Macquarie: Buy Mundra Port & SEZ - Sailing ahead; target Rs 161

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Mundra Port & SEZ - Sailing ahead

Event
 Mundra Port declared its 3Q FY11 results. Revenue growth of 33% and
earnings growth of 40% were driven primarily by 26% growth in cargo
volumes. Outperform maintained.
 We revisit our SEZ valuations following uncertainties about tax benefits. We
reduce our target price marginally by 8% to Rs161 from Rs175.

Impact
 Strong cargo volume growth driven primarily by containers: Overall
cargo volume increased by 26% YoY, primarily led by container (44% growth)
and bulk cargo (31% growth) volumes.
Container volumes at own terminal grow: MSEZ handled 0.325m TEU
in 3Q FY11 (up 44% YoY). All incremental volume is being handled by
Mundra Port’s own container terminal, which offers higher margins.
Adding 3m TEU container capacity over next 3–4years: MSEZ plans
to undertake development of a container terminal of 1.5m TEUs in Hazira
in the next 3–4 years. Similarly, it intends to add another terminal of 1.5m
TEU capacity in Mundra Port.
 Near-term volume growth expected to be strong: The company is on track
to achieve our volume forecasts of ~55m tons in FY11 and ~85m tons in
FY12. MSEZ will handle an estimated ~20–22m tons of coal imports for Adani
Power (ADANI IN, Rs122.95, Outperform, TP: Rs145.00, covered by Jeff
Evans) and Tata Power’s (TPWR IN, Rs1,211.00, Outperform, TP:
Rs1,553.00, covered by Jeff Evans) power plants being set up in the vicinity
of Mundra Port.
 Impact of Direct Tax Code on SEZ status remains uncertain: Uncertainty
looms about the impact of DTC on the tax benefits currently available to SEZ.
Current tax benefits are likely to be available for all the companies starting
manufacturing before 2014, in our view.
Cutting our valuation for SEZ due to tax-benefit uncertainty: We have
cut our sales assumption from 12,000 acres to 5,000 acres until FY20.
We have reduced our valuation for SEZ by Rs14/share.
Earnings and target price revision
 We have cut our target price by 8% to Rs161 to factor in lower valuations for
SEZ due to uncertainties about tax benefits under the new DTC regime.
Price catalyst
 12-month price target: Rs161.00 based on a Sum of Parts methodology.
 Catalyst: Crystallisation of growth plans and a further pickup in volumes.
Action and recommendation
 Stock trading at discount to port valuations: MSEZ is trading at a discount
to its core port valuations (~Rs145/share). Moreover, we do not think the
current stock price is ascribing any value to the growth options (domestic and
international) being pursued by the company. We maintain an Outperform on
the stock with a revised target price of Rs161.


Near-term volume CAGR of 45% driven by long-term contracts
 Building-in a CAGR of 45% in volumes from Mundra Port over FY11–15E: We are building-in
a volume CAGR of 45% over FY11–15E, as the fixed contracts of coal cargo from power plants
and the oil cargo of Indian Oil (IOCL IN, Rs322.35, Outperform, TP: Rs473.00, Jal Irani) and
Hindustan Petroleum (HPCL IN, Rs348.40, Outperform, TP: Rs535.00, Jal Irani) kick in over a
period of time.
Coal cargo to jump substantially in FY12: We estimate coal imports to reach 20m tons in
FY12 and to increase to 30m tons in FY13, after the full commissioning of 4,620MW of
thermal power plants by Adani Power and 4,000MW by Tata Power’s UMPP.
Crude cargo expected to increase by 9m tons in FY12: We are forecasting an increase in
cargo volumes to 9m tons after the commissioning of the crude terminal in FY11, to cater to
the needs of IOCL and HPCL.


Valuation – reducing our target price marginally to Rs161
 Reducing our SEZ valuation to factor in tax uncertainties: There is uncertainty about the
continuation of the current tax benefits that are available to the manufacturing units being set up
by SEZ. We have therefore reduced our sales forecast from 12,000 acres (523m sqft) to 5,000
acres (217m sqft) spread over FY11–20.
 Stock trading at discount to current port valuations, growth option is free: Mundra Port is
trading at a discount to its core port valuations of Rs145/share. Moreover, we believe that the
current stock price does not ascribe any value to the growth options – ports in India and abroad –
that are being pursued by the company.