STOCK IDEAS- Mundra Port and Special Economic Zone Limited

Mundra Port and Special Economic Zone Limited

BSE Code: 532921

NSE Code: MUNDRAPORT

Though Indian economy has witnessed some moderation in growth during recent times in the face of rising inflation, GDP is expected to grow at around 8% in FY2009. International trade which forms an integral part of this growth engine is expected to grow at 12%-15% over the next few years. This increase in India’s EXIM trade would in turn benefit ports sector, which handles around 95% of trade by volume and 70% in value terms.

Incorporated in 1986, Mundra Port and Special Economic Zone Limited (MPSEZL) - a part of the Adani group, is developer and operator of one of the major non-captive private sector ports in India. Besides this, MPSEZL is also developing India’s first port based multi product SEZ near Mundra port and surrounding areas.

Business:

MPSEZL has exclusive right to develop and operate Mundra port and related facilities until February 2031 pursuant to the Concession Agreement entered into with the Gujarat Maritime Board (GMB) and the Government of Gujarat. MPSEZ is primarily engaged in providing multi-purpose port services for handling bulk, container and liquid cargo and also provides ancillary services like railway network, handling and storage. In addition, it also generates income from land related and infrastructure activities.

Port Services: MPSEZL facilities for bulk cargo services include 2 multipurpose terminals with 8 operational cargo berths and one barge berth capable of handling 4 bulk cargo vessels simultaneously. It has two container terminals operated by container sub concessionaire for handling container services and a single point mooring terminal and pipelines connecting to crude oil tanks for handling crude oil services.

MPSEZL also provides rail services for movement of bulk and container cargo within the port area and on the Mundra-Adipur broad gauge rail link connecting port to the Indian Railways network.

The revenue contribution for FY08 from bulk, container, crude oil and railway services stood at 50%, 12%, 18% & 8% respectively. MPSEZL port volume for FY08 stood at 28.8 million tonne, 46% growth over last year, which was primarily led by strong growth in container (39%) and crude oil cargo (92%). Going forward, management expects to clock around 50 million tonnes in cargo volumes by FY2010 with greater contribution from container and crude oil cargos.

Value Added Services : MPSEZL also provides highly mechanized cargo handling systems, marine and waterside services like tugs, navigation buoys and port utilities such as power, water and other infrastructure facilities. It has storage facilities of more than 800,000 square metres for bulk cargo and has 81 tanks with a combined capacity of approximately 342,000 kilolitres to store liquid cargo which are connected to the berths by pipelines. With these facilities & services, Mundra Port sets and consistently meets international benchmarks where the turnaround time for ships is just 13 hours, while corresponding figure for public sector ports like Mumbai, Chennai and Kochi is three-and-half days.

Land and Infrastructure : This segment contributed 12% to its revenues in FY2008. MPSEZL has received the rights to develop and use 3,404 acres of land for 30 years under the concession agreement. MPSEZL plans to utilize part of 4000 metres undeveloped waterfront to expand its port operations and sublease remaining portion to third parties for their respective port-based commercial activity and related development.

MPSEZL has approximately 15,665 acres of land under possession and an additional 16,688 acres are at various stages of being transferred. MPSEZL has plans to develop SEZ over this area in a phased

manner with 5947 acres expected to be developed by FY2011. The company’s integrated SEZ will be developed through investment from third parties in industrial infrastructure and commercial developments, residential accommodations and commercial and retail facilities, as well as schools, hospitals and other support infrastructure. Revenues would be generated through one-time premium charges and ongoing lease charges. Going forward, this segment would be source of continuous operating income and major growth driver for MPSEZL.

Expansion plans:

MPSEZL came out with highly successful IPO in November last year to raise funds for financing its expansion plans. The company is strategically planning to cover entire value chain with value-added services provided at the port like Logistic management, Coal terminal, Container rail operation and Inland container depots (ICD).

MPSEZL is developing a coal terminal for handling coal and other cargo requirements for Tata’s 4000MW thermal UMPP and upcoming Adani’s 2640MW power project in the vicinity of Mundra port.It is also setting up a solid cargo port terminal at Dahej with annual capacity of 15 million tones of cargo to service inland regions of South Gugurat, parts of MP & Maharashtra.

MPSEZL through its subsidiary Inland Conware Pvt. Ltd. (ICPL) is developing 14 new ICDs which would help it to attract more container cargo customers. Also the logistics arm (Adani Logistics Limited) which has a license to run container trains on Category I routes (JNPT/ Mumbai ports to NCR) has two rakes in operation with plans to have 20 rakes operational by FY09.

Investment rationale:

MPSEZL is a unique story as it offers logistics advantage and tax concessions to the companies setting up operation in Mundra SEZ. On the other hand, Mundra port would get additional revenues through increased cargo volumes and utilization of its port facilities by companies based in SEZ. Such synergies apart from it’s natural location advantage having huge port back up area, proximity to northern hinterland and major maritime trade routes, excellent connectivity through road, railways & pipelines and deep water draft capable of handling large vessels; provide MPSEZL an edge over other ports situated on western coast of India.

Increasing exim trade and growth in containerized and bulk traffic, driven by increased demand for oil and coal and exports of steel and iron ore would ensure sustained growth in port traffic in coming years.

MPSEZL has long term strategic arrangements with various companies such as IOCL, HPCL, Indian Railways, Tata Power, Maruti Suzuki and other group companies Adani Enterprises and Adani

Power which provide assured revenue visibility.

The coal terminal at Mundra, bulk terminal at Dahej, the network of rail and ICDs and SEZ operations would contribute substantially to MPSEZL earnings growth from FY2010 onwards. Further, SEZ development would lead to additional income directly from lease of land diversifying its revenues and insulating it against cyclicalities.

Concerns:

MPSEZL operates under concessions and licenses granted by the various government and quasi-government organizations like GMB. Cancellation, early termination or non-renewal of any such concession agreements would impact its business. MPSEZL’s port handling and other operations faces

operational risk due to factors such as natural disasters, increasing government regulations or downturn in shipping industry. Also, any unfavourable regulation regarding working of SEZs could severely hamper MPSEZL’s valuations.

Valuations:

Given the very high growth prospects driven by scaling up of operation in near future and embedded value of multi product SEZ, MPSEZL offers good long term growth. Going forward, margins are likely to

increase significantly on account of change in revenue mix, increased capacity utilization, and revenue generation from Dahej terminal and SEZ operations from FY2010. We expect MPSEZL to continue its blistering growth with revenues expected to grow at CAGR of 46% over FY08-FY10E and net profit at CAGR of 117% between FY08-FY10E. At CMP of Rs 545.30 it trades at a P/E of 100.8x its FY08A earnings and at 36.13x & 22.04x its FY09E & FY10E earnings respectively. At current levels, valuations seem to be attractive from long term perspective.

SALES AND PROFIT PROJECTIONS
		Annual	Annual	Annual
in Rs. Crore	Q4 FY08	FY08	FY09(E)	FY10(E)
Net sales	328.65	817.02	1152.00	1739.00
OP	234.89	534.43	806.40	1269.47
PAT	91.10	210.40	604.80	991.23
Capital	400.68	400.68	400.68	400.68
EPS (Rs.)	2.27	5.41	15.09	24.74

PRICE AND VALUE RATIOS
Price	545.30	Date	11/7/2008
PE	100.79	PB	8.16
Book value per share	66.81	EV	23173.08
EV/EBIDTA	43.40	Mcap	21849.08

SHAREHOLDING PATTERN
Share holding	Mar 2008
Promoter owned	81.3
Public owned	5.07
FIIs owned	3.97
Others owned	9.66