Low SEZ volumes prompt re-rating

We increase our target price Rs 164 to reflect roll?forward of DCF (discounted cash flow) and the fact we now value Dahej port on a DCF-basis versus on BV (book value) earlier, and we also value Hazira and Mormugao ports. It is too early to value its other domestic/international expansion plans. However, our re-rating to Sell is prompted by SEZ volumes being lower than expected?we cut FY11-13e volumes sharply by 60-70%, and port volumes may also fall short of our previous expectations?we cut volumes by 7-8%. We have cut earnings by 18%-29% over FY11e-13e on the back of these reduced volume assumptions, which leaves the current stock price looking fully valued to us.

While revenues were in line, margins were lower than expected due to higher operational expense. Interest expense was lower than expected?Rs 92 million vs our estimates of Rs 247million, which boosted profits. Cargo volumes were up 24% year-on-year.

Mundra port has not sold any SEZ land so far in FY11e. It has booked contractual income of Rs 85million in Q1FY11 and Rs 50 million in Q2FY11e. As per our discussions with management, MPSEZ has entered into agreements for about 18 acres of land with realisation of Rs 9.5-10 meter/acre in Q3FY11. Clients include a hotel and an educational institution among others.

MPSEZ is looking to expand container handling capacities (3m TEUs?twenty-foot equivalent unit) and build a LNG terminal (5-10 mt) at Mundra Port. Dahej port (15-20 mtpa) has started operations and Hazira Port (25-30 mtpa in Phase I), and Mormugao Port (7mt-10mt) will start operations in FY13/14. MPSEZ is also exploring developing the Kalinga port (100 mtpa). MPSEZ is looking to develop Dudgeon point and is looking to acquire Port of Brisbane in Australia. Plans also include building a coal handling terminal in Indonesia. While we value Dahej, Hazira and Mormugao, we believe it?s too early to value its other expansion plans.

The port is seeing good volumes at container terminal 2 and is doing well as (i) major port capacities are full; (ii) JNPT has not invested in increasing capacity; (iii) many liners have included Mundra Port as a port of call; and (iv) Bhildi-Luni gauge extension has happened 2-3 months back. It has given a good push to Mundra port volumes.

Mundra Port is looking to expand the container terminal. It is contemplating adding about 1,800 metres of container berths with a total handling capacity of 3m TEUs. The capex for this is likely to be in the range of Rs 15-16 billion and will happen over 2-3 years. The dredging has been undertaken for these berths. MPSEZ is still in the process of finalising the details? high likelihood of it being finalised this year.

Update on the coal terminal: Peak coal volumes for both power plants (Tata and Adani ) would be 31m tonnes/pa. The current handling capacity is three berths adding to 50 mt. The total potential in the basin is of 21 berths (all of which will not be used for coal). Adani power is planning to set up about 3,300MW at the Bhadreshwar near the port, which will lead to additional coal import volumes at the terminal.

Update on the LNG terminal: Mundra port plans to build a dedicated LNG terminal. The capacity would be 5m initially, and eventually 10m tonnes. Adani Power is also planning an LNG-based power plant with a capacity of 2,000MW in the area.

Other port concessions?Dahej terminal: The port has a capacity of 15-20 mt for dry bulk cargo. Mundra Port holds a 74% stake and 26% is held by Petronet LNG.

The total project cost is Rs 10 bn, funded by a debt:equity ratio of 70:30. All equity has been invested. It is a 30-year concession and Rs10/tonne of bulk cargo is to be paid as royalty payment to GMB. The port has tax benefits (MAT?minimum alternate tax ?rate for the first 10 years).

The Dahej terminal has been operational from September. The port is doing volumes at a run-rate of .15-.2mt of cargo per month. The current realisations are Rs 350-375/tonne with Ebitda (earnings before interest, taxes,depreciation and amortisation) margins 60%-70%.

Hazira Port: The port has 5.5kms of water front and has a potential of up to 80 mtpa of cargo. In Phase-I, the port will handle 25-30 mt of cargo (five berths). The preconstruction work has started. The port has to pay Rs 10/ tonne of cargo as the royalty payment to GMB (Gujarat Maritime Board) which translates to 3.5-4% of revenues. The project cost is Rs 20 bn, with 70% debt funding. The port will start operations in FY14.

Mormugao Port: The terminal will have 7 mt initial capacity going up to 10 mt for coal handling. The total project cost is Rs 4 bn; with debt funding of Rs 2.85 bn. The terminal will start operations in FY13 and will share 20% of revenues with the port trust.

Upcoming opportunities: Mundra port is also looking to develop ports/terminals in other parts of India (esp. the eastern coast). The company may look at states of Orissa and Andhra Pradesh for such opportunities.

Kalinga Port: The company is looking to develop a port in Kalinga , Orissa. It will be a greenfield port and majority of cargo handled would be coal. The Orissa government is examining the proposal. The proposed capex is Rs 100 bn. The port will have 16 berths with a total capacity of 100 mtpa.

MPSEZ is looking to develop its first international greenfield project at Dudgeon point in Australia and is looking to acquire the state-owned Port of Brisbane. It will also explore opportunities in South Africa for port development.