Mundra Port and SEZ -Broadly in-line results; one-offs impact margin :: Kotak Sec

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Mundra Port and SEZ (MSEZ)
Infrastructure
Broadly in-line results; one-offs impact margin, SEZ sales remain elusive. Strong
revenue growth (26% yoy) was in line with estimates. EBITDA margin at 66.2% (down
520 bps) was likely impacted by one-off costs related to heavy rain. Increased coal
requirement for the recently commissioned unit of Adani power plant and closure of
JNPT boosted volumes. SEZ sales remained sedate with no significant sale made during
2Q. Retain REDUCE on valuations and limited potential for upside to estimates.



Revenues in line but margins disappoint potentially on one-off costs; SEZ sales remain elusive
Mundra reported strong revenue growth of 26% yoy to Rs4.1 bn in 2QFY11, marginally (~2%)
below our estimate. EBITDA margin at 66.2% was about 180 bps below our estimates and down
520 bps on a yoy basis. Strong margin contraction was led by lower operating expenses as a
percentage of sales—possibly a result of one-off operating expenses related to heavy rains in the
quarter. However, lower-than-expected interest expense (likely led by debt restructuring) helped
the company report a net PAT of Rs2.1 bn, about 5% above our estimate. SEZ sales continued to
remain relatively sedate with no significant sale made during the quarter.
Volume growth led by bulk (COD of third unit of Adani power) and container (closure of JNPT)
Strong volume growth (24%) was led by (1) strong bulk cargo growth (40% yoy), especially coal
(up 54% yoy) likely on account of the increased coal requirement for Adani’s power plant post the
commissioning of the third unit of 330 MW in the previous quarter and (2) container volumes (up
39% yoy) likely aided by non-operations of JNPT in August 2010. The closure of Panipat refinery
for expansion works likely led the decline in crude volume handled at IOCL SPM (down 28% yoy).
Indonesia port project and start of operation of Dahej port - key positive developments
Other key developments (1) MPSEZ is setting up a 35 MTPA port facility to handle coal cargo in
Indonesia based on an agreement signed between Adani Enterprises, regional Govt. of Sumatra
Selatan, Indonesia and PT Bukit Asam—this is in addition to the potential port development
project in Australia, and (2) start of commercial operations of Dahej port in August 2010.

Retain REDUCE (TP: Rs150) on high valuations and limited potential for upside to estimates
We have retained our earnings estimates of Rs4.5 and Rs7.2 for FY2011E and FY2012E. We retain
our REDUCE rating on the stock with a target price of Rs150/share based on (1) relatively
expensive valuations, (2) strong estimates in the near term as well as long term leaves limited
potential for upside and (3) slower-than-expected pick-up in SEZ land sales. The company
(adjusted for SEZ and other assets) is presently trading at an EV/EBITDA of about 17.2X FY2012E.
Indonesia and Australia projects are still too early to be valued.