 Constructed and operationalTotal coal capacity addition 116 -Source Maritime Agenda, Standard Chartered Research estimates

Increasing containerisation

Container traffic posted a 10% CAGR over FY04-10 and we expect it to grow by 13% over FY11-17. Nevertheless, there has not been much container berth capacity addition at ports. At thecurrent rate of capacity addition, there would be a shortage of container handling berths goingforward. In FY11, 67% of container traffic was handled by two major ports – JNPT (on the westcoast with 44%) and Chennai (on the East coast with 23%). Both these container terminals arealready operating at 90%+ utilisation and their much needed capacity expansion has yet to reachthe bidding stage.

In the private sector, only MPSEZ’s Mundra port and GPPL’s Pipavav port have dedicatedmechanised container terminals. They handle about 15% of total container traffic. Going forward,we estimate a 13% CAGR in container cargo traffic growth over FY11-17E, which translates into270m tonnes or 22.5m TEU by FY17. Furthermore, CII’s container cargo forecast at 6.5% GDPgrowth is 23m TEU by FY17, which is in line with our estimates.

In the next section, we have analysed container demand versus container capacity addition. Weexpect container terminals to remain over-utilised. Container terminals are currently operating atmore than 80% capacity and we expect the situation to continue at least until FY16.

30GW of imported coal-based generation capacity addition

Non-major ports likely to handle about 70% of coal imports

Container traffic likely to post 13% CAGR over FY11-17





High utilisation here to stayOur analysis of capacity addition suggests we need not be worried about over capacity. Capacityutilisation at major ports is 88%, with those on the west coast significantly over-extended – Mumbai, JNPT and Kandla are running at 125%, 100% and 96% utilisation. A conservativeestimate of 11% cargo growth implies 2x capacity addition. Nevertheless, our study shows thatgovernment ports lag demand requirements and private ports just about meet traffic demand. Weexpect major ports to run at >90% utilisation over FY11-17E and private ports to hover around70-80% utilisation.

Capacity addition at major ports not keeping pace

A conservative estimate of 11% cargo growth would imply port capacity needs to increase 2x forefficient utilisation. The Maritime Agenda estimates an investment of Rs3trn is required toincrease port capacity to 3,200m tpa from the current 1,075m tpa by FY20E. Existing portcapacity (major and non-major ports) is operating at 84% utilisation, which is not conducive for

efficient port operation, resulting in turnaround times of 4-5 days – extremely high by globalstandards.

Over FY01-11, major ports’ cargo handling capacity posted a 7.5% CAGR against total cargohandled CAGR of 8%. Current capacity utilisation at major ports is 88%. Capacity utilisation atmajor ports in western India, however, is 95% with key ports such as Mumbai, JNPT and Kandlarunning at 125%, 100% and 96% utilisation, respectively. This high capacity utilisation leads tolower efficiencies with average turnaround time for Mumbai, JNPT and Kandla at 4.6, 4.9 and 5.6days, respectively.

Fig 29 – Major ports’ capacity growth Fig 30 – Major ports’ cargo growth

5 9 9 6 4 5 6 6 5 7 3 2

7 5 1 7 7 8

8 1 1 9 4 7

400

500

600

700

800900

1,000

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

F Y 1 6 E

F Y 1 7 E

M T P A

6% CAGR

5 6 1

5 7 0 6 3 2

6 9 6 7 1 3

7 3 9 7 7 0 8 9 9

0

150

300

450

600

750

900

1,050

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

F Y 1 6 E

F Y 1 7 E

M T

8% CAGR

Source: Crisil, Standard Chartered Research estimates Source: Crisil, Standard Chartered Research estimates

The prospects for capacity addition at major ports do not look good. We expect capacity at major

ports to rise by 113m tpa in the next five years, with a further 130m tpa to come on stream inFY17. The key bottleneck impeding the expansion of projects has been the lack of flexibility atmajor ports.

Fig 31 – Major ports’ capacity utilisation to remain at 90-95%

80

84

88

92

96

100

2 0 0 3 - 0 4

2 0 0 4 - 0 5

2 0 0 5 - 0 6

2 0 0 6 - 0 7

2 0 0 7 - 0 8

2 0 0 8 - 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

F Y 1 6 E

F Y 1 7 E

%

Capacity utilisation of major ports Source: Standard Chartered Research estimates

At 84% utilisation,turnaround times are 4-5 days

Capacity addition at

major ports not meeting demand





Fig 32 – Major port capacity expansion roadmap and statusPort Project Capacity (m tpa) Expected CoD StatusParadip Iron ore berth 10 2012-13 Awarded

Coal berth 10 2012-13 Awarded (Essar Ports)Vizag POL (SBM) 15 2014-15 NAEnnore Coal berth 8 2012-13 Awarded

Iron ore berth 12 2012-13 AwardedRO-RO - 2013-14 Awarded

Ennore Container 15 2015-16 Bidding yet to beginChennai Container 48 2016-17 Bidding stageTuticorin Container 6 2015-16 Bidding stage

Container 5 2013-14 Bidding stageMormugoa Coal berth 7 2012-13 Awarded/ MundraCochin Container 12 2011-12 AwardedMumbai container 9.6 2014-15 Awarded/ but uncertainJNPT Marine chemical 30 2016-17 Proposed

Container 58 2016-17 ProposedKandla offshore berthing 12 2015-16 Bidding stageNew Mangalore Iron ore berth 7 2012-13 AwardedTotal addition 249Source: Crisil, Standard Chartered Research

Capacity addition at private ports just meeting current requirements

Current capacity utilisation at minor ports is ~68% and we expect private ports to have graduallyincreasing utilisation levels. We estimate 16% traffic growth at minor ports – from 294m tonnes inFY11 to 702m tonnes by FY17. Capacity addition at minor ports could follow the same trend,posting 12% CAGR over FY11-17E from 430m tpa to 851m tpa, respectively.

Fig 33 – Non-major ports’ capacity growth Fig 34 – Non-major ports’ cargo growth

3 4 64 9 9 5 4 5 6 2 8 7 1 2 7 7 9 8 5 1

4 3 0

300

400

500

600

700

800

900

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

F Y 1 6 E

F Y 1 7 E

M T P A

12% CAGR

2 8 9 2 9 4 3 6 2

4 1 4 4 7 1 5 5 2 6 2 3 7 0 2

0

100

200

300

400

500

600

700

800

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

F Y 1 6 E

F Y 1 7 E

M T

16% CAGR


Fig 35 – Non-major ports’ capacity utilisation to increase but below 85%

65

70

75

80

85

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

F Y 1 6 E

F Y 1 7 E

%

Capacity utilisation at minor ports


Most capacity addition projects back-ended





Minor ports benefiting from weakness at major ports

The port sector was nationalised in 1963 under The Major Ports Act (1963). There are 12 portsclassified as major ports, which come under the jurisdiction of the Central government. All theseports are located in major cities and thereby have excellent rail/road connectivity to the hinterland.Plans to expand capacity at these ports, however, have been slow to take off and remaininadequate. The increase in evacuation infrastructure has not kept pace given these ports arewithin existing cities. Due to this, the average turnaround time and pre-berthing time has beenincreasing at major ports. On the other end, private ports offering better services and higherefficiencies are gaining traffic share through a better “customer focused” approach.

The market share of major ports has fallen from 74% in FY01 to 63% in FY11. We expect thetrend to continue with market share of major ports falling to 54% by FY17.

Furthermore, capacity addition at minor ports has been timely and has enabled them to cater tobulging traffic demand. Delay in capacity addition at major ports is lowering their market share.

Fig 36 – Traffic handled by major andminor ports over FY17E

Fig 37 – Non-major ports’ capacity growthby state

5 7 0 6 3 2

6 9 6 7 1 3

7 3 9 7 7 0

8 9 9 2 9 4 3 6 2 4 1 4

4 7 1 5 5 2 6 2 3 7 0 2

0200400600800

1,0001,2001,4001,6001,800

F Y 1 1

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

F Y 1 6 E

F Y 1 7 E

M T

Cargo at major port Cargo at minor port

0150300450600750900

2 0 0 9 - 1 0

2 0 1 0 - 1 1

2 0 1 1 - 1 2 E

2 0 1 2 - 1 3 E

2 0 1 3 - 1 4 E

2 0 1 4 - 1 5 E

2 0 1 5 - 1 6 E

2 0 1 6 - 1 7 E

M T P A

Gujarat Maharashtra Andhra Pradesh

Orissa Other states


Under the Major Ports Act, state governments can develop small and non-major ports throughconcession agreements with the private sector. State governments have been using thisprovision to drive investment into the port sector in their respective states. Gujarat has been anearly pioneer, given its natural advantages (long coast and proximity to northern India), but otherstates such as Andhra Pradesh, Goa and Pondicherry, too, have been providing strong supportto their respective port projects.

Container capacity lagging demand

Container terminals are currently operating at more than 80% capacity and we expect the

situation to continue at least until FY16, despite significant expansion in capacity by privateplayers and assuming all the projects at major ports in the Maritime Agenda come on stream.

Fig 38 – Container demand vs capacitygrowth (TEU)

Fig 39 – Container capacity breakup andcapacity utilisation

1 0 1 1 1 2 1 4 1 6 1 8 2 0 2 312 12 13 15 16

2024

33

0

10

20

30

40

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

F Y 1 6 E

F Y 1 7 E

m T

E U

Containers cargo demand (m TEU)Total container capacity (TEU)

0

100

200

300

400

500

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

F Y 1 6 E

F Y 1 7 E

M T P A

020406080100120

%

New major ports (LHS)Non-Major capacity (LHS)Existing major (LHS)Container cap.util (%) (RHS)


Market share of major ports likely to fall to

54% by FY17 from 63% in FY11

We expect container

terminals to operate at 80% until FY16





We expect the shortage of container handling capacity to continue, given:

None of the new container terminals proposed at major ports have progressed much, hence,we do not foresee any of the projects coming up by FY16 at the earliest. In comparison,private sector ports are in expansion mode.

Currently, only JNPT and Chennai among the major ports are well integrated with internationalshipping routes. The Maritime Agenda visualises massive capacity expansion at other majorports, which currently have small or no container capacity. These ports face logistics issuesregarding railway transport and have low efficiency at their existing container operations.Because of this, container traffic continues to flock to JNPT, despite its average time to berthof 3-4 days.

Furthermore, small container ports will find it difficult to get export traffic that has traditionallyflocked to larger ports, making it inefficient for container operators to work with smaller ports.

To gain significant container traffic, new ports will need to tie-up with overseas containeroperators.

This offers a window to existing private container ports. We expect MPSEZ and GPPL tocapitalise on this because of their strong international tie-ups. We estimate container cargohandled by private ports would post a 21% CAGR over FY11-17E to 68m tpa (5m TEU) or 25%of total container traffic, up from 14% in FY11.

Fig 40 – Container capacity (m TEU) Fig 41 – Container traffic growth (m TEU)

0

10

20

30

40

2 0 0 9 - 1 0

2 0 1 0 - 1 1

2 0 1 1 - 1 2 E

2 0 1 2 - 1 3 E

2 0 1 3 - 1 4 E

2 0 1 4 - 1 5 E

2 0 1 5 - 1 6 E

2 0 1 6 - 1 7 E

m T

E U

Chennai JNPTOther major ports Mundra Port and SEZ*Pipavav

15 22 26 31 41 48 59 68 1 0 1

1 1 4 1 2 2 1 3 6 1 4

9 1 6 6 1 8 3 2 0 5

0

50

100

150

200

250

300

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

F Y 1 6 E

F Y 1 7 E

M T

Container cargo at major ports (MTPAContainer cargo in Minor ports (MTPA)

Source: Standard Chartered Research estimates, Maritime Agenda Source: Standard Chartered Research estimates, Maritime Agenda

Unhealthy 90%+ container capacity utilization at major ports

A window for private container ports





Fig 42 – Container capacity additions

Coast Sector PortExistingcapacity(m TEU)

FY17target

(m TEU)Project Project status

West Major JNPT 4.9 10.72 Fourth containerterminal/ also extendingthe existing terminals

Project award under litigationwith operators of existingterminal. We do not expect it tocome on stream before FY16

West Major Cochin 0.34 1.5 International containerand transshipmentterminal

Project being executed by DPWorld, on schedule, strongchances of completion by FY13

East Major Kolkata 0.44 2.76 Diamond harborcontainer terminal – 4container jetties

Feasibility report approved,land recently acquired, but notyet bid, very unlikely to comeby targeted FY14, FY17 looksmore feasible

East Major Chennai 2.7 5.25 Construction of Megacargo terminal

Approval for taking the projectunder PPP mod from MoSawaited, targeted only forFY17/18 completion

East Major Ennore 0 1.25 Construction of a newcontainer terminal

Bidding underway

West Non-major

Mundra 2.5 5 Conversion of existingbulk berths to containerberths

Strong progress

West Non-major

Hazira(Adani)

0 2.5 Addition of containerberths to existing

JV formed, no other work inprogress

West Non-major

Pipavav 0.6 1.9 Extension of existingterminal and addingmore berths

Expansion on track

Source: Crisil, Standard Chartered Research





Strategic rating scorecardWe introduce our proprietary scorecard that evaluates companies in a structured and consistentway, based on four qualitative and four quantitative parameters. We assess the companies’intrinsic strengths and weaknesses, looking for strategic advantages and disadvantages that willdrive long-term growth potential. Our four qualitative parameters are: 1) Location; 2) Ecosystem;3) Competition; and 4) Parentage. Our four quantitative parameters are: 1) Capacity – Buffer andEfficiency; 2) Execution Capability; 3) Traffic Growth; and 4) Financial Strength – Cash Flow andBalance Sheet.

We used a four-point scorecard: 4 – Very Strong, 3 – Strong, 2 – Medium, and 1 – Weak. Ourscorecard shows MPSEZ has the best strategic positioning and long-term growth potential (itscored 26 out of 32). Next comes Essar Ports (24), followed by GPPL (18) and Marg (15).

Qualitative scorecard

Fig 43 – Qualitative scorecard: MPSEZ and Essar Ports top the scoresMPSEZ Essar Ports GPPL MargCriteria Criteria detail Mundra Hazira Vadinar Hazira Salaya Pipavav Karaikal

Location Potential for marineinfrastructure growth

4 3 1 3 3 2 2

Dredging requirement 3 3 3 3 2 2 3

Alignment to existingshipping routes

2 3 1 3 2 3 2

Access to hinterland(Northern or Southern)

3 4 3 4 2 3 3

Ecosystem Contracted cargo 3 2 4 4 3 2 2

Captive economy 4 2 3 3 2 1 1

Level of industrialisation 3 4 3 4 2 1 2

Competition Competition 3 3 3 3 3 2 2Parentage Group advantage in cargo

generation3 3 3 3 3 4 1

Weighted average company score 12.1 11.6 9.8 7.2Source: Standard Chartered Research Estimates

1) Location. Here we review a port’s location in relation to existing shipping routes, itsevacuation facilities and options, coastline/waterfront availability, geological and hydrologicalconditions. Waterfront availability and draft affect the supply side (i.e., port capacityscalability), while its position in relation to shipping and surface transport routes affect thedemand side (i.e., cargo demand). On this parameter, MPSEZ’s Mundra and Hazira portsscore high, so does Essar’s Hazira port. We believe they have the potential to become megaports. Other ports have slight disadvantages, constraining their growth potential. In the table

below, we show our estimates of potential capacity addition at the ports.

Fig 44 – Ports’ scalability based on current plansMPSEZ Essar Ports GPPL Marg

(m tonnes) Mundra Hazira Vadinar Hazira Salaya Pipavav KaraikalCurrent capacity 60 0 46 30 0 12 5FY14E capacity 177.5 25 58 40 20 20 21FY17E capacity 192.5 70 58 50 20 32 40-47Source: Standard Chartered Research estimates

Marine-side potential. The ability to expand a port’s capacity depends on waterfrontavailability (for berthing), land (for storage and transport) and an adequate channel.MPSEZ’s Mundra port scores high given the natural draft availability (16 metres+

without dredging), naturally placid waters and long waterfront. Essar Ports’ Vadinar is aconstrained asset as it is close to a marine national park, thus limiting growth. In thetable below, we compare the marine conditions of the different ports.

Mundra port scores well on draft and waterfront availability





Fig 45 – Ports’ marine conditionsMPSEZ Essar Ports GPPL Marg

Mundra Hazira Vadinar Hazira Salaya Pipavav KaraikalDredged draft 16 10 NA 10-12 NA 13-14 12

Total draft 20 14/16 16(SPM 32) 14 14 14 12

Tiding conditions Good(<4 m)

Poor(4-8m)

Good(<4 m)

Moderate(4-8m)

Low(<4 m) Moderate Good

Breakwater type Under water To beconstructed

Notrequired

Riverine,hence notfeasible

Notrequired

Natural(Island) Present

Source: Company, Standard Chartered Research

Draft requirements . MPSEZ’s Mundra port has good draft and is the only port that canhandle Capesize vessels. Private ports have invested heavily to increase draft and arewell placed to benefit from the predominance of large-size Panamax vessels ininternational trade. On the other hand, the major ports have drafts of around 10-13metres. All the major ports under NMDP and the Maritime Agenda aim to increase draft,but the projects have been slow to take off.

Fig 46 – Draft and vessel handling capacity

1 5 1 3 . 4

1 2 . 5

1 2 . 5

1 2 . 5

1 1 . 7

1 1 . 5

1 0 . 8

1 0 . 7

1 0 . 5

1 0 7 . 5

2 0 1 6 1 6

1 4 1 4 1 2

1 2 . 5

0

5

10

15

20

25

M u n d r a

V a d i n a r

A d a n i H a z i r a

V i s h a k a p a t n a m

E

s s a r H a z i r a

S a l a y a

C h e n n a i

P i p a v a v

M u r m u g a o

J N P T

C o c h i n

K a r a i k a l

K a n d l a

P a r a d i p

T u t i c o r n

M u m

b a i

N e w

M a n g a l o r e

H a l d i a

K o l k a t t a

m e t r e s

Can handle Panamax vessels DWT of 60,000MT

Only Mundra has 17mt+ draft: can handle capesize vessels: DWT of 100,000 MT

Supramax vessels DWT of 52,000MT

Handymax vessels DWT of10,000MT

Source: Standard Chartered Research, IPA

Alignment to existing shipping routes. MPSEZ’s and Essar’s Hazira ports andGPPL’s Pipavav port are poised to receive spill-over traffic from JNPT, which is only120 nautical and 152 nautical miles, respectively, from these ports. The Mundra,Vadinar and Salaya ports (all located in the Gulf of Kutch) are 400+ nautical miles fromJNPT. Though the three ports are less than 100 nautical miles from Kandla, Kandla isnot a major container port. MPSEZ’s Mundra port, however, has managed to enter thecontainer-shipping route through an agreement with P&O Terminals (now DP World)and is now a mid-sized container terminal. Marg’s Karaikal port lies between Chennai

and Tuticorn and hence is in a well-established shipping lane. Nevertheless, we believethat the spill-over traffic pie in the south is much smaller than for Gujarat ports.

Access to the hinterland. The northern hinterland generates over 50% of cargo trafficinto the country. MPSEZ’s Mundra port is the closest port to the north. The Hazira ports’hinterland is highly industrialised and caters to Surat, south Gujarat and Maharashtra.Hazira is strategically located along the Delhi-Mumbai corridor and hence has goodtransport routes to the northern region. Marg’s Karaikal port is close to Chennai port, thesecond-largest container terminal in India, and has good rail and road connectivity tothe Tamil Nadu hinterland.

2) Ecosystem . Ports need to develop captive ecosystems to achieve strong growth. Weassess contracted cargo (long-term agreements), captive economy, i.e., economy of areas

primarily serviced by a particular port, and the level of industrialisation in the particularhinterland. All these affect the port on the demand side. MPSEZ’s Mundra port has an idealmix of both parameters – long-term contracted cargo off-take from refineries/power plants,an industrialising hinterland and the SEZ. MPSEZ’s and Essar’s Hazira ports have therichest hinterland in highly industrialised south Gujarat, a region that is currently largely

Mundra may emerge as India’s only transshipment hub





untapped and serviced from Mumbai/JNPT. GPPL’s Pipavav and Marg’s Karaikal havereasonably good hinterlands with moderate industrialisation, but do not have any contractedcargo.

Contracted cargo. We like port assets that have captive cargo customers and havesigned long-term contracts that help generate annuity-type earnings streams. EssarPorts and MPSEZ score high on this parameter as they have over 90m tpa and 50m tpa,respectively, of contracted coal and crude cargo. These commitments would amount to30-50% of their capacity by FY14. This gives them good revenue and margin visibility – particularly useful as bulk cargo handling in Gujarat is becoming commoditised giventhe numerous government ports trying to corner the market. The table belowsummarises contracted cargo by port.

Fig 47 – Contracted cargo as of FY14

(m tpa) Mundra Portand SEZ@ Essar Ports*

GujaratPipavavPorts #

Marg #

Coal/ iron ore 30 45 NA NACrude 20 45 NA NASource: Standard Chartered Research estimates

@ The coal includes coal to be delivered to the Adani Power and Tata Power plants, crude includes HPCL and IOC off-take

*45m tpa is broken down as Hazira: 25m tpa of coal and iron ore, Paradip: 10.8m tpa of coal, Salaya 9.1m tpa

#GPPL and Marg currently do not have any firm bulk cargo contracts, though they are in negotiations with power generation units coming up in thevicinity

Captive economy. MPSEZ’s Mundra port has been successful in attractinginvestments into the region. We expect the Mundra SEZ to contribute substantially tocargo demand going forward. All the other projects, however, depend heavily oneconomic growth in the immediate hinterland for a large part of their traffic. Among otherprojects, Hazira and Pipavav have rich captive hinterlands that are currently under-serviced.

Fig 48 – Hinterlands for various portsMPSEZ Essar Ports GPPL Marg

Mundra Hazira Vadinar Hazira Salaya Pipavav Karaikal

PrimaryHinterland

MundraSEZ/ Kutch/ Rajasthan

Surat/ Vapi/ Valsad/ industrialbelt

NorthSaurashtra(Jamnagarindustrialbelt)

Surat/ Vapi/ Valsad/ industrialbelt

NorthSaurashtra(Jamnagarindustrialbelt)

SouthSaurashtra(Bhavnagarbelt)

NorthernTamil Nadu

Secondaryhinterland

Northernregion

Ahmedabad-Indore beltandMaharashtra

NA

Ahmedabad-Indore beltandMaharashtra

Northernregion

Northernregion

SouthernTamil Nadu,Bangalorebelt


3) Competitive Scenario . Our analysis shows that container cargo will be the leastcompetitive segment, while ad-hoc bulk cargo would be the most competitive segmentdespite immense growth potential. Essar’s and MPSEZ’s ports are not likely to face anycompetitive pressure for bulk cargo due to secure long-term agreements. For containercargo, MPSEZ and GPPL are in a strong competitive position given container-handlingcapacity addition (especially by major ports) on the west coast is likely to fall well short ofdemand. GPPL and Marg have not yet entered into any long-term agreements for bulk cargoand they will face competitive pressure from existing and new ports. In this regard, Marg isbetter placed as it could face competition only from existing public sector major ports(Chennai and Tuticorin), which are running at maximum utilisation. GPPL faces toughcompetition from other GMB ports for bulk cargo.

4) Parentage . We assess the affect of parentage on a port’s ability to generate cargo demandand on management capabilities. MPSEZ and GPPL score high on both these counts, whileEssar Ports scores high on cargo generation, but moderate on operational capabilities. Webelieve Marg has demonstrated its execution capabilities, but lags in cargo generation.





Advantage in cargo generation. GPPL’s parent is AP Moller Maersk, the world’slargest shipping company. This has helped it generate cargo from the group. EssarPorts has utilised its parent group’s interests in steel, power and refinery to secure bulkcargo trade, but we do not believe the benefit is scaleable beyond the initial head start.The Adani group has been using MPSEZ’s Mundra port for its trading purposes and forimporting coal for its power plants, generating captive cargo for the port.

Quantitative scorecard

Our four quantitative parameters are: 1) Capacity – Buffer and Efficiency; 2) Execution Capability;3) Traffic Growth; and 4) Financial Strength – Cash Flow and Balance Sheet.

Fig 49 – Quantitative scorecard of portsCriteria MPSEZ Essar Ports GPPL MargCapacity - Buffer 4 3 2 2

- Efficiency 3 2 2 1Execution capability 4 3 2 2Traffic growth FY11/FY17E 3 4 2 3Financial strength - Cash flows 4 3 3 2

- Balance sheet 3 2 2 1Weighted overall score 14 12 8.5 8Source: Standard Chartered Research estimates

1) Capacity – Buffer and Efficiency . With demand remaining strong, we expect players suchas MPSEZ that are adding capacity ahead of demand (i.e., players with high traffic growthbut low capacity utilisation) to be well placed. GPPL is likely to operate at optimum capacityutilisation over most of FY11-17 and we expect capacity addition only post FY13-14. EssarPorts currently has low capacity utilisation of 58%, but we believe that the buffer will betaken up by group captive demand, and hence does not have immediate capacity to cater to

external demand.

Most non-major ports score over major ports in terms of efficiency parameters – withturnaround times of about 2-3 days against major port average of 4.4 days. We believe thatwhile these are early days yet for most of the ports in our coverage, given the high degree ofmechanisation and capacity buffer they have, all the ports could sustain these advantagesvis-à-vis major ports.

Fig 50 – Ports’ capacity utilisation

59 5872

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2) Execution Capability . MPSEZ rates high on execution parameters vital for port growth: 1)execution at current location, 2) appetite to work on new locations and 3) partnering withcustomers (shipping lines as well as end-users). We are positive about Essar Ports’ appetitefor growth in newer locations, but it could struggle to partner with non-group customers,especially for container traffic. GPPL has good management and is able to attract containertraffic, but it does not plan to expand significantly for bulk cargo growth or look atgeographical expansion beyond Pipavav. Marg is a new entrant; it has shown good

MPSEZ rates high on execution capability





execution capability at Karaikal port and has an inclination to grow in newer locations, butwe believe the company needs to partner with customers for bulk cargo and also will need torope in strong partners/operators to secure its growth on the container cargo front.

Fig 51 – Execution capabilityMundra Port and SEZ Essar Ports Gujarat Pipavav

Ports ltd. Marg

Execution track record oncurrent location

Very strong.Demonstrated executioncapability

StrongStrong – Especially sinceAPM Terminals took overthe long delayed project

Medium – It is developingexecution capability as itmoves up the learningcurve, given only two yearsof operation

Appetite for expansion tonew locations

Strong . Looking for portlocations on the East coast

Strong – Company hasexplored opportunities, butlargely in sync with groupstrategy

No geographical expansionplans

Medium - Looking forlocations within Tamil Naduand the East coast.

Partnering with newcustomers/ developers Very strong

Weak – Predominantly in-house customer focus as of

now

Medium – Strong oncontainer, but low on bulk

cargo partnerships.

Medium – No firmcontracts for bulk cargo yet.We also foresee need for atie-up with a shipping linefor the 7m tpa containerterminal


3) Traffic Growth. We believe that non-major ports will report strong cargo traffic growth.Among the four we cover in this report, MPSEZ, with massive capacity expansion andsecured growth drivers, is likely to report the highest growth – 31% traffic CAGR over FY17E.Essar Ports is likely to post lower growth at 22%, but with more secured cargo. We believeMarg is likely to benefit from a low base and relative lack of competition.

Fig 52 – Cargo traffic growth

52 399 5

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4) Financial Strength – Cash flow and balance sheet. We prefer companies with adequate

leverage and strong operating cash flows such as MPSEZ and Essar Ports as they will havethe ability to fund their expansion. We are uncomfortable with highly leveraged companiessuch as Marg. GPPL has an under-leveraged balance sheet and has strong cash flowpotential.

Fig 53 – Cash flow and balance sheet comparison(Rs m) MPSEZ Essar Ports GPPL MargDebt to Equity FY12 (x) 3.0 2.8 1.1 4.2Debt to Equity FY14E (x) 1.8 2.3 1.1 5.1Debt outstanding FY12E 138,541 62,390 6,944 26,379OCF FY12/14E 65,969 14,575 4,049 6,905FCF FY12/14E -107,344 -22,306 -1,140 -14,398Source: Standard Chartered Research estimates





Appendix

Fig 54 – World’s largest ports by cargo (MT)Traffic in MT

Rank Port Country 2007 2008 20091 Shanghai China 561 508 5062 Singapore Singapore 484 515 4723 Rotterdam Netherlands 401 421 3874 Tianjin China 309 365 3815 Ningbo-Zhoushan China 472 362 3726 Guangzhou China 341 347 3647 Qingdao China 265 278 2748 Qinhuangdao China 246 252 2449 Hong Kong China 245 259 243

10 Busan South Korea 244 242 22642 Kandla India 65 72 8055 Chennai India 57 61 6156 JNPT India 56 57 61

Source: Standard Chartered Research, AAPA

Fig 55 – World’s largest ports by container cargo (TEU) Traffic in TEU

Rank Port Country 2008 20091 Singapore Singapore 30 262 Shanghai China 28 253 Hong Kong China 24 214 Shenzhen China 21 185 Busan South Korea 13 126 Guangzhou China 11 117 Dubai Ports United Arab Emirates 12 118 Ningbo China 11 119 Qingdao China 11 10

10 Rotterdam Belgium 11 1024 JNPT India 4.2 4.479 Chennai India 1.7 2.0

Source: Standard Chartered Research, AAPA

Indian ports are small by global standards

JNPT has 44% of India’s container traffic, but is ranked 24 among global container ports





Company Section



India Ports l 17 June 2011


Mundra Ports and SEZGennext port

OUTPERFORM (initiating coverage)PRICE (as at 16 June 11)

Rs152 PRICE TARGET

Rs201

Bloomberg code Reuters codeMSEZ IN MPSE.NS

Market cap 12 month rangeRs303,615m (US$6,325m) Rs129 - 182

EPS est. change 2012E - 2013E -

We initiate coverage on MPSEZ with an OUTPERFORMrating and price target of Rs201/sh. Mundra port is likelyto become India’s largest port by FY14.

Over FY11-17E, we estimate MPSEZ would post 31%cumulative traffic CAGR.

We expect EBITDA CAGR of 47% to Rs41bn and netprofit CAGR of 35% to Rs22bn over FY11-14E.

The Abbot Point acquisition is value accretive, expandsits global footprint and adds Rs27/sh to NAV.

Premium valuation justified given volume and earningsgrowth, robust management and execution capability.

Year end: March 2011 2012E 2013E 2014ESales (Rs m) 20,001 36,969 47,174 60,648EBIT (Rs m) 10,606 19,975 25,866 34,822EBITDA (Rs m) 12,994 25,388 31,572 40,931Pretax profit (Rs m) 10,036 14,014 19,823 28,175Earnings (Rs m) adjusted 9,142 11,617 16,034 22,431Diluted EPS (Rs ) adjusted 4.56 5.80 8.00 11.20Diluted EPS growth (%) adj. 31.0 27.1 38.0 39.9DPS (Rs ) 0.90 1.00 1.10 1.20DPS growth (%) - - - -EBITDA margin (%) 65.0 68.7 66.9 67.5EBIT margin (%) 53.0 54.0 54.8 57.4Net margin (%) 45.7 31.4 34.0 37.0Div payout (%) 19.7 17.2 13.7 10.7Book value/share (Rs ) 21 26 33 43Net gearing (%) 102 301 242 180ROE (%) 23.9 24.9 27.5 29.8ROACE (%) 12.9 12.0 10.2 12.6FCF (Rs m) 3,965 -112,324 -1,840 6,821EV/Sales (x) 16.8 12.2 9.6 7.4EV/EBITDA (x) 25.8 17.7 14.4 10.9PBR (x) 7.3 5.9 4.6 3.6PER (x) 33.2 26.1 18.9 13.5Dividend yield (%) 0.6 0.7 0.7 0.8Source: Company, Standard Chartered Research estimates

Share price performance

120130140150160170180190

Jun ‐ 10 Sep ‐ 10 Dec ‐ 10 Mar ‐ 11

Mundra Ports and SEZ BSE SENSEX 30 INDEX (rebased)

Share price (%) -1 mth -3 mth -12 mthOrdinary shares 9 15 7Relative to Index 11 16 4Relative to Sector - - -Major shareholder Promoter share holding (77.5%)Free float 23%Average turnover (US$) 5,012,455

Leaping forward . It is adding significant capacity at Mundraport: 1) a 60m tpa highly mechanised coal terminal, 2)another 3.2m TEU container capacity by FY14, 3) four bulkterminals totaling 20m tpa, and 4) 12.5m tonne secondSPM. It is adding 110m tonnes of capacity at its other Indianports – Dahej, Hazira and Mormugao – and 50m tonnes atAbbot Point by FY17.

Strong demand . We expect growth to be driven byindustrialised Gujarat, containerisation in north India,captive SEZ demand, high-utilisation at major ports on thewest coast and value-added efficient services provided byMPSEZ. The 3Cs: 1) container demand on the west coast topost growth of 6.6m TEUs over FY12-17, of which 33% islikely to come to MPSEZ, 2) coal demand of 48m tpa from14GW of generation capacity coming up in the region, and3) 11m tpa of crude import demand from Bhatinda refinery.

Solid financials . We expect MPSEZ to sustain EBITDAmargin of 67%+ and RoE of 25%+ over FY12-14E. Raisingcapacity to 350m tpa by FY17E would require capex ofRs198bn. We expect non-dilutive growth given the under-leveraged balance sheet; we expect operating cash flow of

>Rs20bn annually over FY12-17E.

Valuations offer room for re-rating . MPSEZ trades atFY13 P/E, EV/EBITDA and PB of 19x, 14x and 4.6x,respectively. We expect net profit CAGR of 35% over FY11-14E. Given growth momentum, robust management andexecution capability, we initiate with OUTPERFORM and PTof Rs201/sh (62% contribution from Mundra port).

Risks . Imposition of MAT on SEZ units might make itdifficult to attract new units. Acquisition of new ports. Source: Company, Bloomberg


Shashikiran [email protected]+ 91 22 6755 9764





Investment argument and valuationWith capacity addition at Mundra port, acquisition of Abbott Point (Australia) and capacity addition

at Vishakapatnam, Dahej, Mormugao and Hazira, MPSEZ’s cumulative port capacity is likely torise to 285m tonnes by FY14 and to 350m tonnes by FY17. MPSEZ will not just become thelargest Indian port by FY14 but also likely achieve mega port status in terms of cargo andcapacity by FY17. We recently visited its flagship asset, Mundra port, and were impressed withthe pace of execution across the new terminals, adjacent power plants, and development work atthe SEZ. We believe Mundra port would have enough demand and absorption capability to reachcargo traffic of 102m tonnes by FY14E and 155m tonnes by FY17E. Cumulative traffic acrossMPSEZ’s ports could reach 167m tonnes by FY14E and 264m tonnes by FY17E; 31% cargoCAGR. With most of the Rs198bn capex required for the expansion already arranged, thecompany is headed for non-dilutive growth, which could result in 45% and 35% CAGR in revenueand earnings, respectively, over FY11-14E.

Towards 350m tpa port capacityThrough organic expansion at Mundra port and expansion of newly acquired port capacities inIndia and Australia, MPSEZ is likely to have 350m tpa of port capacity by FY17 (see chartsbelow).

Fig 1 – Location-wise capacity expansion Fig 2 – Cargo-wise capacity expansion

050

100150200250300350400

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30 30 45 55 85 100 10010 23 23 23 2323 23

4060 70

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96127

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Container Crude General bulk Coal


We expect traffic growth to be sustainable at these ports, and estimate traffic would grow from52.3m tpa currently to 264m tpa by FY17, a CAGR of 31%. The large capacity and cargoexpansion are driven by 1) acquisition of Abbot Point in Australia, 2) new coal/bulk terminals inMundra and 3) new ports/terminals in four locations in India becoming operational.

Fig 3 – Location-wise traffic growth Fig 4 – Cargo-wise expansion of capacity

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Container (LHS) Crude/ POL (LHS)General bulk (LHS) Coal (LHS)


Capacity to rise 3.5x to 350m tpa by FY17E across 6 locations

Traffic likely to grow from 52.3m tpa currently to 264m tpa by FY17, a CAGR of 31%





Mundra port: Flagship port, sailing on 3C wave

Mundra port is set to become the largest port in India by total cargo handled by FY14. We expect

it to ride on the 3Cs, which will add about 65m tpa of assured bulk/crude cargo and another ~25mtpa of container cargo by FY14, thus increasing traffic at the port by more than 3x.

Fig 5 – Mundra Port capacity growth Fig 6 – Mundra cargo growth andutilisation

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Coal: The west terminals of Mundra port have been developed as a specialised bulk handlingzone. The 60m tpa mechanised coal handling terminal is nearing completion. Note that TataPower’s 4,000MW Mundra UMPP and Adani’s 4,620MW power projects are progressing welland they could become fully operational by FY14-15. We estimate the immediate hinterlandcould host 14GW+ of power generation capacity, which will assure coal off-take of 48m tpa asshown below.

Fig 7 – Power generation capacity and coal demand in the immediate hinterlandPower project Generation

capacity (MW) Completed COD Coal requirement(m tpa)

Adani Power Mundra phase I 1,320 Operational 4.9Adani Power Mundra phase II 1,320 Partly Operational 4.7

Adani Power Mundra phase III 1,980 FY13/14 7.1

Tata Power Mundra UMPP- phase I 4,000 FY12/14 14.3

Tata Power Mundra UMPP- phase II 1,600 FY15/16 5.7

Adani Power Badreshwar project 3,300 FY15/16 11.8Total 13,520 48.4Source: Standard Chartered Research estimates

Crude: Mundra port currently has two SPMs, one for IOC’s Panipat refinery (already in

operation – refining capacity expanded to 15m tpa from 12m tpa) and the other one for the 9mtpa HPCL-Mittal Energy Bhatinda refinery, which will together expand crude traffic to 18m tpa.The Bhatinda refinery is likely to double capacity to 18m tpa by FY15-16, which will further addto demand for Mundra port.

Containers: We estimate additional container capacity requirement of 7m TEU (~85m tpa)over FY11-17 on the west coast, of which around 33%, i.e., 2.4m TEU (~30m tpa) will be metby Mundra port. We expect Mundra port to report significant container cargo growth given 1)lack of competition (only Pipavav port is adding capacity in the near term, we don’t see anyprogress at JNPT yet), 2) capacity at Mundra is already available, two container terminalscurrently have utilisation of 60%, in addition to the expansion plans (refer section below) and 3)well-known advantages of proximity to the northern hinterland will be enhanced by progresson the dedicated freight corridor.

Strong drivers: coal crude and container growth

13.5GW of imported coal-fired power capacity in vicinity = 48m tpa of assured coal cargo

Container momentum strong at both terminals





Infrastructure update at Mundra portWe were impressed with the progress in infrastructure development at several locations atMundra port.

Fig 8 – Mundra capacity details and status

Port Terminal type No ofberths

Capacitym tpa/TEU

Status/ pending work/ comments

Existing port Adani container terminal 2 15/(1.25) OperationalMundra international containerterminal 2 15/(1.25) Operated by DP World,

General bulk terminal 1 4 10 Operational

General bulk terminal 2 4 10 OperationalNew bulk terminals 4 20 Operational by FY13-14

SPM 1 NA 12.5 Completed and in operation

SPM 2 NA 12.5 Competed about to becomeoperational

South basin Container terminal 4 40 Piling work in progress

West basin Coal terminal 3 60

Work on the marine side completed;2 berths operational. Work ongoingfor the third berth.Work for conveyors completed instages and partly operational. 9GWoperational power plants by FY14

East basin Project cargo terminal To be developed in FY17/18

North basin Chemical cargo terminal To be developed in FY17/18Source: Company Reports

Fig 9 – Work in progress at new containerterminals

Fig 10 – West port coal conveyors

Source: Standard Chartered Research Source: Standard Chartered Research

SEZ: Slow starter but infrastructure advantages likely to prevailThe 33,000-acre Mundra SEZ is an integral part of Mundra port, as units located in the SEZ helpcreate additional demand for cargo traffic. However, pick-up in activity has been slow.Furthermore, with the government proposing to impose MAT on SEZ units, it will be difficult toattract new manufacturing units to the SEZ. In the medium to long run we believe land availabilityand excellent infrastructure advantages will attract investments into the zone. Already, as muchas 2,900 acres have been leased out and units are operational.

Work in full flow on container as well as bulk terminals





Fig 11 – Mundra SEZ details and statusProject Status/ CoD Type of work Cargo requirementMaruti Export terminal Operational Washing/ painting RO-RO

(General/ Bulk terminal)Adani agri-park Under construction Export Bulk

(General cargo terminal)Adani Wilmar Operational Edible oil manufacturing Bulk

(General cargo terminal)Bharat Forge-Alstom Under construction Power equipment manufacturing Project cargoThermax Operational Power equipment manufacturing Project cargoTata Power Under construction Power generation Coal/ project cargoAdani Power Partially completed Power generation Coal/ project cargoApparel park 11 units operational Textile Container cargoOCCL Under construction Tank farms Liquid cargoSource: Company reports

Adani group’s trading capabilities synergic for MPSEZThe Adani group is India’s largest importer of coal and has coal reserves in Indonesia andAustralia. MPSEZ has taken on the task of building requisite port infrastructure to import andexport coal. We expect MPSEZ to add 160m tpa of capacity at newer locations by FY17, of which~98m tpa will be dedicated coal infrastructure (see table below).

Fig 12 – MPSEZ diversifying locationsPort Terminal Operational capacity (m tpa)

FY11 FY14E FY17EDahej General dry bulk 20 20 20Hazira coal/ container/ MP 0 25 70

Mormugao Coal terminal 0 12 12

Vishakapatnam Coal terminal 0 0 8Abbott, Australia Coal terminal 20 50 50

Total capacity beyond Mundra 40 107 160Source: Company, Standard Chartered Research

Among these projects, two have significant advantages.

Abbot Point, AustraliaLocated in northeast Australia in Queensland province, the AUD1.8bn/ 50m tpa port recentlyacquired by MPSEZ is close to Australia’s coal exporting zone. The port, which was developed bythe Australian government, has take-or-pay agreements with several producers till 2030 andhence provides annuity streams, which takes care of the AUD1.8bn acquisition cost funded

entirely through debt. In addition, we see a strategic fit for the Adani group, as the port is one ofthe closest ports to Adani group’s coal mines in Carmicheal, Australia. The mine, which has aresource of 7.8bn tonnes, is expected to produce 60m tpa of coal by FY23, predominantly forexports. Key features of the port’s economics are summarised below:

Secured TOP volume going up from 21m tonnes in FY11 to 50m tonnes in FY17E, revenueincreasing from AUD126m to AUD350m by FY17E

Market pricing of port tariffs post FY18

Assuming management control in FY16/17 and increasing the capacity of the port to 80m tpa,the capex to be funded from internal accruals

SEZ taking off but slowly, 31,000 acres still available





Fig 13 – Port of Abbot Point location Fig 14 – Abbot Point TOP volume

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Source: Google Maps, Standard Chartered Research Source: Standard Chartered Research estimates

Hazira portMPSEZ has won a construction/operation concession for 35 years to construct 13 container/ coal/ general cargo terminals at the port, which is owned 74:26 by Shell Gas and Total Gaz (France).Its advantage over Pipavav is its hinterland traffic as it lies on the Delhi-Mumbai corridor, which isalready well connected with the northern hinterland. We believe this is a strategically primelocation for a container port. The master plan for the port is at the discussion stage and accordingto current indications 1.5km of the total 5.5km of waterfront available will be developed in the firstphase, which will enable it to handle 40m tpa of cargo (mix of bulk and container cargo) going upto 70m tpa by FY17.

Fig 15 – MPSEZ’s Gujarat port locations

Source: Google Maps, Standard Chartered Research

Hazira port is being developed as a non-crude extension to the existing Shell terminal. Therefore,it already has a 1,000 metre long channel, a turning radius of 600 metres, a dredged depth of 12

metres and draft of 16 metres.

Assured TOP volumes and revenues till 2030

Hazira has good potential with strong

industrialisation





Other ports Dahej – Dahej port was originally developed as an LNG import terminal by Petronet LNG.

Adani had entered into a 74:26 JV to develop a 20m tpa bulk cargo terminal, which

commenced operations in December 2010. The port is strategically located to the north ofHazira, deeper inside the Gulf of Khambat and caters to cargo in the industrialised zonesaround Bharuch and Baroda as its primary hinterland and cargo from Ahmedabad and Indoreas its secondary hinterland. We expect the port to report steady pick-up in traffic, with 4.5mtpa in FY12 rising to 12m tpa in FY14 and full capacity utilisation by FY19.

Mormugao – MPSEZ is developing a 12m tpa mechanised coal berth in Mormugao port (amajor port), which will cater to coal demand from existing and new iron/steel units in thehinterland around Goa, Maharashtra and North Karnataka. Being in a major port, the tariffshere are regulated by TAMP and MPSEZ will be sharing 20% of the revenue under the termsof the concession agreement.

Vishakapatnam – MPSEZ recently won a concession to develop an 8m tpa mechanised coal

berth in Vishakapatnam port (a major port), which will cater to coal demand of the powerplants coming up in the vicinity. Like Mormugao, the tariffs here are regulated by TAMP andMPSEZ will be sharing 40% of the revenue under the terms of the concession agreement.





Valuation

To value MPSEZ, we use SOTP and value individual ports on DCFE. We have used 13% cost of

equity across the ports and ascribed 5% conglomerate discount to cumulative value.

Fig 16 – DCF and SOTP valuation

Business Valuation (Rs m) Value/ share (Rs) Capacity m tpa(FY14-17E) Rs m/m tpa

Mundra Port 264,725 132 178 1,491Abbot Point 55,017 27 50 1,100

Hazira 46,653 23 25 1,866

SEZ 30,969 15

Dahej Terminal 20,144 10 20 1,007Mormugao 3,533 2 12 294

Adani Logistics 2,063 1

Vishakapatnam 1,086 1 8 136Total 424,189 212

Price target 402,979 201Source: Standard Chartered estimates

The valuation implies a P/E of 25x, EV/EBITDA of 17x and P/B of 6x to our consolidated FY13estimates. Given 35% earnings CAGR over FY11-14, 47% EBITDA CAGR, EBITDA marginsmore than 66% and RoE of 27%, we believe valuations are justified. Furthermore, MPSEZ hascash RoE of 37% and trades at 18x FY13 cash EPS on our implied price target.

Fig 17 – Valuation scenariosFY11 FY12E FY13E FY14E

Ratios at price target Rs201

Diluted price earnings ratio 44.0 34.7 25.1 18.0

Diluted price to cash earnings ratio 34.9 23.6 18.5 14.1

EV/EBITDA 33.5 21.6 17.5 13.4

Price to book value 9.6 7.8 6.2 4.7

Ratios at current price Rs152



EV/EBITDA 25.8 17.7 14.4 10.9

Price to book value 7.3 5.9 4.6 3.6

RoE 23.9 24.9 27.5 29.8

Cash RoE 30.2 36.5 37.2 37.9Source: Standard Chartered estimates

We expect earnings to grow 8x between FY08 and FY13, but the current stock price is still about40% lower than the FY08 peak. We believe the valuation correction is done, and it is now tradingat the lower end of its PE band despite 35% earnings CAGR over FY11-14E.

Fig 18 – Earnings growth of 8x from FY08 to FY13, share price fitting into the band

0

50

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N o v - 0 7

J a n - 0 8

M a r - 0 8

M a y - 0 8

J u l - 0 8

S e p - 0 8

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J a n - 0 9

M a r - 0 9

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Share price 14x 20x 26x 32x 38x

Source: Bloomberg, Standard Chartered estimates

Mundra port contributes 63% to total valuation

P/E 25x FY13E,EV/EBITDA 18x at price target is attractive given high

growth and RoEs





Key Risks

SEZ is critical for MPSEZ: Less than 10% of the 33,000-acre SEZ has been taken up to date.

MPSEZ has demarcated zones for different types of industries, but there has not beenprogress. Capex hindering high interest rates and MAT imposed on the units could dampendemand.

Future acquisition/greenfield expansion on the east coast of India by MPSEZ could impact thecompany negatively or positively depending on the bid structure, cost and traffic dynamics.





FinancialsWe expect MPSEZ to generate over Rs56bn in net operational cash over FY12-14, driven by

45% revenue and 35% net profit growth over FY11-14E. MPSEZ enjoys mature RoE of 25%,which we expect to improve to 30% driven by improved margins from Abbot Point.

Fig 19 – OCF and revenue Fig 20 – EPS

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Fig 21 – Return ratios Fig 22 – EBITDA margin

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Fig 23 – Net debt to equity Fig 24 – Asset turnover

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35% EPS CAGR likely over FY1114





Fig 25 – Profit and loss statement (Rs m) Year end: Mar FY10 FY11 FY12E FY13E FY14EOperating income (sales) 14,955 20,001 36,969 47,174 60,648

Port income - - 21,891 28,298 34,096SEZ income - - 3,142 3,348 4,674

Other ports 10,097 15,529 21,878Subsidiaries - - 1,839 1,989 2,153

Operating expenses 5,293 7,007 11,582 15,602 19,717

EBITDA 9,663 12,994 25,388 31,572 40,931

% margins 64.6 65.0 68.7 66.9 67.5 Depreciation & amortisation 1,868 2,388 5,413 5,706 6,109

Gross interest 559 880 6,396 6,425 7,171Other income 321 309 436 381 524

Recurring PBT 7,556 10,036 14,014 19,823 28,175

Add: extraordinaries (220) - - - -

Less: Taxes 601 - 2,472 3,626 5,362--Current Tax 80 - 2,472 3,626 5,362--Deferred Tax 521 - - - -

Net Income (reported) 6,760 9,142 11,617 16,034 22,431

Recurring net income 6,979 9,142 11,617 16,034 22,431Source: Company, Standard Chartered Research estimates

Fig 26 – Balance sheet (Rs m)As at end Mar FY10 FY11 FY12E FY13E FY14EAssets

Total current assets 17,191 16,747 22,012 25,744 32,389

of which cash & cash eqv. 9,997 8,828 7,513 6,633 7,979 Total current liabilities & provisions 5,494 6,112 9,689 12,856 13,183

Net current assets 11,698 10,636 12,323 12,888 19,206Investments 2,219 2,132 2,105 2,097 2,095

of which

Strategic/Group 697 609 583 575 572

Other Marketable 1,523 1,523 1,523 1,523 1,523 Net fixed assets 67,682 72,532 193,061 209,116 219,233

Goodwill 29 - - - -

Total assets 81,629 85,299 207,489 224,102 240,534

Liabilities

Borrowings 37,062 33,811 146,054 148,449 144,403

Deferred tax liability 2,817 2,796 3,484 3,987 4,335Others 6,389 5,973 5,694 5,414 5,135

Preference share capital 28 28 28 28 28Equity share capital 4,007 4,007 4,007 4,007 4,007

Face value per share (Rs) 2 2 2 10 10 Reserves & surplus* 30,504 37,842 47,456 61,286 81,313

Less: Misc. Exp. n.w.o. 0 0 0 0 0Net worth 34,538 41,877 51,491 65,321 85,348

Total liabilities 81,629 85,299 207,489 224,102 240,534Source: Company, Standard Chartered Research estimates





Fig 27 – Cash flow statement (Rs m)Year end: Mar FY10 FY11 FY12E FY13E FY14EOperating cash flow 9,048 11,221 16,594 21,359 28,016

Working capital changes -1,380 -107 -3,003 -1,445 -4,972Capital commitments -17,775 -7,149 -125,915 -21,754 -16,223

Free cash flow -10,107 3,965 -112,324 -1,840 6,821Cash flow from investing activities 189 309 436 381 524

Issue of share capital -16,790 0 0 0 0

Inc (Dec) in borrowings 8,105 -3,251 112,242 2,395 -4,046Dividend paid 1,603 1,803 2,003 2,204 2,404

Chg. in cash & bank balance -2,925 -1,198 -1,315 -880 1,346Source: Company, Standard Chartered Research estimates

Fig 28 – RatiosYear end: Mar FY10 FY11 FY12E FY13E FY14EPer Share Data (Rs)

EPS(basic recurring) 3.4 4.6 5.8 8.0 11.2

Diluted recurring EPS 3.5 4.6 5.8 8.0 11.2Recurring cash EPS 4.4 5.8 8.5 10.9 14.2

Dividend per share (DPS) 0.8 0.9 1.0 1.1 1.2

Book value per share (BV) 17.2 20.9 25.7 32.6 42.6Growth Ratios (%)

Operating income 25.2 33.7 84.8 27.6 28.6

EBITDA 31.6 34.5 95.4 24.4 29.6

Recurring net income 61.4 31.0 27.1 38.0 39.9

Diluted recurring EPS 61.4 31.0 27.1 38.0 39.9Diluted recurring CEPS 52.7 30.3 47.7 27.7 31.3

Valuation Ratios (x)

P/E 43.5 33.2 26.1 18.9 13.5P/CEPS 34.3 26.3 17.8 14.0 10.6

P/BV 8.8 7.3 5.9 4.6 3.6

EV / EBITDA 35.0 25.8 17.7 14.4 10.9EV / Operating income 22.6 16.8 12.2 9.6 7.4

EV / Operating FCF 44.1 30.2 33.1 22.8 19.4

Operating Ratio

Personnel expenses / revenue 4.0 4.0 2.4 2.0 1.8Other Income / PBT (%) 4.2 3.1 3.1 1.9 1.9

Effective tax rate (%) 7.9 8.7 17.6 18.3 19.0

NWC / total assets (%) 2.1 2.1 2.3 2.8 4.7

D/E Ratio (x) 1.3 1.0 3.0 2.4 1.8Return/Profitability Ratio (%)

Recurring net income margins 45.7 45.0 31.1 33.7 36.7RoCE 11.0 12.9 12.0 10.2 12.6

RoNW 21.9 23.9 24.9 27.5 29.8

Dividend payout ratio 23.0 19.7 17.2 13.7 10.7

Dividend yield 0.5 0.6 0.7 0.7 0.8

EBITDA margins 64.6 65.0 68.7 66.9 67.5Source: Company, Standard Chartered Research estimates





Company profileMundra Port and SEZ is part of the Adani group, which has interests in power generation and

transmission, coal trading and mining, gas distribution, port and oil & gas exploration. The groupincludes Adani Enterprises, which is India’s largest importer of coal and one of the largest tradinghouses, and Adani Power, one of the largest power generators in the private sector.

MPSEZ was promoted in 1997 to develop the Mundra port and the special economic zone in theKutch district of Gujarat. In a short span of 13 years, it has become the 7 th largest port and thelargest private sector port in India.

Fig 29 – Shareholding pattern

Promoter78%

DII4%

FII10%

Others8%

Source: BSE

Fig 30 – ManagementName Designation Background

Gautam AdaniChairman

and Managing Director

The company’s Executive Chairman and founder of theAdani Group has over 25 years of varied businessexperience. Under his leadership, the Adani Group hasemerged as a diversified Energy and Logisticsconglomerate with interests in Power Generation &Transmission, Coal Trading & Mining, Gas Distribution,Oil & Gas Exploration, along with Ports and SpecialEconomic Zones

Source: Company





Essar PortsGaining size


Rs106 PRICE TARGET

Rs190

Bloomberg code Reuters codeESRS IN ESRS.NS

Market cap 12 month rangeRs44,362m (US$991m) Rs101.55 - 194.70


We initiate coverage with an OUTPERFORM rating andprice target of Rs190/sh. It offers discounted valuationson the back of strong traffic and earnings growth.

Essar Ports’ capacity is likely to reach 168m tpa byFY17E, making it one of India’s largest ports.

Around 28% of its capacity is locked into take-or-paycontracts with Essar group companies with a minimumrevenue guarantee of Rs12bn per year over FY12-15E.

We expect 36% traffic CAGR to FY14E, leading to 38%EBITDA and 131% net profit CAGR over FY11-14E.

We estimate EBITDA margin of 70%+ going forward.Year end: March 2011E 2012E 2013E 2014ESales (Rs m) 7,327 10,180 15,467 19,597EBIT (Rs m) 3,656 5,333 8,532 10,641EBITDA (Rs m) 5,340 7,515 11,396 14,037Pretax profit (Rs m) 592 2,047 4,022 5,139Earnings (Rs m) adjusted 333 1,409 3,016 4,114Diluted EPS (Rs ) adjusted 0.81 3.44 7.36 10.03Dilut ed EPS growth (%) adj. -150.3 323.3 114.0 36.4DPS (Rs ) 0.00 0.00 0.00 0.00DPS growth (%) - - - -EBITDA margin (%) 72.9 73.8 73.7 71.6EBIT margin (%) 49.9 52.4 55.2 54.3Net margin (%) 4.5 13.8 19.5 21.0Div payout (%) 0.0 0.0 0.0 0.0Book value/share (Rs ) 53 57 64 74

Net gearing (%) 204 278 262 230ROE (%) 2.2 6.2 12.2 14.5ROACE (%) 5.3 4.9 7.1 8.8FCF (Rs m) -17,235 -18,624 -2,657 -1,025EV/Sales (x) 11.9 10.4 7.0 5.6EV/EBITDA (x) 16.4 14.1 9.5 7.8PBR (x) 2.0 1.9 1.7 1.4PER (x) 130.6 30.9 14.4 10.6Dividend yield (%) 0.0 0.0 0.0 0.0Source: Company, Standard Chartered Research estimates


100110120

130140150160170180190200

Jun ‐ 10 Sep ‐ 10 Dec ‐ 10 Mar ‐ 11

Essar Ports BSE SENSEX 30 INDEX (rebased)

Share price (%) -1 mth -3 mth -12 mthOrdinary shares -29 -20 -19Relative to Index -29 -21 -25Relative to Sector - - -Major shareholder Promoter share holding (83.0%)Free float 17%Average turnover (US$) 537,270

Captive demand from group companies. Essar Portshandles the cargo requirements of Essar group companies(Essar Oil and Essar Steel), which are likely to generatetotal cargo demand of 85m tpa. The company has enteredinto take-or-pay (TOP) agreements for 47m tpa of cargowith them, resulting in an annuity stream of Rs12bn/year.

Amongst the largest port owner/operators . Essar Ports’capacity is likely to reach 168m tpa by FY17E from thecurrent 67m tpa. The company is adding capacity at fourlocations: Vadinar (SPM/POL with 34m tpa operational,

expanding to 45m tpa), Hazira (dry bulk/container, 30m tpaoperational, expanding to 50m tpa), Salaya (bulk/containerterminals under construction, 20m tpa) and Paradip (coaland iron ore terminals under construction, 34m tpa).

High margin and high traffic growth. Given a highproportion of crude cargo and mechanisation, Essar Portsenjoys healthy margins of >70%, which we believe issustainable. With secured bulk cargo traffic under TOParrangements and good port locations, we expect traffic topost 36% CAGR over FY11-14E to 98m tpa.

Valuation. Our sum-of-the-parts NAV of the four ports isRs111bn or Rs271/sh; our price target based on 30%discount to NAV is Rs190. The stock is trading at FY13EPE, EV/EBITDA and PB of 14x, 9.5x and 1.7x, respectively.We expect 39% revenue and 131% earnings CAGR overFY11-14E; expect cash RoE of 22% over FY12-14E.

Risks. Lack of external customers increases thedependence on the performance of group companies forcargo growth. Essar Ports’ DE ratio is slightly high at 2.6xFY13E; however, given the Rs14bn cumulative netoperating cash flow over FY12-14E (gross debt of Rs69bnin FY13E), we believe the company is well funded.

Source: Company, Bloomberg







Investment argument and valuationEssar Ports, which emerged from the de-merger of Essar Shipping and Ports Ltd, is amongst thelargest port operators in the private sector with 67m tpa port capacity at two locations (Vadinarand Hazira). Its total capacity is likely to increase to 168m tpa (in four locations) by FY17. EssarPorts mostly caters to bulk and crude cargo, however, captive demand of 85m tpa from groupcompanies (Essar Oil and Essar Steel) benefits it significantly. Essar Ports has take-or-paycontracts with group companies to handle 10m tpa in FY11, which is to rise to 47m tpa by FY17,translating into secure annuity revenue stream of Rs7bn in FY11 going up to Rs16m in FY17.Because of low cargo handling and operational costs, Essar Ports enjoys EBITDA margins ofabove 70%. We believe Essar Ports trades at a steep discount to MPSEZ and ascribe a pricetarget of Rs190, which is a 30% discount to our NAV estimate of Rs111bn (Rs273/sh).

Amongst the largest port operators – bulk and crude to lead

Essar Ports is expanding its cargo capacity at three standalone ports on the west coast and two

terminals on the East coast. It is poised to raise capacity from 67m tpa in FY11 to 168m tpa byFY16, making it the second-largest port operator in the private sector after MPSEZ. Based oncaptive traffic growth (refer section below) from the Essar group, we expect cargo traffic to reach98m tonnes by FY14, 36% CAGR over FY11-14E and 130m tonnes by FY17, 22% CAGR overFY11-17E.

Fig 1 – Essar Ports: capacity Fig 2 – Essar Ports’ traffic growth

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General bulk Crude/ liquid ContainersCoal Iron ore


Fig 3 – Essar port locations: Vadinar andSalaya Fig 4 – Essar port location: Hazira

Source: Google Maps, Standard Chartered Research Source: Google Maps, Standard Chartered Research

Capacity CAGR of 28%, traffic CAGR 22% over FY11-17E





Captive demand leading to growth

Essar Ports currently operates from two locations, Vadinar and Hazira, which have captivelinkages with Essar group companies Essar Oil and Essar Steel. The linkages guarantee EssarPorts take-or-pay contracts for 47m tpa of cargo traffic by FY17, which translates into minimumrevenue of Rs16bn (see charts below).

Fig 5 – Take-or-pay off-take Fig 6 – Take-or-pay revenue

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Vadinar Port – Essar Oil: Vadinar port, which handles all the cargo for Essar Oil’s refinery,has adequate infrastructure to handle refinery expansion, which will be completed over FY12-13. The port already has a 27m tpa SPM, which handles crude imports, and two productberths of 7m tpa each. It also has 7m tpa of rail and road gantries and 5m tpa of producthandling capabilities, which we have not incorporated into our capacity calculations to ensureparity with other port operators. It is also expanding the existing terminal to handle anadditional 12m tpa of liquid cargo traffic. Essar Oil has already planned phase II of its

expansion to raise capacity to 38m tpa, which may materialise only post FY15-16. If thishappens, then Vadinar port would expand beyond our current estimates.

Fig 7 – Essar Oil capacity expansion Fig 8 – Vadinar port capacity

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* Not included in our capacity calculation

Essar Steel – Hazira port. Essar Steel already has a 5m tpa steel plant at Hazira. For thisplant, the Hazira port handles iron ore imports (from the East coast), coking coal imports andhot rolled and cold rolled steel exports. Total traffic from these segments is likely to be 10mtpa in FY11. The steel plant is being expanded to 14m tpa by FY13 and therefore Essar Portshas a TOP commitment capacity of 18m tonnes and 25m tonnes for FY12 and FY13,respectively.

47m tpa capacity and Rs16bn revenue

committed under TOP

Vadinar port 58 m tpa and Hazira port 30 m tpa operational





Fig 9 – Essar Steel capacity expansion Fig 10 – Hazira port capacity

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C a p a c i t y

Bulk Container


Essar Power Salaya. Essar Power, another Essar group company, is building a 2 x 600MW

coal-fired power generation plant at Salaya, which should become operational in Aug/Dec2012. It plans to expand capacity to 2,520MW by FY15. Essar Power imports coal from itsown mines in Mozambique and Indonesia and has entered into a TOP agreement with Salayaport to handle the coal.

Fig 11 – Essar Power captive demand Fig 12 – Salaya port capacity/ traffic

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Essar Steel – Paradip port. Essar Steel is setting up a 12m tpa integrated pelletisation facilityat Paradip, where Essar Ports is building two terminals, one for iron ore and the other for coal,using the PPP route. The iron ore terminal will export pelletised iron ore to Essar Steel’sHazira unit. This terminal has entered into a TOP with Essar Steel to export up to 10.8m tpa ofiron ore pellets by FY14. The coal terminal will import coal primarily for external customersoperating power plants in the region.

Fig 13 – Paradip traffic mix Fig 14 – Paradip terminal capacity

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Iron ore CoalSource: Standard Chartered Research estimates Source: Standard Chartered Research estimates

Salaya and Paradip projects have Essar group customer base





Valuation

We value Essar Ports at a 30% discount to DCFE using post tax earnings adjusted fordepreciation, working capital changes and capex. In line with our view that the sector is a low riskinvestment, we use market beta of 0.9 to derive cost of equity of 13%. This implies a value ofRs190/sh as shown in the table below.

Fig 15 – Essar Ports valuation

Valuation (Rs m) NAV(FY12E in Rs m)

Value pershare (Rs)

Port capacityin FY14 ( MTPA) Rs/MTPA

Vadinar 34,669 85 45 766

Hazira 59,907 146 40 1498

Salaya 19,085 47 20 954

Paradip 5,778 14 20 289

Parent debt 8,200 20

NAV 111,238 271

Discount to NAV (%) 30Target valuation 77,867 190Source: Standard Chartered estimates

The valuation implies a P/E of 55x, EV/EBITDA of 19x and P/B of 3.3x on our consolidated FY12estimates, which is steep at first glance. But, factoring in 39% revenue and 131% earnings CAGRover FY11-14E with expected cash RoE of 22% over FY12-14E, valuations look attractive.

Fig 16 – Valuation ratios at price targetFY11 FY12E FY13E FY14E

Ratios at target price Rs190

Diluted Price Earning Ratio 233.9 55.3 25.8 18.9Diluted price to cash earnings ratio 38.6 21.7 13.2 10.4

EV/EBITDA 22.8 18.7 12.5 10.2

Price to Book Value 3.6 3.3 3.0 2.6

Ratios at current price Rs104Diluted Price Earning Ratio 130.6 30.9 14.4 10.6


EV/EBITDA 16.4 14.1 9.5 7.8Price to Book Value 2.0 1.9 1.7 1.4

RoE 2.2 6.2 12.2 14.5

Cash RoE 13.2 15.9 23.7 26.5Source: Standard Chartered estimates

Risks

Internal cargo concentrationBecause of the high concentration of Essar group cargo, Essar Ports’ performance dependsheavily on the expansion plans of group companies Essar Oil, Essar Steel and Essar Power.Despite the take-or-pay contracts, project commissioning poses a risk to volume off-take.

Competition from emerging Gujarat ports for external trafficWe believe Essar Ports’ key port is Hazira given that it can be expanded 2-3x from currentcapacity, whereas the other three projects are likely to hit peak capacity in the first couple ofyears of operation. Essar’s Hazira port will face stiff competition from Adani’s Hazira port,especially for coal and container traffic.

EV/EBITDA at 13x on FY13E at target price





FinancialsEssar Ports is likely to post revenue CAGR of 39% and earnings CAGR of 131% over FY11-14Egiven new port capacity coming on stream, increase in off-take from Essar group companies andimproving operating and financial leverage, in our view. This is also likely to improve RoE andRoCE over the same period.


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Fig 23 – Profit and loss statement (Rs m) Year end: Mar FY11E FY12E FY13E FY14EOperating income (sales) 7,327 10,180 15,467 19,597

Growth 0 39 52 27Operating expenses 1,987 2,665 4,071 5,560

EBITDA 5,340 7,515 11,396 14,037

% margins 72.9 73.8 73.7 71.6 Depreciation & amortisation 1,684 2,182 2,864 3,396

Gross interest 3,064 3,409 4,646 5,653

Other income 0 124 136 150

Recurring PBT 592 2,047 4,022 5,139

Add: Extraordinaries 0 0 0 0Less: Taxes 132 638 1,006 1,025

- Current tax 0 0 0 0

- Deferred tax 0 0 0 0Less: Minority interest 0 0 0 0

Net income (reported) 333 1,409 3,016 4,114

Recurring net income 333 1,409 3,016 4,114Source: Company, Standard Chartered Research estimates

Fig 24 – Balance sheet (Rs m)As at end Mar FY11E FY12E FY13E FY14EAssets

Total current assets 5,250 8,430 13,446 16,054

of which cash & cash eqv. 800 2,248 4,052 4,152 Total current liabilities & provisions 6,850 7,525 9,146 11,589

Net current assets -1,600 905 4,299 4,465Investments

of which 680 680 680 680

Strategic/Group 680 680 680 680

Other marketable 0 0 0 0 Net fixed assets 53,020 71,872 75,819 80,742

of which

intangibles 0 0 0 0

Capital work-in-progress 20,350 10,054 11,147 5,381Goodwill 14,470 14,470 14,470 14,470

Total assets 66,570 87,927 95,268 100,357

Liabilities

Borrowings 44,690 64,638 68,963 69,938

Deferred tax liability 0 0 0 0Minority interest 0 0 0 0

Equity share capital 4,100 4,100 4,100 4,100

Face value per share (Rs) 10 10 10 10 Reserves & surplus* 0 0 0 0

Less: Misc. exp. n.w.o. 17,780 19,189 22,205 26,319

Net worth 21,880 23,289 26,305 30,419

Total liabilities 66,570 87,927 95,268 100,357Source: Company, Standard Chartered Research estimates





Fig 25 – Cash Flow Statement (Rs m)Year end: Mar FY11E FY12E FY13E FY14EOperating cash flow 1,708 1,165 5,816 7,593

Working capital changes -7,863 -1,058 -1,590 -66Capital commitments -11,080 -18,732 -6,884 -8,552

Free cash flow -17,235 -18,624 -2,657 -1,025

Cash flow from investing activities 0 124 136 150Issue of share capital 0 0 0 0

Buyback of shares -184 0 0 0

Inc (Dec) in borrowings 16,669 19,948 4,325 975

Dividend paid 0 0 0 0

Extraordinary Items 0 0 0 0Chg. in cash & bank balance 12,353 1,448 1,804 100Source: Company, Standard Chartered Research estimates

Fig 26 – Ratios

Year end: Mar FY11E FY12E FY13E FY14EPer Share Data (Rs)

EPS (basic recurring) 0.8 3.4 7.4 10.0

Diluted recurring EPS 0.8 3.4 7.4 10.0

Recurring cash EPS 4.9 8.8 14.3 18.3Dividend per share (DPS) 0.0 0.0 0.0 0.0

Book value per share (BV) 53.4 56.8 64.2 74.2

Growth Ratios (%)Operating income 68.4 38.9 51.9 26.7

EBITDA 63.5 40.7 51.6 23.2

Recurring net income -147.2 323.3 114.0 36.4Diluted recurring EPS -149.3 323.3 114.0 36.4

Diluted recurring CEPS 215.0 78.1 63.7 27.7Valuation Ratios (% YoY)

P/E 130.6 30.9 14.4 10.6P/CEPS 21.6 12.1 7.4 5.8

P/BV 2.0 1.9 1.7 1.4

EV / EBITDA 16.4 14.1 9.5 7.8EV / Operating income 11.9 10.4 7.0 5.6

EV / Operating FCF -5.1 -5.7 -40.8 -106.6

Operating RatioRaw material/sales (%) 27.1 23.0 24.2 26.6

SG&A/sales (%) 0.0 0.0 0.0 0.0

Other income / PBT (%) 0.0 6.1 3.4 2.9

Effective tax rate (%) 22.3 31.2 25.0 19.9NWC / total assets (%) -3.6 -1.5 0.3 0.3Inventory turnover (days) 44.2 85.7 86.1 90.2

Receivables (days) 180.4 152.5 147.0 158.7

Payables (days) 1,902.8 979.1 747.3 680.6D/E Ratio (x) 2.0 2.8 2.6 2.3

Return/Profitability Ratio (%)

Recurring net income margins 4.5 13.7 19.3 20.8RoCE 5.3 4.9 7.1 8.8

RoNW 2.2 6.2 12.2 14.5

Dividend payout ratio 0.0 0.0 0.0 0.0

Dividend yield 0.0 0.0 0.0 0.0EBITDA margins 72.9 73.8 73.7 71.6Source: Company, Standard Chartered Research estimates





Company profileEssar Ports, earlier Essar Shipping and Logistics (ESPL), was formed after spinning off theshipping and oil field services businesses of the company (under Essar Shipping). As part of thede-merger scheme, for every three shares of ESPL, two shares of Essar Ports and one share ofEssar Shipping was swapped.

The company belongs to the Essar group, which is a conglomerate that has interests in steel, oil& gas, power, shipping and engineering services. Essar Ports handles all the captive ports andstorage assets of the group.


Others8%

FII8%

DII0%

Promoter84%

Source: Company, Standard Chartered Research estimates


Shashi Ruia Chairman Founder/ Chairman of the Essar Group

Rajiv Agarwal Managing Director

Rajiv Agarwal is a chartered accountant with over 25 yearsexperience in various levels of the Essar group, was the MD of EssarShipping and Ports since August 2010. He was earlier ExecutiveDirector of Essar Shipping between 1998 and 2002 and the CEO ofMobile Store prior to joining Essar Shipping and Ports

Source: Company





Gujarat Pipavav PortsSteady growth in traffic and margins

IN-LINE (initiating coverage)PRICE (as at 16 June 11)

Rs64 PRICE TARGET

Rs71

Bloomberg code Reuters codeGPPV IN GPPL.NS

Market cap 12 month rangeRs27,637m (US$617m) Rs46.00 - 69.85


We initiate coverage with an IN-LINE rating and pricetarget of Rs71/sh. GPPL scores high on qualitativeparameters; however, valuations look expensive; tradesat CY12E PE and EV/EBITDA of 31x and 15x.

GPPL benefits significantly from its parent APMM, oneof the world’s largest port and container operators.

GPPL is well-located – close to JNPT with good accessto the hinterlands of Saurashtra and north India. Weexpect healthy cargo CAGR of 11% over CY10-13E.

EBITDA margin is likely to improve to 52% in CY13Efrom 16% in CY09.

Year end: December 2010 2011E 2012E 2013ESales (Rs m) 2,839 3,473 4,419 5,342EBIT (Rs m) 535 1,179 1,734 2,214EBITDA (Rs m) 1,027 1,669 2,247 2,783Pretax profit (Rs m) -655 424 889 1,222Earnings (Rs m) adjusted -655 424 889 1,222Diluted EPS (Rs ) adjusted -1.5 1.0 2.1 2.9Diluted EPS growth (%) adj. -61.4 -164.6 109.8 37.5DPS (Rs ) 0.00 0.00 0.00 0.00DPS growth (%) - - - -EBITDA margin (%) 36.2 48.1 50.8 52.1EBIT margin (%) 18.8 34.0 39.2 41.4Net margin (%) -23.1 12.2 20.1 22.9Div payout (%) 0.0 0.0 0.0 0.0Book value/share (Rs ) 17 18 20 23

Net gearing (%) 108 109 110 107ROE (%) -12.5 5.6 10.8 13.2ROACE (%) 4.2 8.1 10.7 12.1FCF (Rs m) -1,031 47 -607 -580EV/Sales (x) 11.6 9.5 7.5 6.3EV/EBITDA (x) 32.1 19.7 14.8 12.1PBR (x) 3.7 3.5 3.1 2.7PER (x) -41.2 63.7 30.4 22.1Dividend yield (%) 0.0 0.0 0.0 0.0Source: Company, Standard Chartered Research estimates


4045

5055606570

Sep ‐ 10 Dec ‐ 10 Mar ‐ 11 Jun ‐ 11

Gujarat Pipavav Ports BSE SENSEX 30 INDEX (rebased)

Share price (%) -1 mth -3 mth -12 mthOrdinary shares 11 11 45Relative to Index 11 9 33Relative to Sector - - -Major shareholder Promoter share holding (43.0%)Free float 57%Average turnover (US$) 404,795

Strong parentage. APMM (AP Moller Maersk) is one of theworld’s largest port operators, with CY10 revenue ofUS$56bn. It operates 50 terminals in 34 countries; in CY10,APM Terminals handled 32m TEUs with revenue of>US$4.3bn. Strong parentage provides GPPL 1) alignmentwith international shipping routes, 2) professional andexperienced management and 3) best in class governanceand business practices.

Healthy cargo growth . We expect GPPL to post stronggrowth in cargo traffic – 21% CAGR over CY10-13E. Trafficgrowth is likely to be driven by 1) APMM group – contributesover 50% of container traffic, 2) location advantage withaccess to hinterlands of Saurashtra and north India, 3)closeness to JNPT (150 nautical miles) to receive spill overtraffic particularly from parent’s Gateway terminal in JNPTand 4) robust demand for coal (from upcoming units in theregion) and for containers from north and western India.

Margin expansion . We expect significant improvement inoperating leverage. EBITDA margin is likely to improve from16% (CY09) to 52% (CY13E) and EBITDA to post 39%CAGR over CY10-13E, in our view. Net profit margin is

likely to rise from 12% in CY11E to 23% in CY13E. Otherlarge private ports have EBITDA margin of 65-70% andNPM of 25-30%.

Valuation. We value GPPL at Rs30bn or Rs71/sh. Thestock is trading at CY12E PE, EV/EBITDA and PB of 30x,15x and 3.1, respectively; we expect earnings CAGR of70% over CY11-13E. GPPL has solid management andcargo growth, however, we do not expect significant upside.

Key risks. Competition for bulk cargo from local ports andlack of captive bulk cargo customers. We have not factoredin cargo from power plants being set up in the region.

Source: Company, Bloomberg







Investment argument and valuationGujarat Pipavav Ports (GPPL) operates the strategically-located Pipavav port, which is at theentry point to the Gulf of Khambat (Gujarat) with unique access to the rich and fast-growinghinterland of Saurashtra (all the other major/minor ports are located in Kutch and a few privateports are located in south Gujarat). GPPL benefits from its parent AP Moller Maersk group, whichhas helped raise container volume at the port. The port is slated to rapidly expand its containercapacity from 0.6m TEU to 1.3m TEU. We expect container traffic to increase at 21% CAGR overCY10-13E and 16% CAGR over CY10-16E. Since commissioning, the port has reported lowutilisation (54% at the container terminal and 40% at the bulk cargo terminal) resulting in lowEBITDA margins (36% in CY10). With rising cargo growth, however, we expect utilisation to riseto 70%+ at the container terminal and to 80%+ at the bulk cargo terminal, enabling EBITDAmargin to improve to 52% by CY13E.

Impressive parentage

APM Terminals, part of the global logistics group AP Moller Maersk, acquired 43% of GPPL,thereby taking operational control of the company. The Maersk group is one of the “big four” ofthe container shipping business. APMM had CY10 revenue of US$56bn; it operates 50 terminalsin 34 countries. In CY10, APM Terminals handled 32m TEUs with revenue of >US$4.3bn. GPPLis one of the few full-fledged ports owned by APMM. Strong parentage offers critical advantages:

Provides critical mass of container cargo from the APMM group (~50% container traffic) andhelps attract container traffic from other shipping lines as container routes move towardsPipavav port. In addition, APMM already operates the 1.8m TEU Gateway container terminalat JNPT; traffic delayed there due to congestion could move to Pipavav port.

Pipavav is about 150 nautical miles and 10 hours from JNPT and thereby shipping lines canroute their surplus cargo handled at JNPT into Pipavav without any significant change toexisting routes.

It also provides Pipavav professional and experienced management, and inculcate the best ofbusiness and corporate practices.

Good location

Pipavav port is strategically located at the entry point of the Gulf of Khambat, and is the largestport in the Saurashtra region of Gujarat. This gives Pipavav good access to the fast-growinghinterland. We believe competition for this market will not arise any time soon, as the proposedports in the vicinity – Chhara, Mahuva and Sutrapada – are still on the drawing board. However,the port is at a disadvantage vis-à-vis south Gujarat ports such as Hazira, Dahej and (theproposed) Dholera as they have better connectivity to the north Indian hinterland. That said,Pipavav port is well connected via a 269km long dedicated broad gauge railway link.

The port site benefits from two small islands off the coast, which act as natural breakwaters forthe port. In addition, no rivers discharge silt in the vicinity, hence, we believe that future dredgingcosts would be lower. The port has already achieved a draft of 14 metres in its channel. Wenoted that the port has not invested in a dredger, because it has found little need for dredgingdue to low sedimentation.

Part of one of the largest shipping/ terminal management group in the world

Strategically located at the entry point of the Gulf of Khambat





Fig 1 – Pipavav vis-à-vis JNPT and Mundra Fig 2 – Pipavav port

Source: Standard Chartered Research Source: Google Maps, Standard Chartered Research

Fig 3 – Pipavav mechanized bulk cargoterminal

Fig 4 – Pipavav container terminal


Much needed container traffic expansion

We estimate container traffic in India would increase to 273m tonnes by FY17 from 131m tonnesin FY10, which will translate into container demand of 21m TEU from 11m TEU. With over 67% ofincremental demand coming from the west coast, we expect new container capacity demand of

7m TEU on the west coast. JNPT, which handles close to 90% of the container traffic on the westcoast, is planning to add 57m tpa (~4m TEU) of handling capacity, but we do not expect it tobecome operational before FY16. We believe that this shortfall (~4m TEU) will be met by Mundraand Pipavav ports with a larger share moving to Mundra.

Currently, the company’s approved expansion plan is to raise container capacity to 1.3m TEU byFY13 through expansion of the container handling area. However, given the demand profile andfrom our assessment of the waterfront available for marine expansion, we believe that thecompany is in a position to add two more container berths to take capacity up to 2.5m TEU byCY16 (see charts below).

Only private sector port in Saurashtra

Will benefit from delay in capacity expansion at JNPT





Fig 5 – Container cargo capacity demand Fig 6 – Pipavav capacity growth

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Source: Standard Chartered Research estimates Source: Standard Chartered Research estimates, company reports

Since 2009, when the new container terminal became operational, port operations have risen to

3.5m tonnes of bulk cargo capacity (70% capacity utlisation) and container run rate of 0.5m TEU(83% utilisation). By CY17, with further expansion, we expect the port to handle container trafficof 1.6m TEU (15% CAGR over CY10-17E) and bulk traffic of 7.5m tonnes (12% CAGR overCY10-17E).

Fig 7 – Growth in cargo post APM takeover Fig 8 – Growth in cargo by category

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Solid infrastructure

The container terminal is fully mechanised and professionally managed. It has five reach stackersand 18 rubber tyred gantry (RTG) cranes. GPPL has two mechanised bulk berths (with aconveyor belt from the berth to the storage yard). We believe its infrastructure is adequate for

three to four years of growth. We thus believe the port is poised for strong traffic growth, whichwe estimate at 21% CAGR over CY10-13E for container traffic (0.9m TEU from 0.47m TEU) and16% CAGR over CY10-13E for bulk cargo traffic (5.9m tpa from 3.4m tpa)

Weak on bulk cargo

Unlike larger port players such as MPSEZ and Essar Ports, GPPL does not have any captivecustomers for bulk cargo because of which bulk cargo traffic has been growing slowly. Thecompany, however, is negotiating with four power projects that import coal to secure coalhandling. In addition, the company is negotiating with Aegis to revitalize the 2m tpa liquid cargoberth. If these initiatives come through, the company’s bulk cargo traffic could increase by about13m tonnes by FY15.

APM Terminals has been a magnet for container traffic

Terminal is fully mechanised





Fig 9 – Potential power plants captive to the port

Potential customer Cargotype

Generationcapacity

(MW)

Potentialtraffic

(MTPA)Client project status Contract status COD

Videocon Coal 2400 7.6Equipment orderplaced. Financialclosure achieved

In negotiationwith GPPL FY14

Torrent/ GPCL Coal 1000 3.2 Financial closureachieved NA FY14/15

Patel Engineering Coal NA NA Not much progress No negotiation NASintex Coal NA NA Not much progress No negotiation NA

Aegis/ Shell LPG NA 2.0 Berth ready/ Tankagesunder construction

In negotiationover storage FY12/13

Source: Company reports, Standard Chartered Research estimates

EBITDA margin likely to improve as operating leverage kicks in

Given longer-than-expected project execution and slow pick-up in cargo volume, utilisation at theport has been low, resulting in a low EBITDA margin – 36% in CY10. With utilisation likely tostabilise at 70%+ for container traffic and 80%+ for bulk traffic by CY14, we expect the companyto report an EBITDA margin of 53% by CY13. The company broke-even at the net income levelfor the first time in Q4 2010 and we expect it to report net margin of 20% in CY12-14E.

Fig 10 – EBITDA margins progress Fig 11 – Utilisation progress

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Valuation

We value GPPL using the DCFE method, using post tax earnings adjusted for depreciation,working capital changes and capex. In line with our view that the sector is a low risk investmentwith high cash flow visibility, we ascribe a cost of equity of 13%. Our DCFE assumes a

concession period until 2028 and terminal value to be received at the end of the concessionperiod. The terminal value is an average of the depreciated book value of the asset and fair valueof business obtained by DCFE. We value the port at Rs30bn or Rs71/sh.

Fig 12 – ValuationValuation (Rs m) NAV (CY12E in Rs m) Value per share (Rs)NPV 16,440 39Pipavav Rail Corp 1,600 4Terminal value 12,107 29Total value 30,147 71Price target 71Source: Standard Chartered estimates

Our valuation implies a P/E of 34x, EV/EBITDA of 16x and P/B of 3.5x to our consolidated CY12estimates. We expect margin turnaround to be visible in CY13.

Bulk captive cargo potential currently is small and tentative

EBITDA margins likely to stabilise around 53% as utilisation stabilises between 70- 80%

High terminal value due to short concession period (2028)





Fig 13 – Valuation ratios at price targetCY11E CY12E CY13E CY14E

Ratios at price target Rs71Diluted Price Earning Ratio 71.0 33.8 24.6 26.1Diluted price to cash earnings ratio 32.9 21.4 16.8 16.8EV/EBITDA 21.5 16.2 13.3 11.7Price to Book Value 3.9 3.5 3.0 2.7 Ratios at current price Rs64Diluted Price Earning Ratio 63.7 30.4 22.1 23.4Diluted price to cash earnings ratio 29.5 19.2 15.1 15.1EV/EBITDA 19.7 14.8 12.1 10.8Price to Book Value 3.5 3.1 2.7 2.4RoE 5.6 10.8 13.2 11.0Cash RoE 12.1 17.0 19.3 17.0Source: Standard Chartered estimates

Risks

Short concession periodAccording to the concession agreement between Gujarat Maritime Board (GMB) and GPPL, theconcession for port operations will expire in 2028. There is no provision for an extension of thecontract, unlike in other concession agreements, including those for the Mundra and Hazira ports(which were signed later). Given that the port started handling traffic in 2008, that gives GPPLonly about 20 years of assured operations, which raises some concern about the sustainability offuture capex and growth. We believe that GMB may be willing to renegotiate the concessionagreement to bring it in line with the other port concessions. However, in case GMB does not re-negotiate the concession agreement, GPPL is entitled to “depreciated replacement value” of the

asset.

Intense competition in bulk cargo in Saurashtra; no long-term commitmentsThough bulk cargo demand in Gujarat is strong, traffic is distributed across many ports. Pipavavhas to tie up long term contracts, especially for coal. GPPL is negotiating with some proposedpower plants, but this would be a long drawn process and we do not factor the additional cargofrom these coming before CY14. Furthermore, we believe GPPL’s pricing power in charging tariffon bulk cargo will be driven more by market forces.

Lack of captive ecosystemUnlike MPSEZ and Essar Ports, which benefit from captive ecosystem created through the SEZ(Mundra) or large group projects (Essar), GPPL does not have a captive ecosystem to generateand sustain incremental demand.

Valuations do not offer upside





FinancialsWe expect strong 21% and 33% revenue and EBITDA growth over CY10-13E. We estimate thatEBITDA margin would improve to 52% by CY13. Nevertheless, earnings are likely to beconstrained by high interest costs and high depreciation due to the limited concession life. Wethus expect the asset to continue to have low return ratios over CY11-13E.


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Likely 24% and 39% revenue and EBITDA

growth over CY10- 13E





Fig 20 – Profit and loss statement (Rs m)Year end: December CY09 CY10 CY11E CY12E CY13EOperating income (sales) 2,207 2,839 3,473 4,419 5,342Growth 32 29 22 27 21Operating expenses 1,862 1,812 1,804 2,172 2,559EBITDA 345 1,027 1,669 2,247 2,783

% margins 15.6 36.2 48.1 50.8 52.1Depreciation & amortisation 458 493 490 513 569Gross interest 1,157 1,271 853 962 1,121Other income 7 81 98 117 129Recurring PBT -1,263 -655 424 889 1,222Add: extraordinaries 0 0 0 0 0Less: Taxes -1 0 0 0 0

- Current tax -1 0 0 0 0- Deferred tax 0 0 0 0 0

Less: Minority Interest 0 0 0 0 0Net income (reported) -1,262 -655 424 889 1,222Recurring net income -1,262 -655 424 889 1,222Source: Company, Standard Chartered Research estimates

Fig 21 – Balance sheet (Rs m)As at end: December CY09 CY10 CY11E CY12E CY13EAssetsTotal current assets 1,711 2,848 3,732 4,606 5,462

of which cash & cash eqv. 798 1,949 2,632 3,206 3,770 Total current liabilities & provisions 1,526 1,253 1,380 1,580 1,719Net current assets 186 1,595 2,352 3,026 3,743Investments

of which 830 830 830 830 830

Strategic/Group 830 830 830 830 830

Other marketable 0 0 0 0 0 Net fixed assets 12,986 12,907 13,111 14,391 15,910

of which

Intangibles 0 0 0 0 0

Capital work-in-progress 156 304 783 1,674 2,153 Goodwill 0 0 0 0 0Total assets 14,002 15,332 16,294 18,247 20,483 LiabilitiesBorrowings 10,891 7,973 8,511 9,576 10,590

Deferred tax liability 0 0 0 0 0Minority interest 0 0 0 0 0Equity share capital 3,149 4,236 4,236 4,236 4,236

Face value per share (Rs) 10 10 10 10 10 Reserves & surplus* 7,731 11,440 11,440 11,440 11,440Less: Misc. Exp. n.w.o. -7,769 -8,317 -7,893 -7,004 -5,782Net worth 3,111 7,359 7,782 8,671 9,893Total liabilities 14,002 15,332 16,294 18,247 20,483Source: Company, Standard Chartered Research estimates





Fig 22 – Cash flow statement (Rs m) Year end: December CY09 CY10 CY11E CY12E CY13EOperating cash flow -242 -450 878 1,402 1,769Working capital changes -818 -433 -113 -161 -196Capital commitments -3,846 -149 -717 -1,848 -2,153Free cash flow -4,906 -1,031 47 -607 -580Cash flow from investing activities 7 81 98 117 129Issue of share capital 0 1,087 0 0 0Buyback of shares -306 0 0 0 0Inc (Dec) in borrowings 3,476 -2,918 538 1,064 1,014Dividend paid 0 0 0 0 0Extraordinary Items 0 0 0 0 0Chg. in cash & bank balance -854 1,036 683 574 564Source: Company, Standard Chartered Research estimates

Fig 23 – Key ratios

Year end: December CY09 CY10 CY11E CY12E CY13EPer Share Data (Rs)EPS (basic recurring) -4.0 -1.5 1.0 2.1 2.9Diluted recurring EPS -4.0 -1.5 1.0 2.1 2.9Recurring cash EPS -2.6 -0.4 2.2 3.3 4.2Dividend per share (DPS) 0.0 0.0 0.0 0.0 0.0Book value per share (BV) 9.9 17.4 18.4 20.5 23.4Growth Ratios (%)Operating income 31.9 28.6 22.3 27.2 20.9EBITDA 171.1 198.1 62.5 34.6 23.9Recurring net income 86.7 -48.1 -164.6 109.8 37.5Diluted recurring EPS 104.8 -61.4 -164.6 109.8 37.5

Diluted recurring CEPS 188.3 -85.0 -661.3 53.5 27.7Valuation Ratios (% YoY)P/E -15.9 -41.2 63.7 30.4 22.1P/CEPS -24.9 -165.8 29.5 19.2 15.1P/BV 6.4 3.7 3.5 3.1 2.7EV / EBITDA 87.5 32.1 19.7 14.8 12.1EV / Operating income 13.7 11.6 9.5 7.5 6.3EV / Operating FCF -6.1 -32.0 693.1 -54.9 -58.3Operating RatioRaw material/sales (%) 66.0 49.1 38.4 36.9 36.3SG&A/sales (%) 0.0 0.0 0.0 0.0 0.0Other income / PBT (%) -0.5 -12.4 23.1 13.2 10.6

Effective tax rate (%) 0.1 0.0 0.0 0.0 0.0NWC / total assets (%) -4.4 -2.3 -1.7 -1.0 -0.1Inventory turnover (days) 8.7 11.3 15.2 16.1 16.9Receivables (days) 24.0 32.9 34.4 33.8 34.6Payables (days) 300.8 208.2 184.5 172.2 162.9D/E Ratio (x) 3.5 1.1 1.1 1.1 1.1Return/Profitability Ratio (%)Recurring net income margins -57.0 -22.4 11.9 19.6 22.3RoCE -0.8 4.2 8.1 10.7 12.1RoNW -36.5 -12.5 5.6 10.8 13.2Dividend payout ratio 0.0 0.0 0.0 0.0 0.0Dividend yield 0.0 0.0 0.0 0.0 0.0EBITDA margins 15.6 36.2 48.1 50.8 52.1Source: Company, Standard Chartered Research estimates





Company profileGujarat Pipavav Ports (GPPL) is the only listed subsidiary of APM Terminals, which is one of thelargest terminal operators in the world and part of the AP Moller Maersk group. APM Terminalstook control of the company by acquiring stakes over FY01-05.

GPPL operates the Pipavav port, which was the first private sector port concession to be signedin India in Sep ’98. The concession agreement is valid for 30 years until 2028. The originalpromoters of the company, Gujarat Maritime Board and Seaking Infrastructure, exited thecompany in 1998 and 2005, respectively.


FII16% Others

30%

DII12%

Promoter42%

Source: Company, Standard Chartered Research Estimates


Prakash Tulsiani Managing Director

Managing Director of APM Terminals Pipavav since January 2009.

He is a qualified chartered accountant and company secretary andhas been with the Maersk group since 1993. He headed theGateway terminals project in JNPT between 2005 and 2009.

Ravi Gaitonde COOHas over 30 years experience in the shipping industry and hasbeen with the AP Moller Maersk group since 1985. Heads thePipavav port operations.

Hariharan Iyer CFOHas been with the AP Moller Maersk group for over 25 years invarious positions in finance and accounting.

Source: Company





MargSteaming ahead


Rs96 PRICE TARGET

Rs163

Bloomberg code Reuters codeMRGC IN MARG.NS

Market cap 12 month rangeRs3,666m (US$82m) Rs91 - 234


We initiate coverage on Marg with an OUTPERFORMrating and price target of Rs163.

Marg’s Karaikal port has a key competitive advantage – only private port with access to Tamil Nadu’s hinterland.

The port’s capacity is likely to reach 21m tpa by Oct ’11,with potential to ramp-up to 40m tpa by FY17E.

Strengths in EPC and real estate are likely to help Margtide over near term cash flow and execution risks.

Despite high debt (D/E of 4.9x), we believe the current

price discounts these concerns but not the intrinsicvalue of the assets.Year end: March 2011E 2012E 2013E 2014ESales (Rs m) 9,197 10,210 14,643 18,171EBIT (Rs m) 1,904 2,149 3,117 4,104EBITDA (Rs m) 2,556 3,149 5,276 7,015Pretax profit (Rs m) 218 407 524 1,162Earnings (Rs m) adjusted 176 304 366 792Diluted EPS (Rs ) adjusted 4.6 7.7 9.2 20.0Diluted EPS growth (%) adj. 48.2 65.5 20.2 116.6DPS (Rs ) 2.18 2.18 2.18 2.18DPS growth (%) 0.0 0.0 0.0 0.0EBITDA margin (%) 27.8 30.8 36.0 38.6EBIT margin (%) 20.7 21.0 21.3 22.6Net margin (%) 1.9 3.0 2.5 4.4Div payout (%) 47.1 28.4 23.7 10.9Book value/share (Rs ) 124 159 166 184

Net gearing (%) 482 423 511 506ROE (%) 4.5 5.5 5.7 11.4ROACE (%) 8.8 6.5 7.5 7.7FCF (Rs m) -8,692 -5,050 -5,975 -3,373EV/Sales (x) 2.9 3.0 2.5 2.2EV/EBITDA (x) 10.4 9.6 6.8 5.6PBR (x) 0.8 0.6 0.6 0.5PER (x) 20.7 12.5 10.4 4.8Dividend yield (%) 2.3 2.3 2.3 2.3Source: Company, Standard Chartered Research estimates


80100120

140160180200220240

Jun ‐ 10 Sep ‐ 10 Dec ‐ 10 Mar ‐ 11

Marg Construction BSE SENSEX 30 INDEX (rebased)

Share price (%) -1 mth -3 mth -12 mthOrdinary shares 3 -8 -42Relative to Index 5 -7 -43Relative to Sector - - -Major shareholder Promoter share holding (49.8%)Free float 50%Average turnover (US$) 426,598

Distinctive port with rapidly expanding capacity . Marg’sKaraikal port is the only private sector port with access toTamil Nadu’s hinterland and is likely to remain so in theforeseeable future. Given robust coal and other bulk cargodemand, it is expanding capacity to 21m tpa by FY12 withtraffic reaching 15m tpa by FY14E (44% traffic CAGR FY11-14E). The port is well connected via rail and road networksproviding better access to hinterland cities. With theChennai and Tuticorn ports running at 86% and 104%utilisation, Karaikal should benefit from spill over traffic andits efficient services. It has a low royalty structure, enjoysEBITDA margins of 50-60% and RoCE of 14-15%+.

Steady real estate and EPC segment . Construction atMarg’s Swarnabhumi SEZ is in full swing; it sold 90 acresand leased 0.1m sq ft. The 1.8m sq ft Marg Junction mixed-use retail/commercial project is likely to become operationalin FY13. Marg Properties has high brand recognition in theChennai residential market. We estimate the NAV of thesebusinesses to be Rs7.7bn. The EPC segment, with aRs33bn order book (70% in-house), is valued at Rs3.5bn.

Debt remains a key concern. Debt has doubled to Rs24bnbetween FY09 and FY11; it includes Rs11bn of port debt

(increasing to Rs15bn by FY13). Another Rs10bn of realestate and corporate debt has lower certainty on cash flows.Unless port traffic and real estate projects achieve criticaloperating levels, there will be low clarity on the debtschedule, leading to a high discount on asset value.

Valuation. Our SOTP value for Marg is Rs435/sh orRs17bn: Karaikal Port Rs13bn, real estate Rs7.7bn andEPC Rs3.5bn. We ascribe a 25% conglomerate discountand a 50% leverage discount to arrive at our Rs163/sh pricetarget. We expect an asset re-rating as the port and SEZshow better performances. Source: Company, Bloomberg







Investment argument and valuationMarg is a conglomerate with infrastructure and real estate assets that have passed theinvestment phase and are ready to generate cash flows, yet is available at a steep discount to itsSOTP value. The prime asset is the Karaikal port, which is currently the only private sector portwith access to Tamil Nadu’s hinterland. The port’s capacity is poised to grow 3x in FY12 to 21mtpa. We have ascribed it an NAV of Rs13bn. Marg has achieved sizeable brand recognition for itsChennai residential/commercial projects as well as Swarnabhumi SEZ (90kms from Chennai).We were pleasantly surprised witnessing the execution of these projects and conservativelyexpect the NAV of the projects to be Rs7.7bn. On the flip side, concerns over high leverage(Rs24bn or D/E of 4.9x) remain and a potential dilution at the port or the parent level to reduceleverage is possible. This makes Marg a high-risk and high-return play with asset significantlyunder valued on leverage concerns.

Karaikal port as a unique asset

Marg’s Karaikal port has a strong competitive advantage: it is the only private sector “Minor” portwith ample access to the Tamil Nadu hinterland. The Tamil Nadu maritime board has not allowedany private sector commercial port to become operational and has restricted approvals only tocaptive ports. In addition, the three major ports in Tamil Nadu (Ennore, Chennai and Tuticorin)are operating at 90%+ capacity utilisation with turnaround times in excess of 5-6 days. Theirexpansion plans have been slow to take off. Karaikal, as a private sector port located inPondicherry which is the mid-point between Chennai and Tuticorin, helps fill this void.

Fig 1 – Karaikal port: unique locational advantage

Source: Google Maps, Standard Chartered Research

Uniquely positioned to capture Tamil Nadu hinterland demand





Rapid capacity expansion

By October 2011, we expect Marg to increase capacity to 21m tpa from 7m tpa currently, with theaddition of two new mechanised coal-handling berths. Currently, the port has two multi-purposeberths and one offshore vessel berth.

Fig 2 – Capacity projection FY11-17E Fig 3 – Capacity addition in phases

7 7 7 713 16 16

16 1616

16 16

2.56 6

16

2.52.5

6

6

05

1015202530354045

F

Y 1 1

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M T P A

General cargo Coal Liquid Container

Phase IIB(2012-15)

47%

Phase IIA(2009-11)

40%

Phase I(2006-09)

13%


Capacity could reach 40m tpa by FY17Post the completion of phase 2, the company believes the marine infrastructure aspects – draft,hydro channel and breakwater – will be adequate to support the master plan capacity of morethan 40m tpa. We are assuming peak capacity of 40m tpa by FY17. To pursue that, the companyis working on:

Breakwater extension for phase 3

Increase of draft to 14 metres for phase 2 (subsequently to be increased to 16 metres forphase 3 to handle capesize vessels, especially container vessels)

Additional berths, storage and surface transport facilities can be added in phase 3 at relativelylower incremental capex. The figure below summarises the future capacity expansion under themaster plan.

Fig 4 – Karaikal port: berth and transport additions as per the master plan

Source: Company

Capacity expansion to 40m tpa by FY17





We visited the site and were impressed with the progress of construction and operations.

Fig 5 – Karaikal port – dredging inprogress for new berth

Fig 6 – Karaikal port – ships on existingberth


Strong cargo pick-up: good prospects for coal

In FY11, the first full year of operations, Karaikal port logged 4.8m tonnes of traffic (80%+capacity utilisation). We expect coal demand to drive growth at the port. Currently, over 85%(3.3m tonnes) of the cargo is coal imports and with the addition of two mechanized coal berthswe expect it to rise to 20m tpa by FY17, 5x growth from FY11.

Fig 7 – Cargo projection FY11-17E Fig 8 – Coal demand in the hinterland

4 7 9 11 14 17 20

11

22

33

11

1 3

1

22

11

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Coal General Cargo Liquid Container

4 613

2743

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1,100 1,582

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9,092

14,87214,872

12,212

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In the immediate future, we expect the hinterland’s coal requirement and the Chennai port’s

inability to handle additional demand growth as its main advantages. We estimate that close to14GW of coal-fired generation capacity is coming up in Nagapattinam, Cuddalore, Thiruvavur andMettur. Port handling demand for coal for these projects will have to be met either by captive

jetties or Karaikal port. We believe that Karaikal port offers an economical option as it savestransportation costs for these projects. However, we recognise that many of these projects are inearly stages of planning and may take time to materialise.

Berth utilisation 80%+ currently





Fig 9 – Power generation capacity coming up in the immediate hinterland

Project Location Capacity (MW) Year Coal(MTPA) Project

Tannex Power Cuddalore 110 FY11 0.4 Tannex Power

OPG Power Generation Thiruvarur 77 FY12 0.3 OPG Power GenerationACC Coimbatore 75 FY12 0.3 ACC

Nagai Power Nagapattinam 330 FY12 1.3 Nagai PowerUDI Infrastructure Nagapattinam 2,000 FY13 8.0 UDI Infrastructure

Tridem Power Tirukkuvalai 2,000 FY13 8.0 Tridem Power

NSL Nagapattinam 1,320 FY13 5.3 NSLETA Star Nagapattinam 1,000 FY14 4.0 ETA Star

Patel Power Nagapattinam 1,000 FY14 4.0 Patel PowerSRM Energy(Spice Energy) Cuddalore 1,800 FY14 7.2 SRM Energy (Spice Energy)

MALCO Mettur 1,050 FY14 4.2 MALCO

Cuddalore Powergen Cuddalore 1,320 FY15 5.3 Cuddalore Powergen

Infrastructure Leasing & Fin Cuddalore 800 FY15 3.2 Infrastructure Leasing & Fin

Sindya Power Nagapattinam 1,000 FY15 4.0 Sindya PowerEstimated demand 13,882 55.5 Estimated demandSource: Standard Chartered Research estimates

Fertiliser and project cargo showing high value near-term upsideIn addition to coal, Karaikal port has also been getting the following small but high-margin cargo

Fertiliser: Karaikal port is one of the designated ports for import of fertilisers. While theimports are of seasonal nature, the realisations are high at Rs400-500/tonne. The companyhas set up bagging and storage facilities to smoothen imports.

Project imports/ exports: With large power, cement and fertiliser plants coming up in thehinterland, Karaikal port has been handling equipment imports for these investments. Inaddition, BHEL Thiruchirapalli has been routing all its exports through Karaikal.

Cement: The hinterland also has several cement units with emerging coal demand of 5.9mtpa, which adds to demand for coal in Karaikal port.

Impressive property development

Marg has become an established brand in the real estate market in Chennai and it has worked tocapitalise on this recognition in three segments – Swarnabhumi SEZ project, residential projectsin Chennai and other cities and commercial projects in Chennai. We visited Swarnabhumi andthe Chennai mall project and are satisfied with the company’s strategy and progress. Weestimate the NAV of the three projects and other land bank to be Rs7.7bn as shown in the tablebelow.

Fig 10 – Real estate and urban infrastructure NAV

Project Type Saleablearea NAV NAV/sq ft Comments

Marg Properties Residential 40.0 1,700 43800 acres in andaround Chennai andSEZ

Digital zone 1/ Marg square Commercial 1.4 779 556 Mixed property underdevelopment

Marg Junction/ Riverside mall Commercial/ retail/ hospitality 1.5 2,859 1,873 7.28 acres

Marg Swarnabhumi SEZ 26.7 2,412 90

613 acres (312 acresLight Engineering &300 acres MultiServices SEZ)

Total area leased/ land bank 69.6 7,749 Source: Standard Chartered Research estimates

Urban infrastructure project (Swarnabhumi): In the urban infrastructure division, the companyis developing an integrated city named Swarnabhumi, which is a notified SEZ about 90kms

14GW power projects planned but may take time to materialise

Real estate NAV Rs7.8bn, developable area 70m sq ft





from Chennai. The 22m sq ft project is being positioned as a locational alternative to Chennai,comprising two SEZs (one light engineering SEZ and one services SEZ) and a non-processing zone comprising residential units and educational institutions. We visited the siteand are impressed with the concept and execution on the ground. In our assessment, we notethe following progress:

1. Music school in the non-processing zone operational

2. Land lease/sale for several engineering units completed

3. One complex with high- to mid-income residential units (~Rs2,500/sq ft) was ready, whilelower-end housing (~Rs1,600/ sq ft) was under construction

Fig 11 – Marg Swarnabhumi land usage Fig 12 – Marg Swarnabhumi projection

Light Eng.SEZ

13%

Resi. Hub67%

MultiServices

SEZ20%

6 , 6 9 0

2 , 1 7 5

2 , 3 7 4

2 , 6 0 3

2 , 8 6 3

3 , 1 3 7

3 , 4 2 5

0.8

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01,0002,0003,0004,0005,000

6,0007,0008,000

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Sales value (LHS) Sales schedule (RHS)


Residential (Non-SEZ): Nested partly in Marg Properties and partly in the parent company,this unit is developing residential units principally in Chennai (and in some other tier II and III

locations).

Chennai Commercial: Marg has a small commercial portfolio in Chennai, comprising interestsin three operational office buildings and one new mixed use project “Marg Junction”. MargJunction is a 1.8m sq ft retail cum hospitality cum office space, strategically located inChennai’s IT corridor along the Old Mahabalipuram Road (OMR). We visited the site and wereimpressed by the progress. The project comprises 1m sq ft of mall retail space (of which 0.7msq ft is leasable space, the only mall space in this part of Chennai), 0.49m sq ft of hotel andbranded service apartment space (in a tie-up with Shangrila, again the only star hotel in OMR)and 0.17m sq ft of office space. Given the location advantage, we see strong lease prospectsfor the projects; we expect annuity revenue of Rs1.3bn from the project starting FY13(Rs900m from the mall). The mall has already secured several anchor tenants such asHypercity, Shoppers Stop and PVR.

Valuation

We value Marg on a sum-of-the-parts basis using the DCFE method for the Karaikal port, NAVfor real estate and P/E for the construction business, which implies a value of Rs163/sh for thestock as shown in the table below.





Fig 13 – DCF and SOTP valuation

Project Valuation (Rs m) Valuation (Rs/sh) MTPA/ m sq ft Rs/ MTPA(Rs/ m sq ft)

Port 13,763 362 21 655

SEZ Seekinapukkam 2,412 63 27 90Riverside Mall 2,859 75 1.7 1,682

Real estate projects 1,700 45 42 40Construction business 3,536 93

Leased assets 779 20

Net Debt in Marg standalone -7,500 -189

Total NPV 17,213 435

Conglomerate discount 25%

Discounted value 12,910 326

Risk adjustment for balancesheet leverage 50%

PT 6,455 163

Source: Standard Chartered Estimates

The valuation implies a P/E of 21x, EV/EBITDA of 10x and P/B of 0.9x to our consolidated FY12estimates, which look attractive. We are expecting 65% earnings CAGR over FY11-14E. We,therefore, feel that FY12-14E numbers are good indicators of the company’s valuation vis-a-visimproving earnings potential as summarised in the table below.

Fig 14 – Valuation scenariosFY11E FY12E FY13E FY14E

Ratios at price target Rs163Diluted price earnings ratio 35.1 21.2 17.7 8.2


EV/EBITDA 11.2 10.1 7.2 5.9

Price to book value 1.2 0.9 0.8 0.7Ratios at current price Rs97



EV/EBITDA 10.4 9.6 6.8 5.6Price to book value 0.8 0.6 0.6 0.5

RoE 4.5 5.5 5.7 11.4

Cash RoE 21 24 39 53Source: Standard Chartered Estimates

Risks: debt, progress on restructuring, EPC

Debt burden may lead to dilution: Marg’s consolidated debt burden currently is a high Rs24bn,which translates into a debt equity ratio of 3.3x, which is worrying. We expect debt to risefurther as phase 2 of Karaikal port heads to completion. The table below shows the structureof the debt.

We are especially concerned about the debt at the parent level as we expect EBITDA in the EPCsegment to decline once Karaikal port is completed.

Fig 15 – Debt breakdownUnit Debt (Rs m) CommentsKaraikal Port 11,000 Total debt by end of phase 2 likely to be Rs15bn

EPC 2,600 Advances

Mall 1,300

Dredger 1,300SEZ (Swarnabhumi) 3,200

Marg (parent company) 5,000 To be transferred to Marg Properties

Total 24,400Source: Standard Chartered Research estimates

Valuation attractive even after 50% discount factor for balance sheet over-

leverage

Stock looks attractive on cash EPS





Progress on restructuring: Marg continues to have a fairly complex structure with a mix ofmultiple unrelated business streams. The company intends to incubate each of thebusinesses first and then possibly list them as separate entities to reduce the holdingcompany discount at Marg parent level. However, currently we believe that only Karaikal portwill be ready for listing in the near future. Therefore, we expect the company to have a largediscount to the NAV valuation of the company.

EPC profile: Marg’s EPC revenue continues to be predominantly from in-house projects(70%+), which in turn is predominantly from construction of the Karaikal port and real estateprojects. The company has been trying to expand its footprint into external constructioncontracts. The company has developed capabilities for dredging and other marine services,which it intends to utilise for external contracts. The company’s growth in EPC will be drivenby its ability to secure a strong external order book over the next 2-3 years.





FinancialsWe expect Marg’s consolidated earnings to remain volatile as many of its projects will remain instart-up phase and these projects will come up for interest cost expensing (vs capitalisation).Most of the assets will achieve stabilisation by FY14. Over FY11-14E, we expect earnings to post65% CAGR and overall margin to improve from ~23% to 38% as ports and real estate form alarger component of revenue.


-5,000

0

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R s m

050100150200250300350400450

%


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120

140

%


Source: Company, Standard Chartered Research estimates Source: Company, Standard Chartered Research estimates


0

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x


Consolidated earnings CAGR 65%, RoE improving to 12%





Fig 22 – Profit and loss statement (Rs m) Year end: Mar FY10 FY11E FY12E FY13E FY14EOperating income (sales) 3,644 9,197 10,210 14,643 18,171

Growth 420 152 11 43 24Operating expenses 2,817 6,641 7,061 9,367 11,156

EBITDA 827 2,556 3,149 5,276 7,015

% margins 15.5 11.6 12.0 12.0 0.0 Depreciation & amortisation 180 652 1,000 2,158 2,911

Gross interest 445 1,930 2,012 2,890 3,268

Other income 242 245 269 296 325

Recurring PBT 444 218 407 524 1,162

Add: extraordinaries 0 0 0 0 0Less: Taxes 325 -13 45 75 276

- Current tax 0 -13 45 75 276

- Deferred tax 0 0 0 0 0Less: Minority Interest 0 0 0 0 0

Net income (reported) 119 176 304 366 792

Recurring net income 119 176 304 366 792Source: Company, Standard Chartered Research estimates

Fig 23 – Balance sheet (Rs m)As at end Mar FY10 FY11E FY12E FY13E FY14EAssets

Total current assets 11,053 11,972 13,641 18,385 22,519

of which cash & cash eqv. 1,415 1,369 1,870 1,504 1,570 Total current liabilities & provisions 3,617 4,327 5,178 7,200 8,623

Net current assets 7,436 7,644 8,463 11,185 13,896Investments

of which 51 3,851 4,851 5,851 5,851

Strategic/Group 26 3,851 4,851 5,851 5,851

Other marketable 25 0 0 0 0 Net fixed assets 13,353 17,953 21,777 23,817 25,105

of which

intangibles 0 0 0 0 0

Capital work-in-progress 7,346 5,827 5,457 4,194 7,212 Goodwill 0 0 0 0 0

Total assets 20,840 29,448 35,091 40,852 44,852

Liabilities

Borrowings 17,248 24,248 28,248 33,648 36,848

Deferred tax liability 0 0 0 0 0Minority interest 426 481 538 621 715

Equity share capital 272 380 396 396 396

Face value per share (Rs) 10 10 10 10 10 Reserves & surplus* 791 884 1,102 1,381 2,086

Less: Misc. Exp. n.w.o. 0 0 0 0 0

Net worth 3,166 4,719 6,304 6,583 7,289

Total liabilities 20,840 29,448 35,090 40,852 44,852Source: Company, Standard Chartered Research estimates





Fig 24 – Cash flow statement (Rs m)Year end: Mar FY10 FY11E FY12E FY13E FY14EOperating cash flow 14 647 1,101 2,321 3,483

Working capital changes -2,071 -262 -328 -3,098 -2,657Capital commitments -5,411 -9,077 -5,824 -5,199 -4,199

Free cash flow -7,468 -8,692 -5,050 -5,975 -3,373

Cash flow from investing activities 217 270 269 296 325Issue of share capital 16 108 16 0 0

Buyback of shares 0 0 0 0 0

Inc (Dec) in borrowings 6,969 7,000 4,000 5,400 3,200

Dividend paid -83 -83 -86 -86 -86

Extraordinary Items 0 0 0 0 0Chg. in cash & bank balance 459 -45 500 -366 66Source: Company, Standard Chartered Research estimates

Fig 25 – Ratios

Year end: Mar FY10 FY11E FY12E FY13E FY14EPer Share Data (Rs)

EPS(basic recurring) 3.1 4.6 7.7 9.2 20.0

Diluted recurring EPS 3.1 4.6 7.7 9.2 20.0

Recurring cash EPS 7.9 21.8 32.9 63.7 93.5Dividend per share (DPS) 2.0 2.0 2.0 2.0 2.0

Book value per share (BV) 83.3 124.1 159.2 166.2 184.0

Growth Ratios (%)Operating income 420.0 152.3 11.0 43.4 24.1

EBITDA 579.6 209.0 23.2 67.5 33.0

Recurring net income 116.0 48.2 72.4 20.2 116.6Diluted recurring EPS 116.0 48.2 65.5 20.2 116.6

Diluted recurring CEPS 145.1 176.7 51.1 93.6 46.7Valuation Ratios (% YoY)

P/E 30.7 20.7 12.5 10.4 4.8P/CEPS 12.2 4.4 2.9 1.5 1.0

P/BV 1.2 0.8 0.6 0.6 0.5

EV / EBITDA 23.6 10.4 9.6 6.8 5.6EV / Operating income 5.3 2.9 3.0 2.5 2.2

EV / operating FCF -9.0 -2.5 -3.1 -3.8 -2.6

Operating RatioRaw material/sales (%) 64.2 66.9 64.2 60.4 58.4

SG&A/sales (%) 0.0 0.0 0.0 0.0 0.0

Other income / PBT (%) 54.5 111.9 66.1 56.5 28.0

Effective tax rate (%) 73.2 -6.0 11.2 14.4 23.8NWC / total assets (%) 28.9 21.3 18.8 23.7 27.5Inventory turnover (days) 399.1 186.0 185.1 162.7 174.7

Receivables (days) 280.1 174.6 173.9 155.3 165.2

Payables (days) 330.3 210.6 237.6 234.5 252.7D/E Ratio (x) 4.9 4.8 4.2 5.1 5.1

Return/Profitability Ratio (%)

Recurring net income margins 3.1 1.9 2.9 2.4 4.3RoCE 1.4 8.8 6.5 7.5 7.7

RoNW 4.4 4.5 5.5 5.7 11.4

Dividend payout ratio 63.9 43.1 26.1 21.7 10.0

Dividend yield 2.1 2.1 2.1 2.1 2.1EBITDA margins 22.7 27.8 30.8 36.0 38.6Source: Company, Standard Chartered Research estimates





Company profileMarg, incorporated in 1994 and which went public in 1995, is a diversified company with interestsin construction/EPC, infrastructure and real estate. In infrastructure, it is present in a gamut ofservices including marine (ports, dredging, etc.), airports, etc. In real estate, the company isdeveloping properties primarily in Chennai and close to its SEZ in Seekinakuppam.


Others30%

FII14%

DII7%

Promoter49%

Source: BSE


GRK ReddyChairman

and Managing Director

GRK Reddy, a first generation entrepreneur, promotedMarg Ltd in 1994 and has been the driving force of thecompany since. He is a post graduate in commerce and ahonorary from Kellogg School of Management

Source: Company





Disclosures appendix

Global disclaimerThe information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch,Standard Chartered Securities (India) Limited and/or one or more of its affiliates (together with its group of companies, “SCB”) and the research analyst(s)named in this report. SCB makes no representation or warranty of any kind, express, implied or statutory regarding this document or any information containedor referred to in the document.

DISCLOSURES INCLUDING THOSE REQUIRED BY THE UNITED STATESThe research analysts responsible for the content of this research report certify that:

The view expressed and attributed to the research analyst or Analysts in the research report accurately reflect their personalopinion(s) about the subject securities and issuers and/or other subject matter as appropriate; andNo part of his or her compensation and other benefits was, is or will be directly related to the specific recommendations or viewscontained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisalsof analysts.

Our ratings are under constant review.

Additional information with respect to any securities referred to herein will be available upon request.

THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES.

Disclosures Appendix

Where “disclosure date” appears below, this means the day prior to the report date. All share prices quoted are the closing price for the business day prior tothe date of the report, unless otherwise stated.

Company Mundra Ports and SEZ

As at the disclosure date, the following applies:

Mundra Ports and SEZ - current rating is: OUTPERFORM

120130140150160170180190

May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11

Source: FactSet prices / SCB ratings and price targets

Company Essar Ports


Essar Ports - current rating is: OUTPERFORM

100110120130140150160170180190200







Company Gujarat Pipavav Ports


Gujarat Pipavav Ports - current rating is: IN-LINE

45

50

55

60

65

70

75

Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11


Company Marg


Marg Construction - current rating is: OUTPERFORM

80100120140160180200220240



Company Petronet LNG


Petronet LNG - current rating is: OUTPERFORM

708090

100110120130140

150160


07/03/11OP : Rs147.00

27/04/11OP : Rs151.00


Marg





Company ACC Ltd


ACC Ltd - current rating is: OUTPERFORM

800850900950

1,0001,0501,1001,1501,200


20/09/10OP : Rs1123.00

26/04/11OP : Rs1170.00


Company Bharat Forge Limited


Bharat Forge Limited - current rating is: OUTPERFORM

260280300320340360380400420440460


06/01/11OP : Rs450.00


Recommendation Distribution and Investment Banking Relationships

% of covered companies currently assignedthis rating

% of companies ass igned thi s ra ting with whichSCB has provided investment banking services overthe past 12 months

OUTPERFORM 62.8% 15.3%IN-LINE 28.8% 10.6%UNDERPERFORM 8.4% 8.3%

Research Recommendation

Terminology Definitions

OUTPERFORM (OP) The total return on the security is expected to outperform the relevant market index by 5% or moreover the next 12 months

IN-LINE (IL) The total return on the security is not expected to outperform or underperform the relevant marketindex by 5% or more over the next 12 months

UNDERPERFORM (UP) The total return on the security is expected to underperform the relevant market index by 5% ormore over the next 12 months

SCB uses an investment horizon of 12 months for its price targets.




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Australia: The Australian Financial Services Licence for Standard Chartered Bank is Licence No: 246833 with the following Australian Registered BusinessNumber (ARBN: 097571778). Australian investors should note that this document was prepared for wholesale investors only (as defined by AustralianCorporations legislation).

Hong Kong: This document is being distributed in Hong Kong by, and is attributable to, Standard Chartered Bank (Hong Kong) Limited which is regulated bythe Hong Kong Monetary Authority.

India: This document is being distributed in India by Standard Chartered Securities (India) Limited which is a SEBI registered broker and a member of theBombay Stock Exchange Limited and The National Stock Exchange of India Limited.

Singapore: This document is being distributed in Singapore by Standard Chartered Bank Singapore Branch only to accredited investors, expert investors orinstitutional investors, as defined in the Securities and Futures Act, Chapter 289 of Singapore. Recipients in Singapore should contact Standard CharteredBank Singapore Branch in relation to any matters arising from, or in connection with, this document.

United States: Except for any documents relating to foreign exchange, FX or global FX, Rates or Commodities, distribution of this document in the UnitedStates or to US persons is intended to be solely to major institutional investors as defined in Rule 15a-6(a)(2) under the US Securities Act of 1934. All US

persons that receive this document by their acceptance thereof represent and agree that they are a major institutional investor and understand the risksinvolved in executing transactions in securities. Any US recipient of this document wanting additional information or to effect any transaction in any security orfinancial instrument mentioned herein, must do so by contacting a registered representative of Standard Chartered Securities (North America) Inc., 1 MadisonAvenue, New York, N.Y. 10010, US, tel + 1 212 667 0700.WE DO NOT OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS EITHER (A) THOSE SECURITIES ARE REGISTERED FOR SALE WITH THE U.S.SECURITIES AND EXCHANGE COMMISSION AND WITH ALL APPROPRIATE U.S. STATE AUTHORITIES; OR (B) THE SECURITIES OR THE SPECIFICTRANSACTION QUALIFY FOR AN EXEMPTION UNDER THE U.S. FEDERAL AND STATE SECURITIES LAWS NOR DO WE OFFER OR SELLSECURITIES TO U.S. PERSONS UNLESS (i) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL ARE PROPERLY REGISTEREDOR LICENSED TO CONDUCT BUSINESS; OR (ii) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL QUALIFY FOREXEMPTIONS UNDER APPLICABLE U.S. FEDERAL AND STATE LAWS.

GENERAL DISCLAIMERThe information on this document is provided for information purposes only. It does not constitute any offer, recommendation or solicitation to any person toenter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or pricesor any representation that any such future movements will not exceed those shown in any illustration. The stated price of the securities mentioned herein is asof the date indicated and is not any representation that any transaction can be effected at this price. While all reasonable care has been taken in preparing thisdocument, no responsibility or liability is accepted for errors of fact or for any opinion expressed herein. The contents of this document may not be suitable forall investors as it has not been prepared with regard to the specific investment objectives or financial situation of any particular person. Any investmentsdiscussed may not be suitable for all investors. Users of this document should seek professional advice regarding the appropriateness of investing in anysecurities, financial instruments or investment strategies referred to in this document and should understand that statements regarding future prospects may notbe realised. Opinions, forecasts, assumptions, estimates, derived valuations and price target(s) contained in this document are as of the date indicated and aresubject to change at any time without prior notice.The value and income of any of the securities or financial instruments mentioned in this document can fall as well as rise and an investor may get back lessthan invested. Future returns are not guaranteed, and a loss of original capital may be incurred. Foreign-currency denominated securities and financialinstruments are subject to fluctuation in exchange rates that could have a positive or adverse effect on the value, price or income of such securities andfinancial instruments.Past performance is not indicative of comparable future results and no representation or warranty is made regarding future performance. While we endeavourto update on a reasonable basis the information and opinions contained herein, there may be regulatory, compliance or other reasons that prevent us fromdoing so. Accordingly, information may be available to us which is not reflected in this material, and we may have acted upon or used the information prior to orimmediately following its publication.SCB is not a legal or tax adviser, and is not purporting to provide you with legal or tax advice. If you have any queries as to the legal or tax implications of anyinvestment you should seek independent legal and/or tax advice.SCB, and/or a connected company, may have a position in any of the securities, instruments or currencies mentioned in this document. SCB has in placepolicies and procedures and physical information walls between its Research Department and differing public and private business functions to help ensureconfidential information, including ‘inside’ information is not publicly disclosed unless in line with its policies and procedures and the rules of its regulators. Data,opinions and other information appearing herein may have been obtained from public sources. SCB makes no representation or warranty as to the accuracy orcompleteness of such information obtained from public sources. You are advised to make your own independent judgment (with the advice of your professional

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