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Best placed to leverage high FCF generating assets for new growth opportunities
Action: Premier infrastructure company in India; BUY
Mundra Port (MSEZ) is among the largest beneficiaries of an increasing
demand-supply mismatch in India’s port capacity. Together with MSEZ’s
competitive advantages – attractive location and connectivity – this
provides strong visibility to our traffic estimates for MSEZ.
We note that ~90% of MSEZ’s estimated traffic comprises coal, crude
oil, and container. Of this, coal and crude oil are unlikely to see any
impact from global macro concerns, while container traffic should
continue to benefit from a shortage of capacity on India’s west coast.
Adani Group has ambitious plans across its three key business verticals
– power, coal and logistics and inter-linkages between them is expected
to drive MSEZ’s future investment and growth plan, in our view.
We estimate MSEZ will generate INR13.61bn of FCF p.a. from FY12F,
and that it is one of the few infrastructure companies in the country to do
so. This allows MSEZ to benefit from rising port opportunities both in
and outside of India without too much balance-sheet risk. While newer
opportunities will likely be ROE-dilutive, we expect them to be NPV +ve.
Valuation/Catalysts: inexpensive, strong earnings growth
As strong earnings growth continues, we believe the stock will witness
upside triggers. At 18.5x FY13F EPS of INR8.11, we think the valuation is
inexpensive for this high growth, high ROE, FCF-generating business with
strong visibility. Our TP of INR180 is based on a sum-of-the-parts
analysis. Together with the recent stock correction, this implies about 15%
potential upside. Reaffirm BUY
Investment argument remains strong
We believe Mundra Port & SEZ continues to be a strong beneficiary of the demandsupply
mismatch in India’s port capacity. This comes at a time when traffic for coal,
crude oil/POL, and container is set for a sustained period of high growth.
India port capacity, demand-supply mismatch to aggravate
Investments in the port sector have lagged targets so far, as private-sector participation
has been well below expectations. The economic crisis, a slowdown in export-import
(EXIM) traffic, and regulatory flip-flops have further hurt the expected revival in
investment in ports over the past three years. However, given a sustained need for port
capacity on the back of rising trade, we expect a pick-up in investments, and believe the
sector presents an investment opportunity of USD10bn over the next five years. We see
substantial business opportunities and market-share increase possibilities for the nonmajor
ports. With a forecast shortage in port capacity by FY12F as per our estimate, we
expect the non-major ports to retain pricing power as well as have a disproportionate
increase in their market shares.
Overall India port traffic to hit 1bn tonnes by FY12F – a 10.7%
CAGR from FY10
Using a bottom-up approach, we estimate that India’s port traffic will likely reach 1bn
tonnes by FY12F, implying a 10.7% CAGR from the 845mn tonnes reached in FY10.
While coal is likely to grow at a substantially higher pace, container traffic will likely be
the other driver of this growth, in our view. Together coal, POL/crude oil, and containers
seem likely to form ~70% of total traffic by FY12F, in our view.
• Coal traffic to register the sharpest growth
While coal is already used as a firing fuel at more than ~100GW of all power plants in
India, the cumulative capacity of all-India’s power plants is set to rise by another
125GW+ over FY11 to FY17, in our view. While such demand for power has led to
rapid reforms in the power sector, the coal industry has not had equally big reforms, in
our view. Thus, while we expect demand for coal to rise rapidly, supply will likely not
rise as fast, leading to demand for imported coal. We think coal volumes at Mundra
port from both Adani Power and Tata Power could reach 13mt in FY12F (from 2.65mn
tonnes in FY11) and could further increase to >30mn tonnes by FY15F. In addition,
coal volumes for other customers will grow at ~8.1% CAGR until FY17f, on our
estimates.
• POL/crude oil to provide necessary support to port traffic
We expect POL/crude oil traffic growth to slow marginally from 9.5% during FY03-08 to
9.1% during FY08-12F; however, it should still form the single-largest component of
India’s port traffic at 35.6%. In our view, sustained growth in crude oil and petroleum
products traffic will be driven by an increase in refining capacity in India. We expect
MSEZ to handle 4-5mn tonnes of crude oil for Bhatinda refinery in FY13 and gradually
ramp up to the full requirement of 9mn tonnes by FY15. Furthermore, HP-Mittal has
planned to expand its Bhatinda refinery to 18mt (from 9mt currently) by FY16. Also,
Indian Oil Corp crude oil handling is expected to ramp up to 11mt by FY13 (from 6.7mt
handled in FY11). These plans show significant visibility in crude traffic through Mundra
port, in our view.
• Container traffic likely to rebound after the economic slowdown
The slowdown in global trade has already hit container traffic throughput at ports
sharply. We now expect EXIM container traffic across all ports to rebound at a CAGR of
around 12.4% over FY10-12F and look for container traffic to reach 10.4mn TEU by
FY12F. Given the limited options available elsewhere on India’s west coast, we expect
a 25-30% CAGR in container traffic at Mundra over the next 3-4 years.
Capacity is not a constraint; expansion plans well laid out
Mundra port currently has a theoretical cargo handling capacity of 165mn tonnes, though
the actual usage might be limited to 135mn tonnes. Theoretically, the two single point
mooring systems (SPMs) at Mundra can handle 50mn tonnes in total, but the respective
refinery capacity itself limits overall requirement to 20mn tonnes pa. Hence, whenever
the IOC and HP-Mittal refineries at Panipat and Bhatinda, respectively, are expanded,
the SPM capacity should be able to handle the incremental volumes up to a maximum of
50mn tonnes in total, in our view. During our recent meeting with the company, we
learned that the port’s capacity is set to expand to >200mn tonnes by FY15.
As per our estimates, Mundra port would be generating more than enough free cash flow
from FY12F, which it could deploy for greenfield port opportunities both in and out of
India. MSEZ has already ventured for a few projects within India as well as acquired a
coal-handling terminal in Australia.
Valuation methodology
Our TP of INR180 is based on a sum-of-the-parts analysis. We have valued the core port
business at INR155 per share, using a cost of equity of 12.50%, SEZ at INR2 per share
(at a cost of equity of 18%), Abbott point x50 terminal at INR9/share and investments in
other smaller ports at INR7/share (2x P/BV). Projected cash on books as of Sep-12 adds
another INR7/share. We have yet to assign any value to the logistics businesses, as it is
in its infancy.
Risks that may impede the achievement of the target price: 1) Our assumed dividend
payout ratio might not be maintained; 2) Substantial share of traffic is dependent on
promoter group companies; and 3) Strategy on Dudgeon point and Indonesia coal
terminals has yet to be firmed up and could be earnings dilutive.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Best placed to leverage high FCF generating assets for new growth opportunities
Action: Premier infrastructure company in India; BUY
Mundra Port (MSEZ) is among the largest beneficiaries of an increasing
demand-supply mismatch in India’s port capacity. Together with MSEZ’s
competitive advantages – attractive location and connectivity – this
provides strong visibility to our traffic estimates for MSEZ.
We note that ~90% of MSEZ’s estimated traffic comprises coal, crude
oil, and container. Of this, coal and crude oil are unlikely to see any
impact from global macro concerns, while container traffic should
continue to benefit from a shortage of capacity on India’s west coast.
Adani Group has ambitious plans across its three key business verticals
– power, coal and logistics and inter-linkages between them is expected
to drive MSEZ’s future investment and growth plan, in our view.
We estimate MSEZ will generate INR13.61bn of FCF p.a. from FY12F,
and that it is one of the few infrastructure companies in the country to do
so. This allows MSEZ to benefit from rising port opportunities both in
and outside of India without too much balance-sheet risk. While newer
opportunities will likely be ROE-dilutive, we expect them to be NPV +ve.
Valuation/Catalysts: inexpensive, strong earnings growth
As strong earnings growth continues, we believe the stock will witness
upside triggers. At 18.5x FY13F EPS of INR8.11, we think the valuation is
inexpensive for this high growth, high ROE, FCF-generating business with
strong visibility. Our TP of INR180 is based on a sum-of-the-parts
analysis. Together with the recent stock correction, this implies about 15%
potential upside. Reaffirm BUY
Investment argument remains strong
We believe Mundra Port & SEZ continues to be a strong beneficiary of the demandsupply
mismatch in India’s port capacity. This comes at a time when traffic for coal,
crude oil/POL, and container is set for a sustained period of high growth.
India port capacity, demand-supply mismatch to aggravate
Investments in the port sector have lagged targets so far, as private-sector participation
has been well below expectations. The economic crisis, a slowdown in export-import
(EXIM) traffic, and regulatory flip-flops have further hurt the expected revival in
investment in ports over the past three years. However, given a sustained need for port
capacity on the back of rising trade, we expect a pick-up in investments, and believe the
sector presents an investment opportunity of USD10bn over the next five years. We see
substantial business opportunities and market-share increase possibilities for the nonmajor
ports. With a forecast shortage in port capacity by FY12F as per our estimate, we
expect the non-major ports to retain pricing power as well as have a disproportionate
increase in their market shares.
Overall India port traffic to hit 1bn tonnes by FY12F – a 10.7%
CAGR from FY10
Using a bottom-up approach, we estimate that India’s port traffic will likely reach 1bn
tonnes by FY12F, implying a 10.7% CAGR from the 845mn tonnes reached in FY10.
While coal is likely to grow at a substantially higher pace, container traffic will likely be
the other driver of this growth, in our view. Together coal, POL/crude oil, and containers
seem likely to form ~70% of total traffic by FY12F, in our view.
• Coal traffic to register the sharpest growth
While coal is already used as a firing fuel at more than ~100GW of all power plants in
India, the cumulative capacity of all-India’s power plants is set to rise by another
125GW+ over FY11 to FY17, in our view. While such demand for power has led to
rapid reforms in the power sector, the coal industry has not had equally big reforms, in
our view. Thus, while we expect demand for coal to rise rapidly, supply will likely not
rise as fast, leading to demand for imported coal. We think coal volumes at Mundra
port from both Adani Power and Tata Power could reach 13mt in FY12F (from 2.65mn
tonnes in FY11) and could further increase to >30mn tonnes by FY15F. In addition,
coal volumes for other customers will grow at ~8.1% CAGR until FY17f, on our
estimates.
• POL/crude oil to provide necessary support to port traffic
We expect POL/crude oil traffic growth to slow marginally from 9.5% during FY03-08 to
9.1% during FY08-12F; however, it should still form the single-largest component of
India’s port traffic at 35.6%. In our view, sustained growth in crude oil and petroleum
products traffic will be driven by an increase in refining capacity in India. We expect
MSEZ to handle 4-5mn tonnes of crude oil for Bhatinda refinery in FY13 and gradually
ramp up to the full requirement of 9mn tonnes by FY15. Furthermore, HP-Mittal has
planned to expand its Bhatinda refinery to 18mt (from 9mt currently) by FY16. Also,
Indian Oil Corp crude oil handling is expected to ramp up to 11mt by FY13 (from 6.7mt
handled in FY11). These plans show significant visibility in crude traffic through Mundra
port, in our view.
• Container traffic likely to rebound after the economic slowdown
The slowdown in global trade has already hit container traffic throughput at ports
sharply. We now expect EXIM container traffic across all ports to rebound at a CAGR of
around 12.4% over FY10-12F and look for container traffic to reach 10.4mn TEU by
FY12F. Given the limited options available elsewhere on India’s west coast, we expect
a 25-30% CAGR in container traffic at Mundra over the next 3-4 years.
Capacity is not a constraint; expansion plans well laid out
Mundra port currently has a theoretical cargo handling capacity of 165mn tonnes, though
the actual usage might be limited to 135mn tonnes. Theoretically, the two single point
mooring systems (SPMs) at Mundra can handle 50mn tonnes in total, but the respective
refinery capacity itself limits overall requirement to 20mn tonnes pa. Hence, whenever
the IOC and HP-Mittal refineries at Panipat and Bhatinda, respectively, are expanded,
the SPM capacity should be able to handle the incremental volumes up to a maximum of
50mn tonnes in total, in our view. During our recent meeting with the company, we
learned that the port’s capacity is set to expand to >200mn tonnes by FY15.
As per our estimates, Mundra port would be generating more than enough free cash flow
from FY12F, which it could deploy for greenfield port opportunities both in and out of
India. MSEZ has already ventured for a few projects within India as well as acquired a
coal-handling terminal in Australia.
Valuation methodology
Our TP of INR180 is based on a sum-of-the-parts analysis. We have valued the core port
business at INR155 per share, using a cost of equity of 12.50%, SEZ at INR2 per share
(at a cost of equity of 18%), Abbott point x50 terminal at INR9/share and investments in
other smaller ports at INR7/share (2x P/BV). Projected cash on books as of Sep-12 adds
another INR7/share. We have yet to assign any value to the logistics businesses, as it is
in its infancy.
Risks that may impede the achievement of the target price: 1) Our assumed dividend
payout ratio might not be maintained; 2) Substantial share of traffic is dependent on
promoter group companies; and 3) Strategy on Dudgeon point and Indonesia coal
terminals has yet to be firmed up and could be earnings dilutive.
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