Result Update

June 3, 2010 Rating matrix

Rating Target Target Period Potential Upside : : : : Buy Rs 93 12 months 15%

Essar Shipping (ESSSHI)

Rs 81
WHATS CHANGED
PRICE TARGET ................................................................. Changed from Rs 92 to Rs 93
FY10 FY11E FY12E

Key financials
(Rs crore) Net Sales EBITDA Net Profit FY09 2574.2 3000.5 3112.4 4085.9 834.5 1049.7 1195.4 1616.6 77.2 94.8 64.8 277.0

EPS (FY11E) .................................................................................................. Unchanged EPS (FY12E) ................................................................... Changed from Rs 3.8 to Rs.3.9 RATING.......................................................................................................... Unchanged

Valuation summary
FY09 PE (x) Target PE (x) EV to EBITDA (x) Price to book (x) RoNW (%) RoCE (%) 64.6 74.2 13.9 0.6 1.0 3.1 FY10 FY11E FY12E 52.6 89.5 60.4 102.8 12.4 11.8 0.6 0.6 1.2 0.9 3.7 3.7 20.9 24.0 9.0 0.6 3.3 5.2

Diversified revenue to mitigate volatility

Essar Shipping Ports & Logistics Ltd (ESPLL) reported an encouraging performance and ended FY10 with 16% revenue growth and 23% PAT growth. The year was eventful for the company as revenue from its new divisions i.e. port/terminals and oilfield services started to make a significant contribution to the topline. During Q4FY10, ESPLL also commissioned its 30 MTPA bulk terminal at Hazira. This is a captive port to serve the requirements of Essar Steel with which ESPLL has signed a 20 year contract and would be handling iron ore pellets, coal, limestone and finished steel products.
Rs. 4988 crore Rs. 8156 crore Rs. 127 crore Rs. 13017 crore Rs. 104 / 40 Rs.615.8 crore Rs.10 0.2 8.3

Stock data
Market Cap. Debt( FY10E) Cash (FY10E) EV 52 week H/L Equity capital Face value MF Holding (%) FII Holding (%)

Encouraging performance in Q4FY10 ESPLL reported a 6.5% topline growth in Q4FY10 at Rs 852.6 crore as against Rs 800.6 crore in Q3FY10. Revenue growth mainly came on account of an 8.9% rise in the ocean transport business at Rs 412.7 crore and a 28.1% rise in the surface transport business at Rs 225.5 crore. The port and terminal business reported a stable performance with Rs 113.0 crore revenues while the oilfield services business registered a drop of 24.0% at Rs 101.4 crore. The company posted a PAT of Rs 64.5 crores in Q4FY10.

Price movement (Stock vs. Nifty)

6000 5000 4000 3000 2000 1000 0 Jun-09
NIFTY

120 100 80 60 40 20 Oct-09 Feb-10

Essar Shipping Ports & Logistics Ltd

Valuation
Contrary to other shipping companies, which have seen a drop in topline in FY10 due to weakness in freight rates, ESPLL reported a 16.6% topline growth in FY10 mainly aided by the rise in revenues from the oilfield services business, surface transport business and port & terminal business. This more than compensated for the drop in the ocean transport business. Going forward, we expect the company to perform well as new port capacity gets commissioned and its shipping and offshore fleet gets ramped up with delivery of 12 dry bulk carriers and two jack-up rigs. We have valued each of the divisions of ESPLL on DCF basis and arrived at our SOTP price target of Rs 93 and maintain our BUY rating on the stock. Exhibit 1: Performance Highlights
Q4FY10 Net Sales EBITDA EBITDA Margin (%) Depreciation Interest Reported PAT EPS (Rs) 852.6 270.6 31.7 106.6 144.9 64.5 1.0 Q4FY09 716.6 335.0 46.7 149.4 153.2 71.2 1.2 Q3FY10 800.6 267.2 33.4 116.7 128.8 21.9 0.4 YoY Gr. (%) 19.0 -19.2 (1500 bps) -28.6 -5.4 -9.4 -9.4 QoQ Gr.(%) 6.5 1.3 (170 bps) -8.6 12.5 195.3 195.3

0 Jun-10

Analysts name
Bharat Chhoda bharat.chhoda@icicisecurities.com Jehangir Master jehangir.master@icicisecurities.com

Source: Company, ICICIdirect.com Research

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Essar Shipping (ESSSHI)

Exhibit 2: Revenue gains traction

Revenues rose by 6.5% in Q4FY10 to Rs 853 crore as against Rs 801 crore in Q3FY10 Shipping services continued to be the largest contributor to revenues in Q4FY10 with 48.4% share and revenue contribution of Rs 412.7 crore The surface transport business was the second highest revenue generator with Rs 225.5 crore, followed by the port & terminal business with Rs 113.0 crore and oilfield services with Rs 101.4 crore revenue contribution

900 800 700 600 500 400 300 200 100 0

801 717 550 676 671

853

Rs. Cr.

Q3FY09

Q4FY09

Q1FY09

Q2FY09

Q3FY10

Q4FY10

Source: Company, ICICIdirect.com Research

Exhibit 3: Operating margin under pressure

400
The operating margin for ESPLL has been steadily declining over the last four quarters and has dropped to 32% in the current quarter

350 300 250 Rs. cr 200 150 100 50 0 Q3FY09 196 36

47 335

50 41 276 35 236 33 267 45 32 271 40 35 30 25 20 15 10 5 0 %

Q4FY09

Q1FY09

Q2FY09

Q3FY10

Q4FY10

EBITDA
Source: Company, ICICIdirect.com Research

OPM

Exhibit 4: PAT reports sharp jump aided by non operating income

80 70
PAT reported a sharp jump from Rs22 crores in Q3FY10

71

65

60 50 Rs.Cr. 40 30 20 10 0 Q3FY09 Q4FY09 Q1FY09 Q2FY09 Q3FY10 Q4FY10 13 6 2 22

to Rs65 crores in Q4FY10. This was mainly aided by non operating income of Rs 57 crore in Q4FY10.

Source: Company, ICICIdirect.com Research

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Essar Shipping (ESSSHI)

Exhibit 5: Steady ramp-up in operations expected

ESPLL reported a 16.6% rise in revenue along with 25.9% rise in EBITDA and 23.4% rise in PAT in FY10 We expect ESPLL to report a subdued performance in

Rs cr

FY11 due to range bound freight markets and also higher depreciation and interest costs due to high capex spending in its port and terminal business However, with the commissioning of additional port capacity in FY12, revenues are expected to rise by 31.3% to Rs 4086 crore combined with a 35.3% rise in EBITDA to Rs 1617 crore and 326% rise in PAT to Rs 277 crore

4500 4000 3500 3000 2500 2000 1500 1000 500 0

4086 3000 3112

50 40 30

2574 1842 834 382277 FY08 77 FY09 Revenue

1050 95 FY10E EBITDA

1195 65 FY11E PAT

1617

20 10 0

277 FY12E OPM (%)

Source: Company, ICICIdirect.com Research

Exhibit 6: Revenue mix in FY10

Surface Transport, 25%

Sea transport constituted the largest segment for ESPLL with 44% share in the revenue mix and was followed by the surface transport business, which constituted 25% of the total revenues

Port/Terminal, 14%

Oilfield Services, 17%

Sea Transport, 44%

FY09
Source: Company, ICICIdirect.com Research

Exhibit 7: Revenue mix in FY12E

Due to the rapid ramp up of the ports and terminals business, it is expected to be the largest revenue contributor for the company with 32% revenue share followed by the sea transport business, surface transport and oilfield services business As a result, the revenue mix in FY12 would be more broad-based with each of the divisions making a sizeable contribution Further, the rising contribution from the port business would bring more stability to the revenue stream

Surface Transport, 23% Sea Transport, 30%

Port/Terminal, 32% FY12E

Oilfield Services, 16%

Source: Company, ICICIdirect.com Research

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Essar Shipping (ESSSHI)

Exhibit 8: Revenue break-up division wise

ESPLL currently has an operational port capacity of 76 MTPA, which is being ramped up to 158 MTPA over the next four years Due to the fast track scaling up of the port business, revenue from the port business is expected to increase from Rs 421 crore in FY10 to Rs 1292 crore in FY12

5000 4000 3000 2000 1000 0 FY10 Sea Transportation Business Port & Terminal Services Business
Source: Company, ICICIdirect.com Research

939 737 421 515 1327 801 705 537 1069 FY11E Oilfield Services Business Surface Transport Business 648 1207 FY12E 1292

Exhibit 9: Fleet profile

ESPLLs fleet consists of 18 dry bulk vessels, two VLCC carriers, six tugs, one semi-submersible rig and 12 onshore rigs

Rs cr

20 18 16 14

18

No of vessels

12 10 8 6 4 2 0 Dry Bulk VLCC Tugs Semisub Rig 2 6

12

1 Onshore Rig

Source: Company, ICICIdirect.com Research

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Essar Shipping (ESSSHI)

Detailed valuation
We have valued each of the divisions of the company on a DCF basis and arrived at our SOTP price target of Rs 93. We recommend BUY on the stock

Contrary to other shipping companies that have seen a drop in the topline in FY10 due to weakness in freight rates, ESPLL reported a 16.6% topline growth in FY10 mainly aided by the rise in revenues from the oilfield services business, surface transport business and port & terminal business, which more than compensated for the drop in the ocean transport business. Going forward, we expect the company to perform well as new port capacity gets commissioned and its shipping and offshore fleet gets ramped up with the delivery of 12 dry bulk carriers and two jack-up rigs. We have valued each of the divisions of ESPLL on a DCF basis and arrived at our SOTP price target of Rs 93. We maintain our BUY rating on the stock.

Exhibit 10: Valuation parameters

Business Sea and Surface Transport Business Oilfield Services Business Ports & Terminal VOTL & VPTL Hazira Bulk Terminal Salaya Bulk Terminal Paradip CQ3 Berth Paradip Coal Berth Total Value Total SOTP Valuation
Source: ICICIdirect.com Research

DCF/Rs. 23.7 23.5 14.5 8.9 19.1 0.6 2.8 46.0 93.2

Exhibit 11: Valuations

Sales (Rs. cr) 3000.5 3112.4 4085.9 Sales Growth (%) 16.6 3.7 31.3 EPS (Rs.) 1.5 0.9 3.9 EPS Growth (%) 23.2 -41.2 327.6 PE (x) 52.6 89.5 20.9 EV/EBIDTA (X) 12.4 11.8 9.0 RoNW (%) 1.2 0.9 3.3 RoCE (%) 3.7 3.7 5.2

FY10 FY11E FY12E

Source: Company, ICICIdirect.com Research

Exhibit 12: Revised estimates

Old FY11E 3112.4 1198.7 67.2 0.9 New FY11E 3112.4 1195.4 64.8 0.9

Sales EBITDA Net Profit EPS

Source: ICICIdirect.com Research

FY12E 4085.9 1611.4 273.7 3.8

FY12E 4085.9 1616.6 277.0 3.9

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Essar Shipping (ESSSHI)

ICICIdirect.com coverage universe

Domestic Peers
ESPLL Idirect Code MCap G.E Shipping Idirect Code MCap Mercator Lines Idirect Code MCap SCI Idirect Code MCap Varun Shipping Idirect Code MCap Aban Offshore Idirect Code MCap Garware Offshore Idirect Code MCap Great Offshore Idirect Code MCap Bharati Shipyard Idirect Code MCap ESSSHI CMP (Rs.) Target (Rs.) 4988.0 % Upside GESHIP CMP (Rs.) Target (Rs.) 4484.0 % Upside MERLIN CMP (Rs.) Target (Rs.) 1085.6 % Upside SCI CMP (Rs.) Target (Rs.) 6818.4 % Upside VARSHI CMP (Rs.) Target (Rs.) 660.0 % Upside ABALLO CMP (Rs.) Target (Rs.) 2627.1 % Upside GARSHI CMP (Rs.) Target (Rs.) 335.6 % Upside GREOFF CMP (Rs.) Target (Rs.) 1662.1 % Upside BHASHI CMP (Rs.) Target (Rs.) 690.0 % Upside 81 FY10E 93 FY11E 15 FY12E 295 FY10E 387 FY11E 31 FY12E 46 FY10E 61 FY11E 33 FY12E 161 FY10E 159 FY11E -1 FY12E 44 FY10E 36 FY11E -18 FY12E 695 FY10E 884 FY11E 27 FY12E 141 FY10E 182 FY11E 29 FY12E 448 FY10E 468 FY11E 4 FY12E 250 FY10E 327 FY11E 31 FY12E Sales (Rs. Crore) 3000.5 3112.4 4085.9 Sales (Rs. Crore) 2856.5 3232.9 3800.8 Sales (Rs. Crore) 1808.7 1826.2 2103.8 Sales (Rs. Crore) 3485.6 3590.9 3738.8 Sales (Rs. Crore) 666.2 638.6 686.8 Sales (Rs. Crore) 3358.7 3617.3 3610.1 Sales (Rs. Crore) 163.2 232.3 234.7 Sales (Rs. Crore) 1172.7 1155.3 1420.8 Sales (Rs. Crore) 1349.0 1334.1 1287.2 EPS (Rs.) 1.5 0.9 3.9 EPS (Rs.) 33.7 37.9 54.9 EPS (Rs.) 2.2 1.3 5.0 EPS (Rs.) 7.9 8.5 7.3 EPS (Rs.) 0.8 EPS (Rs.) 71.5 127.1 165.9 EPS (Rs.) 17.8 17.4 21.1 EPS (Rs.) 50.8 34.2 68.0 EPS (Rs.) 47.4 55.6 74.5 PE (x) 53.3 90.6 21.2 PE (x) 8.8 7.8 5.4 PE (x) 20.8 35.6 9.2 PE (x) 20.4 18.9 22.1 PE (x) 53.7 PE (x) 9.7 5.5 4.2 PE (x) 7.9 8.1 6.7 PE (x) 8.8 13.1 6.6 PE (x) 5.3 4.5 3.4 EV/EBITDA (x) 12.5 11.8 9.0 EV/EBITDA (x) 8.5 6.6 4.7 EV/EBITDA (x) 4.9 4.7 3.3 EV/EBITDA (x) 15.7 14.5 11.2 EV/EBITDA (x) 13.0 10.8 8.5 EV/EBITDA (x) 8.0 6.7 6.4 EV/EBITDA (x) 9.1 7.8 7.4 EV/EBITDA (x) 7.0 6.4 4.4 EV/EBITDA (x) 8.3 7.6 7.4 RoNW (%) 1.2 0.9 3.3 RoNW (%) 8.8 10.1 12.9 RoNW (%) 2.3 1.3 4.9 RoNW (%) 5.3 5.6 4.7 RoNW (%) 1.5 RoNW (%) 14.3 20.6 21.5 RoNW (%) 15.4 16.2 14.4 RoNW (%) 20.9 12.8 20.8 RoNW (%) 16.0 10.1 8.4 RoCE (%) 3.7 3.7 5.2 RoCE (%) 4.7 6.2 8.4 RoCE (%) 5.2 4.6 6.4 RoCE (%) 5.9 6.0 5.4 RoCE (%) 0.1 1.2 3.2 RoCE (%) 10.0 11.4 11.0 RoCE (%) 7.9 9.3 9.2 RoCE (%) 11.7 10.0 14.2 RoCE (%) 10.3 10.1 9.7

Source: Company, ICICIdirect.com Research

Global Peers
P/BV (x) P/E (x) Company Country CY09 CY10E CY11E CY09 CY10E CY11E Dry Bulk/Tankers Teekay Corp.* USA 0.8 0.8 0.8 40.1 18.0 Diana Shipping* USA 1.1 1.0 0.9 9.1 8.9 9.2 Genco Shipping* USA 0.8 0.6 0.6 4.7 5.3 10.3 Dry Ships* USA 0.6 0.6 0.6 5.5 6.6 4.5 Frontline Ltd* Norway 3.6 3.2 3.1 23.8 12.7 13.5 ESPLL# India 0.6 0.6 0.6 139.2 87.4 21.4 G.E Shipping# India 8.4 6.7 4.7 9.0 7.2 5.0 Mercator Lines# India 0.5 0.5 0.4 20.8 35.6 9.2 SCI# India 1.0 1.0 0.9 18.5 17.1 20.0 *consensus # With regards to Indian companies, three year data represents FY10, FY11 and FY12 (financial year ending in March)
Source: Company, ICICIdirect.com Research

EV/EBITDA (x) ROE (%) CY09 CY10E CY11E CY09 CY10E CY11E 11.6 6.7 6.2 7.5 11.0 12.4 8.5 4.9 15.7 9.1 6.3 6.2 6.5 8.9 11.8 6.6 4.7 14.5 8.5 6.4 7.9 4.8 9.0 9.0 4.7 3.3 11.2 13.5 18.0 7.2 14.9 4.0 8.8 2.3 5.3 3.1 10.9 12.5 7.6 24.5 3.8 10.1 1.3 5.6 5.3 9.4 5.3 11.4 21.3 3.9 12.9 4.9 4.7

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Essar Shipping (ESSSHI)

RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Add, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: 20% or more; Buy: Between 10% and 20%; Add: Up to 10%; Reduce: Up to -10% Sell: -10% or more; Pankaj Pandey Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 7th Floor, Akruti Centre Point, MIDC Main Road, Marol Naka Andheri (East) Mumbai 400 093 research@icicidirect.com ANALYST CERTIFICATION
We /I, Bharat Chhoda MBA (FINANCE) & Jehangir Master ACA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

pankaj.pandey@icicisecurities.com

Disclosures:
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