Mundra Port-Buy says Edel with a PO of Rs 1331

 

Mundra Port-Buy says Edel with a PO of Rs 1331

 

Mundra Port & SEZ-Buy

PO: Rs 1331 says Edelweiss

 

Strong growth momentum in Indian port traffic likely to continue

 

With Indian merchandise export and import registering healthy double digit growth, the country's port traffic has grown at a CAGR of 8.7%, touching 650 mn tonnes in 2006-07. This growth momentum is expected to continue and the traffic is expected to reach 1,009 mn tonnes (at CAGR of 9.2%) over 2011-12E. Considering the massive infrastructure rollout in the country, the port capacity is expected to keep pace with the rising traffic.

 

National Maritime Development Programme to create strong infrastructure

 

To keep pace with the growing potential of cargo traffic, the Government of India (GoI) had undertaken an ambitious capacity expansion plan (outlay of INR 558 bn till FY14) under the National Maritime Development Programme (NMDP) 2005. The total capacity of all ports is expected to increase 2.14x from 736.9 mn tonnes to 1.5 bn tonnes by 2011-12E.

 

Major ports set success benchmark for minor ones

 

Major Indian ports enjoy logistical advantages of proximity to industrial belts and export destinations, which allows their cargo composition being skewed in favour of a particular commodity. The business model of these major ports is so well-established in terms of the traffic flow that one can practically gauge the viability of a minor port in their vicinity. 

 

Strong margins and cash flows make investment in ports lucrative  

 

Port operation is highly capital intensive with fixed assets accounting for ~40% of the total assets. These disadvantages are however mitigated, to a large extent, by extremely low working capital requirements of this business. All major ports are expected to generate positive cash flows in each year of projection, going forward. Further, cash from operating activities, including changes in working capital as a percent of net profit for each of the projected years, is more than 100%. With strong margins and positive cash flows, we believe investment in ports is highly lucrative.

 

Business models of ports highly profitable

 

The business model for ports provides multiple revenue streams for the terminal operator. With consistent growth in port traffic, revenues for all major ports are expected to increase from INR 54.4 bn in 2007-08 to INR 81.1 bn in 2011-12E at a CAGR of 9%.

 

 EBITDA margins for all major ports, put together, are expected to rise steadily from 32% in 2007-08 to 49% in 2011-12E. Net profit for all major ports is expected to increase from INR 14.9 bn in 2007-08 to INR 31.1 bn in 2011-12 at a CAGR of 20%; net profit margin is expected to improve from 27% in 2007-08 to 38% in 2011-12E.

 

As a play on port infrastructure development, we prefer Mundra Port and SEZ (MPSEZ) in the sector, given its first mover-advantage, and hence, scalable business model, diversification of cargo category, and integration into allied services like SEZ and container train. Our sum-of-the-parts (SOTP) valuation for MPSEZ stands at INR 1,331 and we maintain 'BUY' recommendation on it.