As per the Union Budget 2011-12, SEZ developers and units located in SEZs will have to pay minimum alternate tax (MAT) starting FY13E onwards versus earlier provision of complete tax exemption for varying periods of 10-15 years. Budget fine print indicates that this will be applicable for all SEZs, including those cleared prior to this Budget.
Management indicated that while representations are being made for continuing tax exemptions (versus announcement in the Budget), positive outcome may not be likely. Accounting for the Budget impact, we anticipate Mundra Port?s tax rate to rise to MAT levels (currently around 18.5%), from levels of under 10% earlier.
Management indicated that core port operations will continue to benefit from volume growth (26% year-on-year growth for 9MFY11). Additionally, on the SEZ front they remain hopeful of ongoing discussions on monetisation of larger land parcels fructifying. Mundra Port will be India?s leader in port traffic in the next 3-5 years, with strong operational cash flows of $450 million annually from current levels of $ 50 million.
Accounting for higher tax rate, we have reduced overall target price for Mundra Port by around 6% to R170?132 for port and R38 for SEZ (from R180 earlier which includes R142 for the port). We believe, cash flows of port offers downside protection, while recent leases at R6-8 million/acre (vis-?-vis assumptions of R3.7 million /acre) leaves room for positive surprise on SEZ valuation.
Balance sheet strength remains intact (net debt:equity around 0.5x), with limited earnings sensitivity to interest rates or capex cycle deferment. We have buy rating on the stock, with a 23% upside to current market price (stock has outperformed the index by around 10% year till date).