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Mundra Port and SEZ Ltd
Neutral
MPSE.BO, MSEZ IN
Will the fairy godmother return soon? Maintain N
• On the lookout for 'growth' catalysts. MPSEZ has underperformed the
Sensex by 10% over the last three months due to rich valuations,
accompanied by the absence of catalysts. We are all ears for new investment
proposals to deploy healthy FCF which existing portfolios are expected to
generate. (a) Announcement of new profitable port projects in Indiacompany
is in talks with Kerala, TN, Andhra Pradesh and Orissa Govts for
new opportunities, as per DN&A; a 50MTPA capacity port can potentially
add ~Rs10B to EBITDA or ~Rs5 to SOP, (b) visibility on favorable
conclusion of ongoing feasibility studies for ~80-90MTPA coal export
terminals in Australia and Indonesia, still two quarter away, in our view.
Our PT of Rs161 implies ~16% upside potential. We maintain our Neutral
rating, and believe a 10% correction from existing levels may provide
an attractive entry opportunity.
• Execution skills among best in sector. Trial runs commenced at the
60MPTA coal terminal at Mundra Port (MP) in Dec-10, CoD is expected to
be announced by end-Jan. MP with 140MTPA capacity (including 25MPTA
SPM capacity) is now the largest port by capacity in India. Among under
construction projects, MPSEZ’s solid cargo port terminal at Dahej is
expected to achieve 20MPTA capacity by Mar-11.
• Pace of SEZ development slow: Only 18 acres developed thru 9MFY11.
According to management, ~3000 acres is the development target over the
next five years. We reduce our FY11 development estimate to 250 acres in
FY11 (vs. 400 earlier) and reduce FY12-17E to 3100 acres (vs. 3500 acres)
earlier. Our FY11 12 estimates are down 2-2.8%.
• Dec-q growth healthy. Our PAT estimate of Rs2.23B (up ~37% YoY). We
estimate 27% YoY traffic growth at MP to 12.5MT in 3Q.
• Dec-11 PT of Rs161. 77% value sits in MP, 11% in SEZ, 4% each in Dahej
and Hazira, and balance 4% mainly in logistics business. Key risks: MoEF
show cause notice on MPSEZ in Dec-10; potential downside risk if outcome
is unfavorable. Implied SEZ valuation@Rs2.2mn/acre of notified area
(15,995 acre) is conservative, a large transaction at high valuations is a key
upside risk.
On the lookout for ‘growth’ catalysts
MPSEZ has underperformed the Sensex by 10% over the last three months on
account of rich valuations, accompanied by the absence of catalysts. We are all ears
for developments on new ‘growth’ opportunities. This could either come from (a)
new port project announcements on both east and west coast making MPSEZ a pan-
India player or/and (b) visibility on favorable conclusion of ongoing feasibility
studies for ~80-90MTPA coal export terminals at Dudgeon Point (Queensland,
Australia) and South Sumatra (Indonesia); concrete capex plans/ progress on preconstruction
milestones required before attributing value. We estimate ~Rs89B of
FCF generation over FY12-16 by MPSEZ- which could be deployed for growth
Traction on greenfield port opportunities in India
DN&A quoted Mr. Gautam Adani, Chairman, on 11 January, saying that the
company is in talks with the Kerala, Tamil Nadu, Andhra Pradesh and Orissa state
governments for the new port opportunities.
MPSEZ had submitted its plan to develop the Kalinga Port to the Orissa state
government in early 2010 and is still awaiting its approval. The port is at a distance
of 3kms from the proposed Posco India Port. According to media reports (DN&A),
the capex outlay for the port would amount to ~Rs100B for 100MTPA of cargo
handling capacity across 16 berths. The company plans to develop the port in two
phases with 12 of the 16 berths to be setup in FY16. Besides this in Orissa, MPSEZ
is also in touch with the govt. over brownfield expansion opportunities at Paradip
port.
MPSEZ is one of the 14 bidders for Vizhinjam BOT port project in Kerala. 10
Jan was the last day for submitting RFQ. Parties besides MPSEZ which have
participated include GVK, GMR, Reliance Infrastructure, Gammon Infrastructure
Projects, Essar, Global Yatirim Holding and STFA consortium (Turkey); Jaiprakash
Associates; Patel Engineering and Limak (UK) Consortium, Sterlite Industries,
Consortium of SCI, SKIL, HCCL, Consortium of Welspun Infratech and Leighton
Contractors; Nagarjuna Construction Company and Condor Brookfield Consortium.
The names of the qualified parties will be announced on Jan 19.
Dudgeon Point coal terminal: progress on feasibility, other
pre-construction milestones are key
According to MPSEZ, geotechnical studies at Dudgeon Point are underway and
financial and operating feasibility study is expected to be complete before Dec-2011.
If found feasible, the preferred proponents have the option to go ahead with the
planning process and they would be required to fund their own construction and
operations with the Queensland state government retaining ownership of the
underlying land. The master plan will assist in the potential allocation of land to each
of the preferred proponents for the construction of coal export infrastructure with the
balance of land retained by NQBP for future development.
We see a LT growth opportunity if Dudgeon coal terminal plans are finalized and
clear capex and commissioning timeline is laid out. At the current stage where the
feasibility study is under progress, attributing value to preferred proponent status is
early.
Port development plans in South Sumatra: receipt of
clearances, outline of capex needs key
In late Aug-10, Adani Enterprises (parent company of MPSEZ) entered into a
tripartite agreement for setting up a dedicated ‘rail and port project’ with the
government of South Sumatra (Indonesia) and PT Bukit Asam, a govt. of Indonesia
coal mining company. The project envisages the ownership, construction and
operation by Adani of 250km rail line capable of transporting a minimum
35MMTPA of coal. The rail line will connect Tanjung Enim, a mining area to
Tanjung Carat (see map below), where MPSEZ will build a port with matching
capacity to evacuate the coal.
As per company, total capex of US$1.65B for rail+port would be incurred over a
construction period of ~4 years. According to management, the govt. of South
Sumatra has undertaken to provide and facilitate all permits, approvals, and land
requirements for rail and port construction. The rail line will pass through swamps,
which could delay execution, in our view.
Like Dudgeon Point, this is also a LT growth opportunity, but pending
clearances, and concrete capex plan for the proposed port, we do not attribute
value at this stage. The delays in ramp up of the coal mine may also impact the pace
of development of the port.
Execution skills among best in sector
Trial runs commenced at the 60MPTA coal terminal at Mundra Port (MP) in Dec-10,
CoD of the coal terminal is expected to be announced by end-Jan and will impact
depreciation of 4Q.
MP with 140MTPA capacity (including 25MPTA SPM capacity) is now the largest
port by capacity in India. According to management plans are to further increase
capacity of coal terminal from 60MTPA to 100TMPA, with investment of Rs1.25B
(for addition of 4th berth and additional equipment). We est. ~49MTPA coal cargo in
our FY14 traffic est. of 111MTPA at MP. Excess capacity and demand-supply
mismatch for coal could aid imports beyond our estimate (see Table 2 for base-case
traffic estimates at Mundra Port).
Among under construction projects, MPSEZ’s solid cargo port terminal at Dahej is
expected to achieve 20MPTA capacity by Mar-11.
Pace of SEZ development slow in FY11 so far
So far in FY11, the only SEZ transaction happened in 3Q for 18 acres. According to
mgmt, ~3000acres is the development target over next five years. We reduce FY11
development est. to 250acres in FY11 (vs. 400 earlier) and reduce FY12-17 to
3100acres (vs. 3500acres) earlier. Our FY11 12 estimates are down 2-2.8%
The asking rate for 4Q is high, according to management negotiations are on with the
cement manufacturers who want to set up green-field capacity in the SEZ. Our
expectation would be met if land parcel is awarded for LNG Terminal (~450acre+)
or for Adani’s 3.3GW Bhadreshwar project/ or partly if Bharat Forge expands
capacity in Mundra SEZ.
Revised Dec-11 PT of Rs161, 16% upside potential from
CMP
Dec-11 SOTP-based PT of Rs161 is broadly unchanged (vs. previous Sep-11 PT of
Rs162). See Table 5 for SOTP: 77% value sits in MP, 11% in SEZ, 4% each in
Dahej and Hazira, and balance 4% mainly in logistics business
PT implies ~16% upside potential. We maintain N, we think further
correction/fruition of catalysts to provide buying opportunity
Prima-facie MPSEZ appears to be the most expensive stock in the listed port universe (see valuation comps in table below. The stock trades at 15.6x FY12E
EV/EBITDA vs. a global average of 11-12x. We believe the premium is justified as MP is among the fastest-growing port businesses with FY10-14
EBITDA and earnings CAGR of 36% and 37.5%, respectively. Also the scalability potential of the port asset is high, which the markets seems to be
attributing value (we estimate ~380MT traffic in FY31, the terminal year of the MP concession, from ~40MTPA at end of FY10). We expect Mundra Port
to be the largest port in India, surpassing Kandla port (which handles ~79MT in FY10) by FY14E. MP has the largest contiguous SEZ with a notified area
of 15,995acres.
Key risks: MoEF show cause notice on MPSEZ in Dec-10; potential downside risk
if outcome is unfavorable (see our Alert dated 20 Dec on the subject). A negative
outcome could impact LT capacity development at MP. We estimate 380MT of
traffic in the terminal year of the concession (FY31). Environmental restrictions may
potentially delay/suspend development. If we assume the growth till FY19
(~178MT) is intact (current capacity is already 140MT), and thereafter taper growth
to 3% p.a., the terminal year traffic number reduces to 240MT and PT reduces to
Rs144, down Rs17/share.
Since the MoEF show-cause notice was issued (15 Dec, 2010), the stock has given
absolute return of -4.65% and has underperformed the Sensex by 2.4%. So the stock
reaction has not been distinctly adverse, post this event.
Implied SEZ valuation@Rs2.2mn/acre of notified area (15,995 acre) is conservative,
a large transaction at high valuations is a key upside risk. In 3Qa transaction for 18
acres of land (for developing educational institution, entertainment and social
infrastructure) has happened at valuation of ~Rs10mn/acre, as per management.
Consolidated P&L and balance sheet statement
We expect 37.6% EPS CAGR thru FY14. Net-D/E is estimated to reduce further to
0.23x over this time frame. We have not factored in capex, earnings, or value for
proposed coal export terminals in Australia and Indonesia, as of now. See our
consolidated P&L and BS in tables below.
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