Mundra Port & SEZ: Buy

Investors with a 3-5 year perspective can consider adding the stock of Mundra Port & SEZ (MPSEZ), the only non-captive private sector port player in the listed space.

MPSEZ’s strong cargo volume growth, ability to handle a diversified range of cargo, long-term contracts that ensure some steady revenue flows and sufficient funds in hand (from the IPO) provide the company with an edge over most other infrastructure players. At the current market price, MPSEZ trades at about 17 times its estimated per share earnings for FY10. While this valuation may seem expensive in relation to the market, the port segment, especially in the private sector, is at a nascent stage and holds huge growth potential; perhaps why the market has continued to accord the stock premium valuations. To obtain better prices, investors may phase out their purchases of the stock, to capitalise on broad market declines.

MPSEZ registered a 29 per cent increase in cargo volume handled over the nine months to December, compared to a similar period a year ago. The cargo volume growth for major ports over this period was about 7.4 per cent. Growth for the last quarter too has been at a healthy 12 per cent for the company. The strong growth comes on the back of MPSEZ’s diversified cargo handling capacity which deals with commodities such as coal, oil and fertilisers. Further, Mundra has secured a number of long-term contracts that ensure steady stream of revenue. Further, dedicated coal terminals for massive coal-based (mostly imported) power projects in Gujarat are also likely to ensure steady import-traffic.

The robust volume clocked by the port enabled a 46 per cent revenue growth and 92 per cent profit growth for the December quarter on y-o-y basis. Operating profits too improved by 200 basis points to 63 per cent. Even as volumes have aided growth, MPSEZ can also derive comfort from the fact that it can set its tariffs in line with market rates as it is not governed by the Tariff Authority for Major Ports.

Over the long-term, MPSEZ’s cargo volume is likely to be driven by its captive SEZ which would house export and import-oriented industries. Lease income from the SEZ can also accelerate revenue growth. However, we have not considered any significant contribution from the company’s SEZ for now, given the slowing capex plans of many corporates. Over the next two quarters however, investors may have to be prepared for more sedate volume growth as the slowdown in exports in recent times may intensify.