Mundra Port & SEZ - Step change :: Macquarie Research

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Mundra Port & SEZ
Step change
Event
 Mundra Port has announced its acquisition of Abbot Point port in Queensland
port, Australia for a consideration of US$2bn. This acquisition would double
the balance sheet size of the company, with a significant increase in leverage.
Equity dilution could be a possibility if work starts simultaneously on all
international projects.

Impact
 Operational port in coal basin with huge capacity growth: Abbot Point is
an operational port handling ~17mn tons of coal cargo annually. The port’s
capacity could ramp up shortly to 50mn tons, with further expansion possible
to 80mn tons with additional capex of around US$600mn. The concession
period for the port is 99 years. Acquisition will be initially financed through
short-term debt at LIBOR+3.25%.
 Guaranteed returns and assured traffic provide earnings visibility: Port
has a take or pay agreement for 50mn tons capacity. Tariffs are regulated and
allow 14% RoIC on the regulated base of US$1.5bn. While management
claims that it would be free to fix its own charges after CY17, we think that
returns cannot be significantly higher than regulated returns.
 Target to triple revenues by CY16: Mundra Port, in its press release,
has stated its target to triple the port’s revenue to US$330mn and
quadruple EBITDA to US$234mn by CY16.
 Equity raising necessary if simultaneous investment in international
port ventures: Equity raising would be required only if work on other
international ventures – Dudgeon Point and Indonesian port – is taken up in
next 2-3 years. Port -elated capex across three ports (including Abbot Point)
would be ~US$5bn with an equity requirement of US$1-1.5bn. We project
MSEZ will generate free cash flow of ~US$1bn over FY11-15.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs148.00 based on a Sum of Parts methodology.
 Catalyst: clarity on capex and return profile of overseas acquisitions
Action and recommendation
 Future capital allocation to be the key to stock out performance: MSEZ is
committing US$2bn to Abbot Point where return on capital would be around
10.5% over the next five years. Upside could be possible beyond 2017 if it is
allowed to increase tariffs. The street will be keen to understand the return
profile on the other international ventures which could consume significant
capital in the medium term.
 Maintain outperform, await further details on overseas foray: We
maintain our Outperform with price target of Rs148, where most of the value
is derived from the Mundra port itself. We await further details to ascribe value
to the overseas ports.