Essar Ports - Captive volumes offer predictability; initiating with a Buy - Anand Rathi

Key takeaways

Second-largest port operator in India. Essar Ports (ESP) operates two ports on the west coast of India (Vadinar and Hazira in Gujarat) and one on the east coast (Paradip in Orissa). Additionally, it is setting up a port at Salaya, Gujarat. By FY15, its capacity would be 158m tpa (outlay of Rs. 18bn), strengthening its position as the second-largest private port operator in the country. Hazira has potential to emerge as an 150m tpa port in the future. Enhanced capacity and locations would enable it to cater to demand for diverse products across various regions.

'Take-or-pay' contracts offer margin of safety. The 'take or pay' contracts with Essar group companies guarantee minimum revenue and volume offtake. Minimum revenues from these 'take or pay' contracts are expected to improve from Rs. 9.4bn in FY12 to ~Rs. 15.9bn in FY15, offering assurance of revenue growth irrespective of volumes handled. We expect revenues from Essar group companies to be higher than the minimum assured revenues, at ~Rs. 19bn in FY15.

Third-party revenues to rise significantly. In FY12, ~2-3% of the company's revenue arose from third-party contracts. With ramped-up capacity, we expect reduced dependence on captive volumes of group companies and rising volumes from third parties. We expect revenue from third parties to be scaled up from Rs. 200m in FY12 to Rs. 2,331m in FY15.

Our take. We believe ESP is set to benefit from the high revenue visibility on account of 'take or pay' contracts. With rising capacities, it is also set to benefit from higher third-party volumes. At our target of Rs. 130, the stock would trade at a P/BV of 2x its FY14e earnings. We initiate coverage on it with a Buy. Risks. Delay in capacity expansions of group companies, keener competition for thirdparty cargo, and a slowdown in group companies' business.

Source : Equity Bulls

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