Mundra Port Harbouring good times ::Macquarie Research,

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Mundra Port
Harbouring good times
Event
 Mundra Port reported its 2Q FY11 results, which were in line with our
estimates. Revenues increased 26% and earnings increased 21% YoY, on
the back of 24% growth in cargo volumes.
 We remain positive on the stock and increase our target price to Rs175 from
Rs156 to factor in the investments in new ports, logistics subsidiary and
overseas investment opportunity, which should sustain long-term growth.
Impact
 Strong cargo volume growth, primarily driven by container: Overall cargo
volume increased 27% YoY, primarily led by container, which registered
strong growth of 38%.
Container volumes at own terminal grow: The trend of increased traffic
in the Mundra Port–operated CT2 terminal in 1Q FY11 continued in 2Q
FY11. Volumes in this terminal have increased sharply by 161% YoY, as
all the container volume growth is coming at the CT2 terminal, which
offers a higher margin as it is self-operated by the port.
 Current valuations capture near-term growth story: The stock is trading at
19x FY12 EV/EBITDA and, in our view, captures most of the near-term
volume growth that would come from coal cargo of Adani Power’s (ADANI IN,
Rs134, OP, TP: Rs144, Jeff Evans) and Tata Power’s (TPWR IN, Rs1,417,
OP, TP: Rs1,627, Adam Worthington) power plants in Mundra in FY12 and
beyond.
 New initiatives would contribute to cargo traffic only after four to five
years: Recently, Adani Group announced its intent to set up ports in Australia
and Indonesia in conjunction with the group’s strategy to acquire coal assets.
These ports can add 100–160m tons in annual volumes to MSEZ. However,
these ports would be operational only in five years or so. It is still early to
comment on the potential profitability of the ventures. MSEZ is well placed to
finance this opportunity, with estimated US$1bn of FCF in the next five years.
Earnings and target price revision
 Increasing our target price by 12% to Rs175 to incorporate the value of
investments in new ports and logistics subsidiary.
Price catalyst
 12-month price target: Rs175.00 based on a Sum of Parts methodology.
 Catalyst: Concrete steps towards new port initiatives in FY11–12.
Action and recommendation
 Raising our target price to Rs175, maintain Outperform: We raise our
target price by 12% to Rs175 to factor in investments in logistics and other
port subsidiaries. We believe that MSEZ is poised for earnings CAGR of 30%
over FY11–14, given strong capacity expansion and tied-up coal contracts
from Adani Power’s and Tata Power’s upcoming plants at Mundra. Any clarity
on progress on the planned ports in Australia and Indonesia would be a key
trigger for the stock, in our view.