Mundra Port and SEZ: Invest at cut-off

Investors with a three-five year perspective can consider subscribing to the initial public offer of Mundra Port and Special Economic Zone (Mundra Port). Superior growth in cargo and container volumes handled in relation to other ports in the region, an integrated business model comprising port operations and services and long-term tie-ups that secure business, are positives for this port developer.

A multi-product special economic zone (planned) in the location is also likely to provide steady captive business.

The offer is at a price band of Rs 400-440. The earnings per share for FY-07 on the existing equity base was Rs 5.2. When the additional capacities from the second multi-purpose terminal and container terminal go on stream, earnings may well grow at a 60 per cent compounded annual rate (CAGR) over the next three years, assuming volumes expand at a rate of 30-35 per cent (the last three years’ volumes have shown a CAGR of 56 per cent). Planned forays into container rail, inland container depots and SEZ would further scale up earnings. We have not factored these operations into our valuations.
Business and objectives

Mundra Port, part of the Adani Group, is a port developer and an operator. The company has a 30-year concession agreement beginning 2001, with Gujarat Maritime Board and the Gujarat Government for a non-captive private port in Mundra located in the Kutch district of Gujarat.

This port, which has been operational since 2001, provides services for various types of cargo such as food grains, coal, petrochemicals and crude.

The company plans to raise Rs 1,610-1,770 crore through this offer (see table for current businesses and offer objectives).
Indian ports

Over 90 per cent of the country’s export-import trade volume is routed through sea ports. While the 12 major ports (regulated by the Centre) handle 70 per cent of this volume, limitations in proper berthing, cargo handling and storage facilities and labour productivity-related issues have for long increased the turnaround time for vessels docking at these ports.

This leads to increased costs and a longer working-capital cycle for exporters and importers, driving demand for more efficient alternatives.

The strong prospects for ports such as Mundra arise from the fact that unlike a number of public ports that were originally developed as ‘need-based’ ports, these private ports have the benefit of being ‘planned ports’ built with future commercial traffic in mind. The Ministry of Shipping, Road Transport and Highways estimates traffic at Indian ports to increase by about 90 per cent to 1,225 million tonnes in 2014, from the present levels.

As existing public ports are already witnessing congestion, new ports could attract a good number of waiting vessels to their shores if they offered the twin advantage of strategic location and good infrastructure.

Securing sustainable business

The company has sub-concession agreement with Mundra International Container Terminal (MICT) for container cargo operations and an agreement with Railways, both of which earn substantial revenues. Mundra Port has also secured long-term contracts from IOC and HPCL for providing a single-point mooring facility for crude oil transport.

The company plans to develop a terminal and provide cargo handling facilities for imported coal to be used in the Ultra Mega Power Project by Tata Power in Mundra and also for Adani Power’s plant in the same region. The company has long-term agreements for the above.

While these are likely to provide steady stream of revenues from big-ticket clients, the company faces the threat of pricing pressure with major ports such as JNPT and Mumbai Port Trust expanding their container terminals. Mundra is attempting to secure its competitive edge by offering port-related value-added services. It has plans to make strategic investments in container rail operations and inland container depots.

This would be executed through investments in Adani Logistics (which has licence to operate container trains in India) and Inland Conware respectively. It is also investing in new port locations such as Dahej — a joint venture with Petronet LNG, located along the Vadodara-Mumbai corridor. The above businesses, if successful, would convert Mundra Port to an integrated player in port solutions, perhaps the first in India.
Financials

Mundra Port has managed a compounded annual growth of 51 per cent in sales and over 200 per cent in net profits over the past three years. Sales and profits for FY-07 were Rs 580 crore and Rs 187 crore respectively. Operating profit margins remained at 53-60 per cent in the last five years. While this growth has been exceptional, we expect growth rates to moderate after 2010, when there may be other new ports vying for business. Profit margins may also be tempered.
Risks

Excess supply of port capacity in the region, over the long term, in the light of expansion by existing ports and the rise of new ones such as Rewas, may usher in competition. The sub-concession agreement with Mundra International Container Terminal (MICT) appears to be running into rough weather as the latter has issued a notice of breach of agreement. Further, Gujarat Maritime Board has also issued a notice against the change in ownership of P&O Ports (now acquired by Dubai Ports World), which holds MICT.

These two events could cause some uncertainty over effective operations at the container terminal, if not resolved quickly. Such disruption could affect this segment which contributed 15 per cent to FY-07 revenues. The offer is open from November 1 to 7.

Lending an edge

A few key features of the Mundra Port lend it a competitive edge over others in the region.

Location: The port has one of the deepest water depths enabling it to handle large-sized vessels. The natural draft of 15-17.5 metres also allows significant reduction in dredging costs compared to other ports.

The port is supposed to be an ‘all-weather facility’ owing to its location in the Kutch region. It has in the past aided in decongesting ports such as JNPT during rains.

This location also places the port at a proximity to the western and northern hinterland which contributes over 55 per cent of India’s exim trade.

Infrastructure: Mundra is connected by rail, road and pipeline to the inland regions of Western and Northern India. Mundra Port has built its own broad gauge link that connects to the Railways.

The company not only earns revenue for this stretch of rail link but also helps its users save on freight as the connectivity has also enabled a rail distance advantage of about 218 km over ports in Mumbai, for Delhi-bound cargo.

Gauge conversion being carried out by the Railways in Northern India, once complete, is expected to provide significant distance advantage (450 km) over Mumbai on traffic to the upper Punjab regions.

A four-lane approach road connects the port to Mundra’s national and state highways, lending road-distance advantage as well.

Development potential: Mundra retains 4,000 m of leased undeveloped waterfront land that can be utilised to expand its port facilities. If the company is able to capitalise on this to cater to increasing demand, it may be able to prevent queuing and resultant increase in turnaround time of vessels seen in other ports.

Finally, the unique feature of this port is the planned development of 15,665 acres of land surrounding it for a multi-product SEZ.

Interestingly, unlike other SEZs which have been stalled by problems of land acquisition, Mundra Port has had a smooth sail as the land in the region is arid and unoccupied.

We expect industries such as textiles, chemicals and petro-products with a high exim component to tenant this SEZ, given the logistical advantage of proximity to the port. Mundra Port would, therefore, not only benefit by way of lease income from the SEZ; it would also secure sustainable business from the industries in the SEZ.

This SEZ we believe would be the biggest advantage that this port would possess relative to others in India.