Mundra Port and Sez

The current valuations of Mundra Port and Special Economic Zone (Mundra) provides a good opportunity for investors to take exposure to an infrastructure segment that holds huge potential for development.

Mundra, with the unique advantage of a special economic zone in its vicinity, has not only clocked healthy cargo volumes in FY-2008 but also made good progress in its effort to offer port-related services that could fast track earnings growth.

The stock has fallen 60 per cent in 2008 to Rs 495 now trades at 19 times its expected per share earnings for FY-10. The valuation is attractive, given the huge business potential in the port sector and the absence of a ports business in the listed space. Invest with at least a three-year perspective and consider adding the stock in small lots, to take advantage of any gyration in the price as a result of broad market volatility.
Stability in revenue flows

Long term contracts with users have helped Mundra gain some assurance in the cargo volumes handled by the port. Over 50 per cent of Mundra Port’s projected volume for coal is expected to flow from agreements with Adani Power and Tata Power — two 4,000 MW imported coal-based power plants to be set up in the region. More coal volume can be expected from the power plants that are expected to come up in the western region. Coal, which accounts for about 14 per cent of the current cargo mix, can therefore be expected to contribute a higher proportion.

Mundra has also entered into contracts with IOC and HPCL for providing single-point mooring facility for crude oil transport. More recently, it has also inked an agreement with Maruti Suzuki for setting up a dedicated car export terminal with an initial capacity of 2,50,000 cars with further capacity increase in the offing.

These contracts not only provide stability to revenues over the long term but also aid in better planning of surplus capacity that can be handled by the port for other customers.
Integrated services

Mundra, a non-major port, is blessed with a deep natural draft and large waterfront for future development.

The inability of major ports in the region to handle high traffic has also benefited Mundra, given its locational advantage. However, with ports such as JNPT and Mumbai Port Trust expanding their container terminals, Mundra could face the risk of pricing pressure.

This potential threat appears to have prompted Mundra to offer port-related value-added services as a service differentiator in relation to other ports in the region. A part of the IPO proceeds has already been invested in subsidiaries (which are now wholly-owned) to develop container road business and inland container depots. The rail-linked container depot business has acquired land in 14 locations for this purpose and also secured notification for one depot. The logistics subsidiary (Adani Logistics) has two rakes in operation with the management planning to take the number to 20 by FY-2009.

We believe these services could provide strong support to Mundra’s core port operations, thus enabling the company to offer integrated services under one head.

While the current business is likely to provide sufficient volume for existing players, the real challenge could be when other private ports with equally well-planned integrated services also come into operation.
Upfront income from SEZ

In line with a change in its accounting policy, Mundra has started recognising non-refundable upfront premium against lease/sub-lease of land in the year of agreement as against the earlier policy of accounting over the lease period.

In the current year, it recognised Rs 52 crore of such income from 155 acres of land. As a result, income from the SEZ segment has seen a jump. This also means that over the next two-three years when the company would continue to enter into fresh agreements for lease, income by way of such premium would add to the revenues.

The over-6,700 acres of notified SEZ area is likely to provide robust lease income given the logistics advantage and tax concessions that port based industries would enjoy by setting up units in the region.

This would, in turn, feed traffic for the port. However, the lease income would come from industries and not residential/commercial projects. Hence the realisations could be lower than other typical real-estate projects.
Financials

For the year ended FY 2008, Mundra’s sales grew 41 per cent to Rs 817 crore. Net profit however grew by only 14 per cent. The muted growth in profits was a result of increase in the deferred tax component (the deferred tax holiday reversal period was reduced from 15 years to 10 years as the company availed benefit under Sec 80IAB).

Operating profit margins, however, surged by 11 percentage points to 65 per cent. A better product mix from crude and container volume aided the margin improvement. Crude oil volumes, for instance, grew 97 per cent in FY 2008 on a Y-o-Y basis.

via BL