Skil Ports; Bau eines Hafens in Indien

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Summary
- Investing in growing India is difficult because of various constraints but can be done through several ETFs.
- Alternatively one can look for specific investments listed outside India.
In this article, I will describe such a stock trading at a big discount to net cash.

India's economy is expected to grow fast for 2 reasons. First, because the average income is expected to go up, just as for other Asian countries. The income gap between developed countries and countries like India is getting smaller through, for example, the adoption of technology, better education and health care, world trade and investments from abroad. Secondly, India is growing simply because the population is still growing. Unfortunately, it is difficult to invest in India's stock markets for individual foreign investors.

So there are people who try to benefit from India's long-term growth by investing in exchange traded funds such as EPI, INDA, INDY, PIN, SCIF, SMIN, and SCIN. These are general India ETFs. One could also consider more specific investments, such as investing in India's infrastructure (NYSEARCA:INXX) and consumer companies (NYSEARCA:INCO). One might expect that these specific funds will perform better but since consensus doesn't pay on the stock market, I doubt it. Or one could search for good investments among the few Indian companies listed overseas. Recently, I bought one of these stocks.
SKIL Ports & Logistics

SKIL Ports & Logistics (OTC:SKPLF) or [SPL:LN] is a company working on a single project: building an extra port close to Mumbai. The founder and 28% owner, Nikhil Gandhi, is Indian. See here. He has built a port before, when he was very young, and with the profits the port generated, he built a big shipyard and a railway. He didn't stick with all his assets. In 2005, he sold the port and the railway, I suppose for a good price. I think he sold the shipyard as well, but I'm not sure. He kept developing new projects in his other company: SKIL Infrastructure. This company is listed on the National Exchange of India. Among others, this company is preparing to build yet another port in a joint venture with the Port of Rotterdam.

The new port is expected to be completed by the end of this year. Ports (and other infrastructure) are not abundant in India. So existing ports are busy and ships often have to wait until they can sail into an Indian port. So I suppose the new port will produce nice profits and cash flows from 2016.

At the moment, SKIL Ports & Logistics trades at slightly more than half net current assets. That's very cheap. Is there a catch?
Possible catches

It took them since 2010 before they were able to start building. But now they are building. But at the moment, there seems to be a delay. There is a dispute with local inhabitants. Nikhil Gandhi has been there before when he had the other port built, many years ago. He was beaten to hospital. This time, the company expects the problems to be resolved soon. See the recent announcement with the preliminary results here.

What is this company doing on the London Stock Exchange? I don't know. But I don't think this is one of those Chinese small caps. One of the differences is that Indian banks have enough confidence to give the company a 48 million GBP loan facility. The company already drew almost 10 million of it.

Could this be a dilution pitfall? Gandhi and another founder have conditional warrants for about 10% extra dilution. However, it is unlikely that the conditions for these warrants will be met. Furthermore, the company expects that it has sufficient funding to complete the port. Even if the company completely draws the loan, it will be much less leveraged than better known infrastructure companies such as Brookfield Infrastructure Partners (NYSE:BIP).

I had no idea how profitable the new port will be. So to get an idea, I had a look at the rates of the Port of Rotterdam. On page 27, they provide example 3 that can be used for comparison. With 3 Panamax ships of 300 meters each using the port 365 days per year, the port could generate about 30 million GBP per year. I have also looked at the rates of the Port of Mumbai. Port rates are very complex, but my impression is that the rates in Mumbai are not much cheaper than in Rotterdam.

To get an idea of the profitability, we now have to look at the costs side. Unfortunately, the interest rate of SKIL's loan is very high: around 13%. So that's 6 million per year if the company draws the entire loan. Another unknown is the operating costs. Because it will be a modern port and labor is still very cheap in India, I suppose these costs are relatively small, maybe 10 million GBP. So then the profit would be 14 million GBP per year. Compare this to the market cap of around 20 million GBP and the future enterprise value of at most 56 million GBP. Not bad, especially since this investment lasts for decades.

But suppose things are bad and the new port only generates 20 million GBP of revenue. Then there is still a profit of 5 million GBP. Assuming no revenue growth, a lifetime of 20 years of the port and a discount rate of 10%, we arrive at a value of 42.5 million GBP. In this pretty pessimistic scenario, the project is almost twice as much worth as you can buy it on the stock market today.
Conclusion

The catch could be that the new port is going to be too expensive. I trust the founder in this. He wouldn't be so rich if he hadn't been consistent in running away from disappointing investments. My discounted cash flow analysis supports this. Since the company trades below net cash, it would be easy to eliminate the company and get some upside. Still there are no signs at all that this will happen. So I'm optimistic. I expect this stock to fly when the port opens. Any comments are appreciated.

Finally illiquid small caps like this one can be very volatile. So I recommend only small positions in stocks like this one.  

Die Aktie scheint offenbar langsam in die Gänge zu kommen.
+40% seit meinem letzten Posting.