Ashok Leyland : Accumulate on every dip.Good stock !!!

ON 5 Jan 2012

Scrip Code: 500477 / ASHOKLEY

CMP:  Rs. 22.60; Buy at Rs. 22.20 levels.

Short term Target: Rs. 24; Medium to Long Target – Rs.30; STOP LOSS – Rs.20.50; Market Cap: Rs. 6,013.13 cr; 52 Week High/Low: Rs. 34.38 / Rs. 20.00

Total Shares: 266,06,76,634 shares; Promoters : 102,72,37,424 shares –38.61 %; Total Public holding : 163,34,39,210 shares – 61.39 %; Book Value: Rs. 9.99; Face Value: Rs. 1.00; EPS: Rs. 2.19; Div: 200 % ; P/E: 10.31 times; Ind. P/E: 25.95; EV/EBITDA: 6.92. Total Debt: 2658.19 Cr; Enterprise Value: Rs. 8711.05 Cr.

ASHOK LEYLAND LTD: The Company was founded in 1948 and is based in Chennai, India. Ashok Leyland limited is a subsidiary of Hinduja Automotive Ltd. It was named after the founder Raghunandan Saran’s son Ashok, the company was renamed ‘ASHOK LEYLAND’ with equity participation from Leyland Motors Ltd in 1955. Ashok Leyland ltd engages in the manufacture and sale of commercial vehicles and related components in India and internationally. In the year 1967, India’s first inland made double decker was launched by Ashok Leyland. The Company's products include Buses – double decker and vestibule buses, CNG buses, Trucks – including multi axle trucks & tractor trailers, diesel engines, defense and special vehicles for Indian army. From 18 seater to 82 seater double-decker buses, from 7.5 ton to 49 ton in haulage vehicles, from numerous special application vehicles to diesel engines for industrial, marine and genset applications, Ashok Leyland offers a range of products. In the year 2006 Ashok Leyland acquired AVIA the Czech Republic based truck manufacturer. In 2007 the company formed a JV with Nissan Motor Company, Japan for the manufacture and marketing of light commercial vehicles, same year Ashok Leyland signed another JV with Continental AG, Germany – for the development of automotive Infotronics. In 2010, the Company acquired 26% stake in Optare plc. a bus manufacturer in the United Kingdom. Ashok Leyland Ltd is compared to: Bajaj Auto Limited, Motherson Sumi Systems Limited in India and Xiamen King Long Motor Company Limited globally.

Investment Rationale:

Management expects industry to grow at a moderate rate of 5 % - 6 % in FY12. Higher interest rates, rising fuel prices and sluggish freight rates in Southeast are likely to impact sentiments negatively. Higher tonnage tipper segment is witnessing strong demand with about 50 % YoY growth in H1FY12 largely driven by construction activities. Regional wise sales increased by 112 % in west, 42 % in South, 15 % in North and decline in East. Company’s strength in Tipper segment was affected due to supply constraints of fully built vehicles. Management expects to maintain its market share of 25 % in FY12 driven by penetration in northern and eastern markets. To achieve this Ashok Leyland is increasing dealerships and service stations, increasing production of fully built vehicles (FBV) and necessary price corrections (for select products). It aims to do 3500 units of FBV as of 2000 to 2500 units per month currently. Implementation of ban on overloading has been gaining momentum in Uttar Pradesh, Madhya Pradesh, Bihar and now in Karnataka also. Ashok Leyland has started dispatching its LCV ‘Dost” under Nissan JV with volumes of 210 units in October. During November domestic prices were increased upto 1 %. Internationally prices of metals like Aluminum & Copper are witnessing marginal reduction which is partly offset by unfavorable exchange rate. Management expects benefits in second half of FY12 and maintains EBITDA margins of 10.5 % for FY12. Management targets 9,000 units of manufactured engine sales in H2FY12. Spare parts sales were at Rs. 370 Cr in H1 and management targets Rs. 400 Cr in H2FY12. Ashok Leylands JV with John Deere is expected to launch its first product named Backhoe loader followed by wheel loader in FY13, with the target volumes of 8,000 to 9,000 units. Ashok Leylands Continental JV has started supplying dashboard electronic equipment which is to be fitted in UTruck platform. Management expects major of its JVs to turn EBITDA positive in the next 2 to 3 years. U-Truck has been launched in tractor-trailer and tipper segments only - with the volumes of 2,000 units in H1FY12 and targets its volumes of 6,000 by H2FY12.  Loans & Advances are up by Rs 310 Cr largely due to VAT accumulation of Rs. 46 Cr and excise of Rs. 55 Cr. Also, capital advances are up by Rs. 50 Cr. Management targets to bring down Loans & Advances by Rs. 100 Cr going ahead. It is expected that Ashok Leyland will maintain exports target of 13,000 vehicles for FY12 and targets 15 % of total volumes as exports this is possible due to increased penetration in new markets of Latin America and Africa.

Outlook and Valuation:

Ashok Leyland is raising its stake in British bus maker Optare Plc to 75.1 % following a re-financing agreement.  Ashok Leyland had already acquired a 26 % stake in Optare in July 2010 aiming at a long-term strategic partnership. This re-financing was achieved with Ashok Leyland facilitating a credit-line to support Optare's re-banking options and providing a substantially improved working capital facility for the business. Optare's management believes that this re-financing represented a "defining moment" in the company's turnaround plan, which the company had commenced in 2009. Along with the access to Optare’s technology including modern range of city buses, Ashok Leyland sees a large opportunities to grow in the global bus market. Both the management sees this as an important element in their vision of being among the top 5 bus manufacturers globally. Through leveraging the synergies of the two companies, managements are confident that going forward they will be able to accelerate technology sharing, develop future-ready products and substantially increase their global footprint. Ashok Leyland has been trading in the range of Rs. 21 & Rs. 24. Keeping these in mind, Ashok Leyland could be an ideal Buy as well as at declines with a stop loss placing at Rs. 20.50 for a target of Rs. 30.00. Uncertainty with respect to demand for Ashok Leyland (due to regional disparity) continues to be a concern on the volume front. However, price hikes and lower Raw Material cost can provide cushion against the drop in earnings due to lower volumes. The company could report EPS of Rs. 2.40 x for FY12E and Rs. 3.00 for FY13 estimates. The stock could be bought with the short term target of Rs. 24 & Rs. 30 for Medium to long term period with the strict stop loss of Rs. 20.50 

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	7,244.70	11,117.70	12,542.70	14,274.70
NET PROFIT (Rs. Crs)	388.90	657.30	627.40	786.20
EPS (Rs.)	1.50	2.50	2.40	3.00
PE (x)	18.50	10.90	11.40	9.10
P/BV (x)	3.10	2.70	2.40	2.10
EV/EBITDA (x)	11.20	6.70	5.90	4.90
ROE (%)	17.60	26.40	22.30	24.70
ROCE (%)	12.50	18.50	17.40	19.40

I would buy ASHOK LEYLAND LTD with a price target of Rs. 24 for Short term and Rs. 30 for the Medium to long term players. 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. 20.50 on every purchase.

New Year Wishes for Readers !!!

Every man should be born again in the first day of January. Start with a fresh page.  Take up one hole more in the buckle if necessary, or let down one, according to circumstances; but on the first of January let every man gird himself once more, with his face to the front, and take no interest in the things that were and are past.

Keep smiling, God Bless u all and Take Care !!!

NMDC : A VALUE PICK !!!

Scrip Code: 526371 / NMDC

CMP:  Rs. 150.60; Buy at Current levels.
Short term Target: Rs. 165, 6 month Target – Rs. 240; STOP LOSS – Rs. 138.55; Market Cap: Rs. 59,708.62 cr; 52 Week High/Low: Rs. 305.00 / Rs. 135.60

Total Shares: 396,47,16,000 shares; Promoters : 356,84,18,180 shares –90 %; Total Public holding : 39,62,97,820 shares – 10 %; Book Value: Rs. 48.46; Face Value: Rs. 1.00; EPS: Rs. 18.62; Div: 330 % ; P/E: 8.09 times; Ind. P/E: 17.23; EV/EBITDA: 10.81. 

Total Debt: NIL; Enterprise Value: Rs. 57,072.08 Cr.

National Mineral Development Corporation LTD: The Company was founded in 1958 and is based in Hyderabad, India. NMDC is an iron ore producer & exporter, operating in Chhattisgarh & Karnataka. NMDC ltd engages in the exploration and production of various minerals in India and internationally. It explores for iron ore, copper, rock phosphate, lime stone, dolomite, gypsum, bentonite, magnesite, diamond, tin, tungsten, graphite & beach sand. The company also focuses on coal and gold properties, as well as platinum group of elements and bauxite. It has iron ore deposits in Bailadila Chhattisgarh, Iron ore mines at Donimalai Karnataka; diamond mines at Panna Madhya Pradesh; magnesite mines at Jammu; & Arki lime stone project in Himachal Pradesh. In addition, the company involves in investing in the development of renewable energy resources, which include wind mill projects of approximately 10.5 MW capacities at Karnataka. NMDC supplied 2.3752 Cr tons of iron ore to domestic industries & had exported 25.63 lakh tons of iron ore. On December 10, 2010, NMDC announced a joint venture (JV) with OJSC Severstal (a vertically integrated steel maker from Russia) to build an integrated 2mn tonne steel plant in Karnataka. This JV will have captive coking coal mine in Russia, while it will have an iron ore mining subsidiary in India. On September 2011, NMDC purchased a 50 % stake in Australian-based Legacy Iron Ore (Legacy) as a cornerstone investor for Rs. 92 Cr. NMDC is compared with SESAGOA LTD in India, Cliffs Natural Resources Incorporation and Ferexpo Plc globally.      

Investment Rationale:

NMDC management aims to ramp up its production capacity to 50mn tonnes by FY2014–15E through increased exploration of its existing mines and development of new mines, i.e., Deposit 11B in Bailadila and Deposit 13 in Kumaraswamy in Karnataka. The targeted cost for the development of the three mines is around Rs. 2,400 Cr. However, in FY2011, the company’s volumes have been impacted by iron ore ban in Karnataka and Naxal activities in the Dantewada region of Chhattisgarh. Management intends to diversify its operations by moving downstream through the establishment of steel plants and pellet plants.

Historically, NMDC has maintained its dividend payout ratio at in the range of 22 % -24 %. In FY11, it paid an interim dividend @ 115 % on the equity shares, aggregating to Rs. 460 Cr in February 2011 and also announced a final dividend of 215 % on the paid up equity share capital, aggregating to Rs. 850 Cr. The total dividend payout for the year stood at Rs. 1310 Cr. Including dividend tax, total cash outflow for the company stood at Rs. 1520 Cr. NMDC has been generating steady cash flow over the last two years. With the very little capex and no buyouts the cash level for the company has been rising year on year. On account of the buoyancy in prices in FY11 the company’s cash level rose the highest. Cash at the end of FY11 stood at Rs. 17,200 Cr. In fact NMDC’s cash level has jumped 5.5 x since FY06. As a result, NMDC has been on the lookout for mineral resources globally as domestic capacity expansion has been slower than expected and new mining licenses in the country are hard to come by. The company is also investing into facilities for value addition. Over the next two years, it is expected that the cash levels could increase 55.7 % to Rs.26,800 Cr, translating into cash per share of Rs. 67.59. With such a strong balance sheet, NMDC is currently prospecting various mining assets, including an iron ore mine and a phosphate mine in Australia, an iron ore mine in Brazil and a coking coal asset in Russia. So an over sea acquisition of mining assets cannot be ruled out. NMDC being a Cash rich PSU it’s the strong candidate for buyback of government held shares which will be an EPS accretive. NMDC is setting up value addition plants like -

Chattisgarh Steel plant: NMDC is setting up Chhattisgarh Steel Plant a 3mtpa steel plant at Nagarnar near Jagdalpur, Chhattisgarh. It has acquired 1,782.62 acres of land for the plant (995 in 1st phase and 787.62 acres in 2^nd Phase). Formal allotment of additional 102.64 acres of Government Land is under process. Besides, diversion of about 63.52 acres of forest land is also under process in the government. The board has approved an investment of Rs. 15,530 Cr for setting up the plant. Environmental Clearance from MoEF was received subject to the conditions.

Donimalai pellet plant: The 1.2mtpa pellet plant at Donimalai has been built largely to prolong the life of Tailing Dam at Donimalai by using slimes for making pellets. Execution of project is divided into six packages and the estimated capital expenditure is Rs. 570 Cr. Civil works are in progress at site. Orders are placed for site leveling. Project is scheduled to be completed by March 2013.

Bacheli pellet plant: Setting up of 2mtpa pellet plant project is kept on hold considering the proposed slurry pipeline from Bacheli to Vizag. It is planned to relocate the project from Bacheli, Dantewada to Nagarnar, Jagdalpur.

Outlook and Valuation:

Iron Ore market is expected to remain tight on the back of restricted supplies from India. Chinese steel production too has not cooled off as per the market’s expectations. Upside risks to the volume estimate remain high as the company has ramped up its output at the Kumarswamy mine in Karnataka over the last one month. Before the mining ban was implemented in Karnataka, NMDC had lowered its production target to 28-29mn tons in FY12 because of mining hurdles such as stricter green laws. However, with the Supreme Court allowing NMDC to mine iron ore in the Bellary area, partially lifting a ban levied by the Karnataka government, the company plans to produce 32mn tons, against the previous target of 29mn tons. NMDC’s cost of production increased sharply in FY11 on account of an increase in royalty and jump in transportation costs. Per ton cost of production increased to Rs. 1,077/ton in FY11 from Rs. 785/ton in FY10. The above two cost heads accounted for 88 % of the increase in per ton costs for the company in FY11. Royalty on iron ore was increased from a fixed royalty of up to Rs. 27 a ton, depending on its variety and grade to 10 % on its prevailing market price. To benefit from the strong iron ore prices, Railways have increased the freight on iron ore meant for exports. Over the last one year, railways have increased its fare by 3 x. Going forward it is expected that  the costs will decrease by 4.7 % yoy in FY12 as the impact higher royalty and export tax would be negated by an increase in overall volumes and decline in exports.

After the 24 % correction in the stock price over the last 6 months, the stock is trading at 5.5x FY13 EV/EBIDTA, which is marginally higher than its peers. NMDC should trade at a premium to its peers considering the high quality reserves and the low cost operations it has. NMDC reported strong growth in sales volumes during 2QFY2012, led by ramp-up in its Karnataka iron ore mines. Going forward, a robust growth in sales volumes is expected. The stock is currently trading at 6.5x FY2012E and 5.40x FY2013E EV/EBITDA. Valuing the stock at 5.4x FY2013E EV/EBITDA, the fair price of NMDC comes at Rs. 241. In my view NMDC could report EPS of Rs. 21.60/sh in FY12E & of Rs. 23.60/sh in FY13E.

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	6,239.00	11,369.00	13,582.00	14,932.00
NET PROFIT (Rs. Crs)	3,451.00	6,499.00	8,565.00	9,346.00
EPS (Rs.)	8.70	16.40	21.60	23.60
PE (x)	27.20	14.50	11.00	10.10
P/BV (x)	6.60	4.90	3.60	2.80
EV/EBITDA (x)	18.30	8.90	6.50	5.40
ROE (%)	26.60	38.80	37.90	31.50
ROCE (%)	33.40	50.60	47.40	39.60

I would buy NMDC LTD with a price target of Rs. 241 for Medium to Long term and Rs. 165 for the Short term players. 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. 138.55 on every purchase.


READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

Why Long Term Investing Pays you Back !!!

This morning has been unusually busy……for TV anchors of Blue & Red business channels. There’s a news report from a leading international institutional brokerage known for its bearish views on India which predicts that BSE SENSEX could hit 11,000. And TV anchors are doing their best to whip up panic based on it. Just ignore all this ‘noise’…….

Stock market will rise and fall – This is a given fact. But what matters to you as an Long Term Investor is where the stock markets will be in say next 3 years or 10 years for that matter. And when it comes to that, things does not look better at least this is what the picture drawn (0r made seen) by the reports from FII’s saying that index could touch 11,000 or so….

Most of us would be out of markets and would be asking questions that why should one invest? – I will argue to that report and will Strongly advocate LONG TERM INVESTING. Just look down at the history and you will find that markets have always given returns in long term, the only thing  one needs is to have patience and selection of stocks. If you buy a strong fundamental stock with good Return on Equity (ROE) and with good management which you hold it over years, will surely give you the best returns over the period of time. The present stock market crisis has thrown up exciting money making opportunities and in particular select the Stocks which commands good fundamentals & which are available at their best valuations –

But, First read the tables below -

NIFTY	1 Yr Return	3 Yr Return	5 Yr Return	10 Yr Return
No. of Occurrences	15	13	11	6
(-)ve return observed	5	2	1	0
Probability of Loss	33.33 %	15.38 %	9.09 %	0.00 %

SENSEX	1 Yr Return	3 Yr Return	5 Yr Return	10 Yr Return	20 Yr Return
No. of Occurrences	32	30	28	23	13
(-)ve return observed	11	6	3	1	0
Probability of Loss	34.38 %	20.00 %	10.71 %	4.35 %	0.00 %

The above tables clearly show that the probability of losing capital is highest if the holding period is around 1 year and lowest or nil if the holding period is increased to 10 or more years.

It means your capital is safest if invested for long term. It also depends on what  kind of stock you hold on, if you hold stocks with good fundamentals, the probability of losing capital nearly vanishes...

Here, down below, I have tried to give a list of stocks which commands RETURN ON EQUITY of 15 % or more which may have potential of money making opportunity - 

*ROE as on 31st March 2011

Stock Name	EPS (Rs.)	Book Value (Rs.)	*ROE (%)	PAT Margin (% )
AXIS BANK	91.51	505.87	19.34	2.78
BAJAJ AUTO	121.10	219.34	85.21	19.72
BERGER PAIN	4.57	23.26	22.03	6.48
BHARTI AIR	16.92	122.63	19.20	20.30
CRISIL	25.60	70.24	50.53	37.02
COAL INDIA	7.43	39.67	25.73	30.33
CONT.CORP	68.26	418.07	18.86	22.95
CIPLA	12.57	89.25	15.36	15.53
GAIL	30.19	168.17	19.76	10.82
HERO MOTOR	104.77	206.20	60.05	9.33
HDFC BANK	19.18	118.26	16.75	4.05
HDFC	26.12	129.86	21.74	27.50
HUL	11.67	18.26	82.66	10.60
IDFC	10.32	75.55	15.03	28.09
INFOSYS	119.24	487.23	27.69	25.38
INDRAP.GAS	20.97	82.94	28.40	13.21
ITC	7.09	24.11	33.35	16.30
ILFS TRANSP	13.32	98.20	17.14	17.83
JINDAL STEEL	21.58	102.20	26.80	16.98
JSW STEEL	86.07	764.35	15.65	8.00
L & T	66.54	375.93	19.71	8.78
M & M	43.71	189.32	29.46	10.40
MARUTI SUZU	69.73	507.32	17.81	5.64
MOIL	35.00	139.18	30.90	51.34
MUNDRAPORT	5.45	24.05	25.36	52.31
NMDC	18.62	57.92	38.85	57.13
ONGC	26.43	127.92	20.67	28.61
PETRO.LNG	11.92	42.63	25.21	4.70
POWER FIN	17.96	148.55	18.42	25.47
REC	26.83	142.52	21.53	31.12
RUPA & COMP	4.68	23.12	21.09	5.01
SESA GOA	31.24	140.95	36.52	41.38
SUN PHARMA	15.22	72.82	22.32	43.83
TALWALKARS	7.33	55.76	18.34	17.60
TATA STEEL	72.31	526.27	16.4	21.52
TCS	48.29	126.35	43.89	25.86
TITAN IND	5.78	15.33	49.20	6.55
TECH MAHIN	51.54	286.81	22.32	14.03
ULTRATECHCEM	73.26	424.11	18.39	9.45
WIPRO	19.66	95.88	24.96	18.35

*The list is just for explanation and should not be taken as stock recommendation

This, by now, would have cleared your doubts, fears and worries of investing in the stock market.

Happy Investing!!! 

Visit the Presentation to learn more on CLICK - RETURN ON CAPITAL EMPLOYED

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.