Mundra Port & SEZ

Investors with a two/three-year perspective can consider adding the stock of Mundra Port & SEZ, a private port developer and operator, to their portfolio. Improvement in container traffic and railway freight, besides an up-tick in the Index of Industrial Production suggest fresh triggers to the company’s earnings growth over the next few months. Earlier-than-expected operation of the Adani Power plant could also improve the coal traffic for the port.

The Mundra stock has also not participated in the rally post-June. At the current market price of Rs 523, the stock trades at about 20 times its expected per share earnings for FY-11.

Even as the economic downturn depressed the domestic port traffic for 2008-09 (it grew 2.1 per cent), cargo handled by Mundra expanded by 24 per cent, which sustained in the June quarter as well. The company’s unique revenue mix of stable income from long-term contracts as well as traffic growth (from handling diversified cargo) thanks to its locational advantage and given the capacity shortage in other major ports were the key drivers of sales (up 34 per cent Rs 1,095 crore) in 2008-09.

Even as the Indian port traffic continues to remain muted, July container traffic, which rose 3.8 per cent year-on-year, hints at revival and is the highest since August 2008. An increase is also visible in the railway freight in the June quarter. This statistics, if sustained, can provide much impetus to Mundra’s container business.

We view the above economic developments as factors that can accelerate Mundra’s traffic growth. Even as some share of revenues is dependent on the macro-economic environment, the company’s long-term agreements with oil refineries, two large power companies as well as with an auto company for usage of port services is likely to ensure steady stream of revenues.

The operating profit margins at 68 per cent now have been consistently expanding over the last three years, aided by volumes as well as superior port services and logistics connectivity. The Marmugao port development project awarded to Mundra, although at a nascent stage, is suggestive of its success in qualifying as a port developer.

Mundra Port’s ability to clinch deals for its SEZ space may be threatened if the SEZ tax benefits for the occupants are withdrawn as proposed by the draft Direct Taxes Code. The SEZ contribution is not factored into the above earnings estimates.

via BL