MUNDRA PORT & SEZ Racing to the pole position :: Edelweiss

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Long-term contracts and volume recovery to lead race to pole position
Since inception, Mundra Port & SEZ (MPSEZ) has posted 35% CAGR and handled
~40 MT cargo in FY10, higher than most other major Indian ports. Also, it has
hedged cargo uncertainty risk by getting into long-term service contracts (45%
of total cargo to be handled in FY14E). The port is expected to continue its
current growth momentum over the coming 2-3 years, handling ~96 MT of cargo
by FY13E, and pip major Indian ports to pole position from its current seventh
position.
􀂃 A unique port: One of its kind in India
MPSEZ, under the aegis of the parent company Adani Enterprises, has been
instrumental in developing a deep draft gateway port and SEZ strategically on
the West coast of India with state–of-the-art infrastructure and capability to
handle diversified cargo. Such a third generation port acting as one-stop-shop
for export/import logistics is in unique league of ports and one of its kinds in
India.
􀂃 Q2FY11 earnings sequentially flat due to fertiliser complex related costs
MPSEZ reported standalone Q2FY11 top line growth of 26% Y-o-Y at INR 4.13 bn
and PAT growth of 21%, at INR 2.11 bn. However numbers were flat Q-o-Q due
to higher costs incurred towards the fertilizer complex. The port handled a cargo
of 12.5 MT, up 25%. While EBITDA margins have dipped 3.5% Q-o-Q, reduction
in interest costs has aided in maintaining PAT margins at 51%. Land sale at the
SEZ continued to be sluggish.
􀂃 Outlook and valuations: Premium valuation; maintain ‘HOLD’
We have valued the port and concession agreements of Dahej, Hazira, and
Murmogao on an NPV basis. While we assume capacity at Mundra port to be
expanded to 250 MT by FY31E, the scale up of volumes post FY14 from 110 MT
is likely to be at a gradual rate of 5%. We have not factored in any of the
overseas projects in Australia and Indonesia and the likely venture into East
coast of India (key upsides to our valuations), as they are in early stages. Our
SOTP value of INR 162 comprises INR 137 for various port assets, INR 17 for the
SEZ, and INR 8 for cash and other businesses. We believe the stock will continue
to outperform/trade at premium valuations due to its scale, 45% of cargo being
contracted, pipeline projects / M&As opportunities and upside risks to our 5%
cargo growth rates beyond FY14E. We maintain ‘HOLD/Sector Outperformer’
recommendation/rating on the stock.