Mundra Port-- Mar-q results incrementally positive, overhang of Abbot deal in the price :: JP Morgan

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Mundra Port and SEZ Ltd

Neutral

MPSE.BO, MSEZ IN

Mar-q results incrementally positive, overhang of Abbot deal in the price

• Mar-q ahead of estimates: MPSEZ reported standalone 4Q PAT of

Rs.3.35B (+74.4% YoY). Reported PAT was higher by ~Rs839MM due to

a change in accounting policy for SEZ income booked so far. Adj. PAT of

Rs2.51B (up 30.6% YoY) was well ahead of our and street est. (Rs2.2B).

• Change in accounting marginally accretive: Earlier upfront payment on a

land transaction constituted ~70-80% of SEZ revenue booking and annual

lease rentals were recognized on an accrual basis. Applying the principles of

financial lease (AS-19), the NPV of rentals over the lease period would also

be booked upfront now. According to mgmt, the rationale is to benefit from

a tax holiday on SEZ available until FY18 (or MAT if budget proposal is

approved post FY13), after which the peak tax-rate (~33%) would apply.

• Operating performance healthy: Adjusted Mar-q standalone sales of

Rs4.71B were up 33.3% YoY, ~6% ahead of estimates. 4Q realizations

were higher than expected; cargo volume details were known (14.1MMT,

up 34.5% YoY) ahead of results. MPSEZ was able to maintain 9M FY11

margins in 4Q at ~68.3% (vs. 65.8% est.). Tax rate of~18% in Mar-q was

much higher than the 9M FY11 level (~5%) mainly on account of higher

deferred tax booking in relation to coal terminal commissioned in Feb-11.

• MPSEZ stock declined ~9% post announcement of Abbot Point Coal

terminal acquisition on 2 May (see our note on the expensive deal). Based

on management inputs CY12 EBITDA would be ~US$115MM. Assuming a

15% premium on average valuation of global ports (12x CY12

EV/EBITDA) to account for growth prospects and adjusting for acquisition

debt (~US$2B), we calculate the overhang on equity value at negative

Rs9/share (~US$414MM). In our view, the negative impact of the deal is

priced in.

• Maintain Neutral, with a revised SOP-based Mar-12 PT of Rs155 (down

from Rs165 earlier). Our new PT implies 12.9x FY13E EV/EBITDA. Mar-q

results are incrementally positive. MPSEZ is headed for a strong FY12, in

our view (see report). We would view a market-led correction as an

opportunity to accumulate the stock. High unrelated capex (e.g. railroad

capex in Queensland) is a key downside risk, while new greenfield port

concession wins in India could drive upside.