Mundra Port & SEZ To reap benefits of cargo shift --Espirito Santo,

Mundra Port & SEZ
To reap benefits of cargo shift
Adani Port & SEZ (ADSEZ) is our silver bullet idea in the infrastructure
space. Tariff reduction at the major ports and infrastructure
bottlenecks at JNPT are likely to aggravate congestion at JNPT,
driving additional volumes at Mundra Port. We expect ADSEZ’s
superior growth profile to continue (FY13 volume growth at 35% yoy),
based on capacity expansion by its assured customers and the benefit
of its own timely capacity expansion. We aren’t too concerned with
its leveraged acquisition of Abbot Point, as the port has take or pay
agreements for its entire capacity (in a phased manner) and scope for
margin improvement. We think the current price presents an entry
point with an attractive valuation. But despite being a rare defensive
growth stock in the Infrastructure space, the governance risk means
caveat emptor.

��


ADSEZ to reap benefits of cargo shift from nearby ports
Mundra Port’s strategic location and superior infrastructure and the capacity
constraints at JNPT and has made it a preferred port destination. The Tariff Authority
for Major Ports (TAMP) has asked private operators (NSICT, GTI) to slash their rates
charged. This move will now force private terminals to slash the container volumes in
the guaranteed throughput they promised in their concession agreements, leading to
traffic being diverted to other private ports (Mundra and GPPV). Gujarat Pipavav port
(GPPV IN, Rs 57, Sell, FV Rs 57) is adding capacity of only 0.2mnTEUs in the next 2-3
years, while Mundra Port is setting up a 1.25mn TEU container terminal (Rs 18bn) to be
commissioned by FY13. The terminal is expected to berth ships of 12,000 TEUs+ and
would be far superior to the infrastructure at JNPT (4,500-5,000 TEUs).
Abbot Point debt refinanced – reiterate positive stance
ADSEZ recently concluded the refinancing of the Abbot Point acquisition debt. The
new AUD loan will replace the existing short-term USD loan taken to acquire the asset
in June 2011. As highlighted in our earlier note, we maintain that though APCT is EPS
decretive it is not cash flow negative. With a take-or-pay agreement (in a phased
manner) for the entire capacity of 50MMT, revenue and cash flow visibility is very high
for APCT. We think ADSEZ will have to inject equity into APCT only in FY16E, when it
starts repaying the AUD loan and begins capex for further capacity expansion.
Superior cargo growth profile to continue
Volume growth for ADSEZ is expected to be driven by coal, container and crude
cargo. Adani Power has commissioned 1,320 MW in Q4FY12 (total capacity 4,620
MW) while Tata Power has commissioned 800 MW during the same period. We
expect Tata Power will significantly ramp up its capacity to 2,400 MW by the end of
FY13. HMEL’s Bathinda refinery was also fully commissioned in March 2012 and will
contribute crude volumes (4 mtpa) to Mundra Port in FY13. We also expect container
traffic to grow by 15% yoy. We estimate ADSEZ will continue to register superior
growth in FY13 (35% yoy), based on the capacity expansion of its assured customers
and the benefit of its own timely capacity expansion.
Fair value at Rs170; governance risk needs cognizance
Tariff reduction at the major ports and infrastructure bottlenecks at JNPT should
continue to benefit ADSEZ, driving additional volumes to the port. ADSEZ has also
been ahead of peers in expanding capacity and is in a sweet spot to capture the
incremental volumes. We also maintain our positive stance on the Abbot Point
acquisition. With a take-or-pay agreement (in a phased manner) for the entire
capacity of 50MMT, revenue and cash flow visibility is very high for APCT. We value
ADSEZ based on DCF valuation by individual project and arrive at a SOTP value of
Rs170 per share. Pending allegations over involvement in Karnataka mining scam
remains a key negative and could be a source of volatility.