Mundra Port & SEZ - Harbouring good times.:: Macquarie Research

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Mundra Port & SEZ
Harbouring good times
Event
 MSEZ reported its 4QFY11 and FY11 results, which were in line with our
estimates. Adjusted PAT of Rs9.02bn in FY11 was up 29% YoY on the back
of 29% growth in cargo volumes. We have an Outperform rating on the stock
with a target price of Rs148.

Impact
 Accounting policy change boosts reported numbers: MSEZ’s 4QFY11
reported PAT at Rs3.35bn and was boosted by Rs0.84bn due to change in
accounting policy on land leases. The company, in accordance with new
accounting guidelines, has recognised the net present value of the
outstanding land leases, discounted at 8.8%. The key reason for doing this is
to save tax outgo, as the company would have had to pay higher tax (at 33%
unlike 20% MAT currently) on lease income from FY15.
 Strong volume growth continues: MSEZ handled 8.9m and 52m tons of
cargo in 4QFY11 and FY11, up 30% YoY. Bulk and container cargo grew by
64% and 19% in 4QFY11 and 42% and 31% in FY11, respectively.
 Volume growth in own container terminal continues: MSEZ operated
container terminal CT2 handled 0.54mn TEUs (up 80% YoY) vs 0.6m
TEUs handled by DP World operated (up 10% YoY) in FY11. Margins in
CT2 are higher than CT1 for MSEZ.
 Coal imports to drive 59% volume growth in FY12: We expect MSEZ
to handle 83m tons in FY12. Growth in volumes should be driven largely
by 20m tons of coal imports for Adani Power (ADANI IN, Rs107,
Outperform, TP: Rs134, covered by Jeff Evans) and Tata Power’s (TPWR
IN, Rs1,211, Outperform, TP: Rs1,553, covered by Jeff Evans) power
plants being set up MSEZ’s vicinity.
 Clarity needed on overseas port projects: The company has lined up
US$5–6bn capex over next 4–5years which need US$1–1.5bn equity.
MSEZ’s recent acquisition of US$2bn Abbot Point port with a return profile of
10.5% RoIC over the next five years has an inferior return profile vis-à-vis
Indian operations. We await clarity on proposed Dudgeon point and
Indonesian ports to ascribe any value to these ports.
Earnings and target price revision
 Minor change of 2–3% in FY12–13E EPS on account of FY11 actual numbers.
Price catalyst
 12-month price target: Rs148.00 based on a Sum of Parts methodology.
 Catalyst: clarity on overseas investments.
Action and recommendation
 Clarity on overseas ports is key to stock out performance: MSEZ is
committing US$2bn to Abbot Point port with 10.5% RoIC over the next five
years. The street is keen to understand the return profile on the other
international ventures which would consume significant capital of US$3–4bn in
the medium term. Meanwhile, we maintain our Outperform with price target of
Rs148, where most of the value is derived from the operational Mundra port.