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Mundra Port and SEZ - Exciting structural story
Key beneficiary of under-capacity in ports, rising trade
Channel checks across the value chain suggest a good outlook
Strong FCFs (FY13E onward) supported by long-term contracts
Initiate with a BUY and TP of INR171 based on two-stage DCF
Port under-capacity beneficiary
Mundra Port and Special Economic Zone (MPSEZ) operates two ports with total
current capacity of 130m tonnes (Mundra: 110m tonnes, and Dahej: 20m tonnes).
The company also owns 32,000 acres of land in the Mundra region, of which
25,000 acres is a notified multi-product special economic zone (SEZ). We believe
Mundra Port’s strong infrastructure, hinterland connectivity, favourable policy
framework (Gujarat Maritime Board) and timely capacity expansion strongly
position it to tap the anticipated port traffic growth, as the major government-owned
ports in India continue to run at nearly 92% capacity utilisation and suffer
from slow capacity expansion and inefficiencies. Flexibility in setting
tariffs, as opposed to being regulated (as are all major ports), provides
MPSEZ a competitive advantage through improving efficiency.
Checks across the value chain suggest a good outlook
Our checks with key competing ports suggest capacity and infrastructure
buildout is still sometime away and we see no major threats to the
volume outlook for MPSEZ. Our assumptions on its contracted volumes
are backed by channel checks (see Exhibit 12), especially for projects
under construction. Checks with shipping lines suggest MPSEZ may gain
due to under-investment in Jawaharlal Nehru Port Trust (JNPT) and
Mumbai.
Strong FCF generation supported by long-term contracts
MPSEZ has four major contracts in place, totalling 41m tonnes, which
account for nearly 41% of capacity at Mundra and 33% of its total capacity
in FY13E. Coal, POL and containers are the key volume drivers. Further,
MPSEZ can serve as an important node to supply imported coal to a
catchment area where total power generation is likely to exceed 18GW.
Access to the Gujarat industrial belt (petrochemicals, cement, fertilisers)
is also a big advantage. We estimate operating cash flow yield of 6% in
FY13, which is among the highest in India’s listed infrastructure space.
Initiate with BUY and TP of INR171
We initiate coverage with a BUY rating and INR171 target price, based
on a two-stage DCF model (growth rate of 3% and WACC of 11%).
MPSEZ enjoys a strong balance sheet with a low gearing of 0.6x, which
provides sufficient headroom to pursue capacity expansion. Key risks to
our rating and TP would be regulatory changes (tariffs being regulated),
delays in expansion plans, and failure to receive required clearances and
approvals from the ministry of environment for its operations.
The Risk Experts
• Our starting point for this page is a recognition of the
macro factors that can have a significant impact on stockprice
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process
Initiate with a BUY and TP of INR171
We initiate coverage on MPSEZ with a BUY rating and TP of INR171 based on a twostage
DCF model. Our TP implies an upside of +26.1% from current levels. We have
used a nominal growth rate of 3% and a weighted average cost of capital of about 11%
to arrive at a DCF-based per share value of INR171.
We have not factored in any upside from the Mormugao or Hazira ports, which are likely
to be commissioned by FY13-15. Once operational, these two ports can potentially add
approximately INR5 per share to our target price. Further, we have also not included
any upside from international ventures (Indonesia and Australia), since both the
projects are still in the planning stage.
A strong balance sheet with low gearing (net debt-equity of 0.6x), low refinancing risk
coupled with a FCFF CAGR of 41% over FY12E-15E boosts its organic and inorganic
growth prospects.
Exhibit 28: DCF value and assumptions
Particulars (INR m)
Terminal growth rate (%) 3
WACC (%) 11
Terminal value 945,644
# of years to terminal value 19
PV of terminal value 130,194
PV of FCFF from FY12-FY31 213,510
Total FCFF 343,704
Net debt (23,704)
Total equity value (Port Venture) 319,999
Value of SEZ 23,438
Total Value of MPSEZ 343,437
Total o/s # of shares 2,003
Total value/share (INR) 171
Sources: Mundra Port and SEZ; BNP Paribas estimates
Based on our target price, Mundra trades at 25x FY12E P/E and 18x FY12E EV/
EBITDA as compared to its historical average of 32.3x and 24.9x. Global peers are
trading at about 19x 1-year forward P/E and 13x 1-year forward EBITDA.
We believe the premium is primarily due to higher margins 67% as compared to global
average of 45% and higher EBITDA CAGR (FY11-13) of 41% as compared to global
average of 17%. We anticipate Mundra to continue to enjoy high margins and stronger
volume growth.
Devil’s Advocate: Risk to our investment case
Policy risks – regulatory
The ports industry in India is highly regulated and minor ports such as Mundra come
under the purview of the Gujarat Maritime Board. Any significant change in the ports
policy in the form of capping tariffs, etc, can hurt earnings severely. Gujarat currently
has a very favourable policy as it aims to attract private investment.
Furthermore, any unfavourable changes in the export-import policy of the Government
of India (such an increase in duties, etc) could impact volumes.
Delay in execution of its projects
We have factored in timely execution of new capacity additions for Mundra Ports and
SEZ. The company is expected to add two new berths in the west basin (capacity of
30m tonnes) and two berths in south basin (capacity of 15m tonnes) to be operational
by 2014. Any delay in execution can reduce our revenue and earnings estimates.
Delay in completion of power projects in the SEZ
Adani Power and Tata Power, together are expected to install approximately 9,000MW
of supply in the SEZ. These two power plants alone will have a total coal requirement of
approximately 26-35m metric tonnes of coal which is likely to be imported at the Mundra
Port. Any delay in setting up the power plant can impact our volume assumptions by
5%.
Environmental damage concerns may arise
The Ministry of Environment and Forests (MoEF) has issued a notification to Mundra
Ports and SEZ for alleged violations of certain provisions of coastal regulation zone
notification. We believe that any further escalation from the MoEF can significantly
impact the port operations.
Increasing competition
Mundra may face stiff competition from the new upcoming private and public sector
ports in the vicinity, which can put pressure in its pricing.
Loss of revenue from MICT
MPSEZ had entered into a sub-concession agreement with Mundra International
Container Terminal Private Ltd (MICT) for operating a container terminal and in return
MPSEZ gets a royalty of 10% on the total revenue. Gujarat Maritime Board has issued
a show-cause notice due to a potential breach of contract and a final ruling is still
expected.
In the event that GMB terminates the MICT Sub-Concession Agreement, there may be
delays in appointing a new sub-licensee under the MICT Sub-concession Agreement
and in obtaining approval from the GMB for such appointment or in MPSEZ operating,
or having the ability to operate, the container terminal. Approximately 1.3% of our FY12
revenue estimate is potentially at risk as a consequence.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mundra Port and SEZ - Exciting structural story
Key beneficiary of under-capacity in ports, rising trade
Channel checks across the value chain suggest a good outlook
Strong FCFs (FY13E onward) supported by long-term contracts
Initiate with a BUY and TP of INR171 based on two-stage DCF
Port under-capacity beneficiary
Mundra Port and Special Economic Zone (MPSEZ) operates two ports with total
current capacity of 130m tonnes (Mundra: 110m tonnes, and Dahej: 20m tonnes).
The company also owns 32,000 acres of land in the Mundra region, of which
25,000 acres is a notified multi-product special economic zone (SEZ). We believe
Mundra Port’s strong infrastructure, hinterland connectivity, favourable policy
framework (Gujarat Maritime Board) and timely capacity expansion strongly
position it to tap the anticipated port traffic growth, as the major government-owned
ports in India continue to run at nearly 92% capacity utilisation and suffer
from slow capacity expansion and inefficiencies. Flexibility in setting
tariffs, as opposed to being regulated (as are all major ports), provides
MPSEZ a competitive advantage through improving efficiency.
Checks across the value chain suggest a good outlook
Our checks with key competing ports suggest capacity and infrastructure
buildout is still sometime away and we see no major threats to the
volume outlook for MPSEZ. Our assumptions on its contracted volumes
are backed by channel checks (see Exhibit 12), especially for projects
under construction. Checks with shipping lines suggest MPSEZ may gain
due to under-investment in Jawaharlal Nehru Port Trust (JNPT) and
Mumbai.
Strong FCF generation supported by long-term contracts
MPSEZ has four major contracts in place, totalling 41m tonnes, which
account for nearly 41% of capacity at Mundra and 33% of its total capacity
in FY13E. Coal, POL and containers are the key volume drivers. Further,
MPSEZ can serve as an important node to supply imported coal to a
catchment area where total power generation is likely to exceed 18GW.
Access to the Gujarat industrial belt (petrochemicals, cement, fertilisers)
is also a big advantage. We estimate operating cash flow yield of 6% in
FY13, which is among the highest in India’s listed infrastructure space.
Initiate with BUY and TP of INR171
We initiate coverage with a BUY rating and INR171 target price, based
on a two-stage DCF model (growth rate of 3% and WACC of 11%).
MPSEZ enjoys a strong balance sheet with a low gearing of 0.6x, which
provides sufficient headroom to pursue capacity expansion. Key risks to
our rating and TP would be regulatory changes (tariffs being regulated),
delays in expansion plans, and failure to receive required clearances and
approvals from the ministry of environment for its operations.
The Risk Experts
• Our starting point for this page is a recognition of the
macro factors that can have a significant impact on stockprice
performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process
Initiate with a BUY and TP of INR171
We initiate coverage on MPSEZ with a BUY rating and TP of INR171 based on a twostage
DCF model. Our TP implies an upside of +26.1% from current levels. We have
used a nominal growth rate of 3% and a weighted average cost of capital of about 11%
to arrive at a DCF-based per share value of INR171.
We have not factored in any upside from the Mormugao or Hazira ports, which are likely
to be commissioned by FY13-15. Once operational, these two ports can potentially add
approximately INR5 per share to our target price. Further, we have also not included
any upside from international ventures (Indonesia and Australia), since both the
projects are still in the planning stage.
A strong balance sheet with low gearing (net debt-equity of 0.6x), low refinancing risk
coupled with a FCFF CAGR of 41% over FY12E-15E boosts its organic and inorganic
growth prospects.
Exhibit 28: DCF value and assumptions
Particulars (INR m)
Terminal growth rate (%) 3
WACC (%) 11
Terminal value 945,644
# of years to terminal value 19
PV of terminal value 130,194
PV of FCFF from FY12-FY31 213,510
Total FCFF 343,704
Net debt (23,704)
Total equity value (Port Venture) 319,999
Value of SEZ 23,438
Total Value of MPSEZ 343,437
Total o/s # of shares 2,003
Total value/share (INR) 171
Sources: Mundra Port and SEZ; BNP Paribas estimates
Based on our target price, Mundra trades at 25x FY12E P/E and 18x FY12E EV/
EBITDA as compared to its historical average of 32.3x and 24.9x. Global peers are
trading at about 19x 1-year forward P/E and 13x 1-year forward EBITDA.
We believe the premium is primarily due to higher margins 67% as compared to global
average of 45% and higher EBITDA CAGR (FY11-13) of 41% as compared to global
average of 17%. We anticipate Mundra to continue to enjoy high margins and stronger
volume growth.
Devil’s Advocate: Risk to our investment case
Policy risks – regulatory
The ports industry in India is highly regulated and minor ports such as Mundra come
under the purview of the Gujarat Maritime Board. Any significant change in the ports
policy in the form of capping tariffs, etc, can hurt earnings severely. Gujarat currently
has a very favourable policy as it aims to attract private investment.
Furthermore, any unfavourable changes in the export-import policy of the Government
of India (such an increase in duties, etc) could impact volumes.
Delay in execution of its projects
We have factored in timely execution of new capacity additions for Mundra Ports and
SEZ. The company is expected to add two new berths in the west basin (capacity of
30m tonnes) and two berths in south basin (capacity of 15m tonnes) to be operational
by 2014. Any delay in execution can reduce our revenue and earnings estimates.
Delay in completion of power projects in the SEZ
Adani Power and Tata Power, together are expected to install approximately 9,000MW
of supply in the SEZ. These two power plants alone will have a total coal requirement of
approximately 26-35m metric tonnes of coal which is likely to be imported at the Mundra
Port. Any delay in setting up the power plant can impact our volume assumptions by
5%.
Environmental damage concerns may arise
The Ministry of Environment and Forests (MoEF) has issued a notification to Mundra
Ports and SEZ for alleged violations of certain provisions of coastal regulation zone
notification. We believe that any further escalation from the MoEF can significantly
impact the port operations.
Increasing competition
Mundra may face stiff competition from the new upcoming private and public sector
ports in the vicinity, which can put pressure in its pricing.
Loss of revenue from MICT
MPSEZ had entered into a sub-concession agreement with Mundra International
Container Terminal Private Ltd (MICT) for operating a container terminal and in return
MPSEZ gets a royalty of 10% on the total revenue. Gujarat Maritime Board has issued
a show-cause notice due to a potential breach of contract and a final ruling is still
expected.
In the event that GMB terminates the MICT Sub-Concession Agreement, there may be
delays in appointing a new sub-licensee under the MICT Sub-concession Agreement
and in obtaining approval from the GMB for such appointment or in MPSEZ operating,
or having the ability to operate, the container terminal. Approximately 1.3% of our FY12
revenue estimate is potentially at risk as a consequence.
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