Though the outlook for Mundra Port & SEZ’s (MPSEZ’s) cargo growth remains healthy, the company is exposed to risks in the medium term, given the slump in the global economic activity and trade.
A key indicator is the drop in volumes at the container terminal (CT1) operated by DP World. Lower investments could also hurt its SEZ, a growth driver for the port.
The company’s large land bank (18,480 acres) has a long development schedule, estimated up to FY18.
A stretched out development schedule exposes the company to significant execution risks as delays in development could impact its earnings and overall financial profile.
We expect MPSEZ’s volumes to grow 19% between FY09-FY12 and 11% between FY12-FY16, thus increasing from 12mtpa to 35mtpa during this period.
The soon-to-be-operational 35mtpa coal terminal, the Single Point Mooring (SPM) set up by IOCL, would support this growth and the second SPM set up by HPCL at the port.
Over FY09E-FY12E, cargo revenues and profits are likely to grow at 19.5% CAGR and 50.4% CAGR respectively. RoE is estimated to increase to 29.5% in FY12E. Capex is well funded with net debt-equity at 0.7x, giving headway for further leverage.
We initiate coverage on MPSEZ with a SELL rating and a price target of Rs315. We value the ports at Rs250/share, investments at Rs15/share and the land bank / SEZ at Rs50/share.
MPSEZ trades at 13.6x FY10E P/E, a premium of over 11.7% to the average of its Asian (ports) peers.
We believe that the long-term growth is factored in the CMP and that further upside could come from market stability, causing us to reduce our cost of equity.
Sale / lease of substantial portions of land and SEZ for industrial use could also provide some upside to the stock.