Buy Mundra Port and SEZ- Sets foot on the East coast of India:: Edelweiss

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Mundra Port and SEZ (MSEZ IN, INR 133, Buy)

n  Sets foot on the East coast of India

Mundra Port and SEZ (MPSEZ) has set foot on the East coast of India, aiming to design and develop a coal terminal at the government owned Vishakapatnam (Vizag) port for a concession period of 30 years with 24 months of construction period. The terminal is likely to be developed at a capex of INR 3 bn with a capacity to handle 6.5 MTPA of coal cargo (expected to be operational by CY13). The company was H1 in the bid and has offered to share 40.1% of its revenue with the Vizag Port Trust as royalty. 

n  Precursor to next phase investment on the East coast

Though the size of the investment is currently small in the overall scheme of things, it nonetheless marks the company’s entry into the East coast, a long pending development. The venture would help the company understand the East coast better, technically as well as commercially. The company will, thus, be able to lay the foundation for the next phase of investment on the East coast, with either brownfield or greenfield projects.

n  MAT likely to be a drain on cash flows

The company was so far exempted from paying MAT on its profits because of its SEZ developer status. However, with the recent budget proposal of levying MAT on SEZ developers/units, the company will have to pay MAT (i.e. 20% of book profits until 2016, post which, it falls under normal tax rate) against which it can book MAT credit. Hence, there is unlikely to be any impact on the company’s earnings, but valuation could be hit because of the cash outgo.

n  Draft Port Regulatory Bill hosted

A draft Port Regulatory Bill, 2011, hosted by the Ministry of Shipping, currently under review, proposes constituting major and state port regulatory authorities to notify tariff guidelines and lay down performance standards. Though the draft is in initial stages, the company does not expect any major tariff changes since its tariff is already competitive to those offered by major ports.   

n  Outlook and valuations: Positive; maintain ‘BUY’

While we await more details on the project, given its small size, we do not expect any major value accretion to our SOTP. Since Vizag terminal is slated to come in only by FY14 and MAT is purely a cash-flow item, we do not see any impact on our existing earning numbers. However, due to MAT cash outgo, we revise our SOTP target to INR 151 from INR 164. We maintain ‘BUY/Sector Outperformer’ recommendation on the stock.