MUNDRA PORT & SEZ : A Value Pick !!!

Scrip Code: 532921 / MUNDRAPORT

CMP:  Rs. 129.00; Buy at Rs. 120 - 125 levels. Short term Target: Rs. 140, Medium term Target – Rs. 181; STOP LOSS – Rs. 118.70; Market Cap: Rs. 25,843.78 Cr; 52 Week High/Low: Rs. 170.45 / Rs. 110.00
Total Shares: 200,33,94,100 shares; Promoters : 155,25,38,715 shares –77.50 %; Total Public holding : 45,08,55,385 shares – 22.50 %; Book Value: Rs. 21.42; Face Value: Rs. 2.00; EPS: Rs. 5.45; Div: 45.00 % ; P/E: 23.66 times; Ind. P/E: 19.43; EV/EBITDA: 19.95.

Total Debt: Rs. 3303.01 cr; Enterprise Value: Rs. 29,146.79 Cr.

Mundra Port and Special Economic Zone LTD: The Company was incorporated in 1998 as Gujarat Adani Port Limited and renamed as Mundra Port and Special Economic Zone Ltd in July 2006, based in Ahmedabad, India. Mundra Port & SEZ Ltd engages in the development, operations and maintenance of Mundra port & port based related infrastructure facilities – including multi product special economic zone in India. The company’s port related services include cargo handling and other value added port services. It handles bulk, liquid and containerized cargo, single point mooring, storage, and transportation of cargo by road, rail and pipeline. MPSEZL is in process of setting up coal cargo terminals at Murmugao Port, Goa. The company is also developing a non- LNG multi-user, multi-cargo port facilities at Hazira under the sub-concession route The company also operates container trains on specific railways routes; and provides multi-model cargo storage and logistics services through the development of inland container depots at various locations. It operates a fleet of approximately 2517 vessels. Mundra Port and SEZ ltd is compared with Rizhao Port Co. ltd; Shenzhen Chiwan Wharf Holdings Ltd. Mundra Port and Special Economic Zone Ltd is a subsidiary of Adani Enterprises Limited from September 2010.    

Investment Rationale:

MPSEZ has approved the change in name of the Company from 'Mundra Port and Special Economic Zone Limited' to 'Adani Port and Special Economic Zone Limited' which would be changed at some later date subject to approval by the Registrar of Companies -Gujarat and subject to the approval of Shareholders of the company. India's port capacity lags behind from rapidly rising demand. This comes at a time when traffic for coal, crude oil/POL, and container is set for a sustained period of high growth. It is expected that MPSEZ to benefit from the supply shortage due to its surplus capacity and advantageous location. Mundra Port is among the largest beneficiaries of an increasing demand-supply mismatch in India’s port capacity. MPSEZ’s competitive advantages and attractive location plus connectivity provides a strong visibility of traffic for MPSEZ. It is noted that 90 % of MPSEZ’s estimated traffic comprises of coal, crude oil, and container. Of this, coal and crude oil are not likely to see any impact from global macro concerns, while container traffic should continue to benefit from the shortage of capacity on India’s west coast. Adani Group has ambitious plans for its three key business verticals – power, coal and logistics and with the inter-linkages between them will drive MPSEZ’s future investment and growth plan. MPSEZ has started handling coal for Tata power’s Ultra Mega Power Project in Q2FY12 (2 million tonnes handled in the current quarter). This has led to the coal volumes surging to 5.13 million tonnes growing more than 60 % YoY. MPSEZ has entered into port service agreements with Adani Power (for 4,620 MW) and Tata Power (for 4,000 MW) for transporting imported coal from Indonesia and Australia to their respective power plants. These power plants, when fully operational would require about 30 metric per annum of coal cargo to be handled at Mundra port (peak estimated by FY15E of 35 million tonnes). It is estimate that MPSEZ to handle 11 million tonnes of coal in FY12 at the new coal terminal for both Adani Power and Tata Power. 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, such demand for power has led to rapid reforms in the power sector, the coal industry has not had equally big reforms, it is expected that the demand for coal will rise rapidly, though the supply will not rise as fast as demand will lead to demand for imported coal. Levy of MAT in the beginning of FY12 will lead to additional cash outflow in tax. However, the company is claiming MAT credit for the same such that the P&L impact will be neutralised. 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. It is learned that the port’s capacity is set to expand to >200mn tonnes by FY15. Mundra port would be generating more than enough free cash flow from FY12F, which it could deploy for green field port opportunities both in and out of India. MPSEZ has already ventured for a few projects within India as well as acquired a coal-handling terminal in Australia. The slowdown in global trade has already hit container traffic throughout ports sharply. It is expected that 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, a 25 % - 30 % CAGR in container traffic at Mundra over the next 3-4 years is expected.

Outlook and Valuation:

Despite been in a capital intensive business, the debt situation for MPSEZ is very comfortable. The stable cash flows from assured cargo and minimum working capital investment would be very important for the company to make more capex in the future for growth. It is believed that MPSEZ to generate around Rs. 1360 Cr of Free Cash Flow p.a. from FY12F, and MPSEZ is one of the few infrastructure companies in the country to do so. This allows MPSEZ to benefit from rising port opportunities both in and outside of India without too much of balance-sheet risk. While newer opportunities will likely to be ROE-dilutive. Mundra Port and SEZ has fallen by 21 % in last one month versus the fall of 8 % in the broader market Nifty, despite of strong operational performance of the company. Now the stock trades at attractive valuation of Price to Earnings of 16.29 x FY13E and RoE of over 20 %. Three year average historical one year forward P/E for MPSEZ is 22. In case of EV/EBIDTA multiple, it trades at 11.90 times FY13E, which seems to me undervalued in context of the healthy operating margin of 65 % with strong operational & free cash flows. Average historical one year forward EV/EBIDTA for MPSEZ for the last 3 years is 15. The valuation of the stock on SOTP (sum‐of‐the‐parts) basis, with the Mundra Port business comes at Rs. 181. In my view Mundra Port could report EPS in FY13E of Rs. 7.70 / sh. I would buy Mundra Port & SEZ LTD for the medium term with a price target of Rs. 181 and for the SHORT TERM PLAYERS it could be Rs. 140.00

Business Subsidiary FY13E	Value Per Share (in Rs.)
Mundra Port	136.00
Value of SEZ	19.00
Adani Petronet Dahej Pvt Ltd	7.10
Mormugao Port	1.20
Abbot Point Coal Terminal	4.00
Hazira Port	6.60
Vizag Port	2.00
Adani Logistics Ltd	5.00
TOTAL	180.90

KEY FINANCIALS	FY11	FY12E	FY13E
SALES (Rs. Crs)	2,000.10	2,581.80	3,391.60
NET PROFIT (Rs. Crs)	893.00	1,083.30	1,549.30
EPS (Rs.)	4.50	5.40	7.70
PE (x)	26.90	22.20	15.50
P/BV (x)	5.50	4.60	3.70
EV/EBITDA (x)	19.40	15.50	11.90
ROCE (%)	13.90	16.30	20.20
RONW (%)	22.30	22.50	26.60

I would buy MUNDRA PORT AND SEZ LTD with a price target of Rs. 140 for the Short term and Rs. 181 for the medium term target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 118.70 on every purchase.

 *As the author of this blog I disclose that I do hold MUNDRA PORT AND SEZ LTD in my investment portfolio.