Private ports: Emerging story

Coal will be the main driver in future, as 30 Gw of power capacity is slated to come up over the next five years.

Imagine a sector where the entry barriers are high, the demand is robust, the regulatory environment is benign and there’s relative pricing flexibility. It sounds too good to be true in an environment where a policy paralysis plagues key infrastructure plays. In such a scenario, it’s almost unbelievable that any business can have so many positives.

Analysts believe the port sector offers some of these positives. Volumes at the country’s 12 major ports reported a steady growth of 4.0 per cent year-on-year and 1.3 per cent month-on-month to 50.2 million tonnes during May 2011. This was led by growth across all cargo segments, barring iron ore and fertilisers. The petroleum, oil & lubricants and coal throughput increased, while iron ore volumes declined.

Currently, the three Cs are driving growth in ports. Containers, crude and coal currently form 67 per cent of India’s total cargo traffic and are likely to continue to be the key growth drivers, going forward.

Private ports have been especially strong in attracting crude import demand. While the petroleum, oil and lubricants (POL) segment mainly drove cargo traffic over FY04-10, Standard Chartered Equity Research believes coal will be the main driver in future. “We expect 20 per cent coal cargo traffic CAGR over FY11-17, given that 30 Gw of coal-fired power generation capacity will come on line during FY12-17, which would require imported coal.”

What makes this play attractive is the benign regulatory environment, as private ports are regulated by state governments, which have been encouraging investments in this sector through progressive policies. At an operational level, these ports compete with state-owned ports, struggling to add fresh capacity. The sector has high entry barriers and offers scalability and natural first-mover advantages, claim analysts.

Apart from the operational advantages, ports form critical infrastructure for any emerging economy that has global aspirations. So, if India has to grow its GDP at 8 per cent, it needs to fire its economy with raw materials and export finished products. This is why port companies give the best returns over the long term, as the experiences of other economies suggest.

Undoubtedly, more capacity is coming up over the next couple of years, but there is no fear of excess capacity. Capacity utilisation at major ports is 88 per cent. Even a moderate estimate of 11 per cent cargo growth over FY11-17 would require a 2x capacity increase. Analysts are betting on Mundra Port SEZ and Essar Ports for their strong traffic growth, location advantages and strong eco system. They also believe the present valuations do not factor in the long-term growth potential.
 

IN PORTLY HEALTH
Company	M-cap ($ bn)	Price (Rs)	P/E (x)		EV/EBIT/ DA(x)
			FY12E	FY13E	FY12E	FY13E
Mundra Port SEZ	6.30	161.15	26	19	18	14
Essar Ports	0.90	98.40	31	14	14	10
Gujarat Pipavav Ports	0.60	66.25	64	30	20	15
Marg	0.10	94.05	13	10	10	7
Source: Bloomberg, Standard Chartered Research estimates