IPO Mundra Port and Special Economic Zone
November 1, 2007 · Print This Article · Email It
The port already offers a number of value-added services. For example, it has a 64-kilometre rail line, which is connected to the nearest railhead at Adipur. The airport at Bhuj and the Kandla airstrip are nearby. MPSEZ also wants to further develop the multi-modal movement of cargo at its port. It has got a strategic investment in the business of running container trains through its 50% holding in Adani Logistics. Adani Logistics proposes to initially procure 20 rakes for its operations. Going forward, MPSEZ also plans to invest in developing ICDs spread across the country, which should further assist the company to attract more container cargo customers to use its Mundra Port.
Mundra SEZ MPSEZ has received an approval as a developer of a multi- product SEZ at Mundra and the surrounding areas from the Government of India on April 12, 2006 . The proposed multi- product SEZ would be one of the first port-based multi- product SEZs in India . We believe that the SEZ’s proximity to the port, its brilliant connectivity, and a number of government incentives (exemption from income tax, central or sales tax, stamp duty, service tax, minimum alternate tax, dividend tax and indirect taxes such as customs and excise charges) should attract strong investments. MPSEZ has a huge land bank in and around Mundra Port. It currently has around 15,665 acre of land while another 16,688 acre would be added soon. The company intends to develop and sub-lease portions of the considerable available land at Mundra Port , which we believe will be a source of operating income and drive future growth at the port.
The SEZ will be developed over multiple phases, involving investments by third parties in industrial, infrastructure and commercial developments as well as residential accommodations and commercial and retail facilities, besides schools, hospitals and other support infrastructure. The setting up of the SEZ would further boost the volumes at the port.
Key concerns Reliance on few customers Like many ports in their initial stage, Mundra Port currently has a high reliance on a few customers. Food Corporation of India , IOCL, Indian Railways and Adani Enterprise along with the Container Sub-concessionaire accounted for 50.9% of its total income in FY2007, with the largest contributor being Food Corporation of India . Delays in construction & development of SEZ Any delays on part of the company in the development of the SEZ would delay its cash flows. Capacity expansions by major ports Any capacity expansions by major ports would increase the competitive pressures and is likely to impact the volumes of the port.
Financials and valuations The company has grown consistently in the last few years, outperforming its peers. Between FY2001 and FY2007, the volumes at Mundra Port have grown at a CAGR of 41.3% as against a 6.3% growth recorded by Kandla Port and a 15.8% growth recored by Jawaharlal Nehru Port Trust. We expect the growth momentum to continue on the back of a number of revenue triggers for the company in the next few years We have valued the proposed SEZ at Rs9,928 crore or Rs247 per share. At the price band of Rs400-440, the stock would trade at 85.4x to 93.9x its FY2007 fully diluted adjusted earnings per share, and at an enterprise value/earnings before interest, depreciation, tax and amortisation of 56.2x-61.4x. Adjusting for the value of the SEZ, the company would trade at 32.7x to 41.2x its FY2007 earnings.
We have listed below the valuations of some of the international port operators. On an average, these firms are trading at about 46.3x their CY2007E earnings and 36.5x CY2008E earnings. Also, it must be mentioned that none of the international companies matches the business model of MPSEZ. Hence a strict comparison would not render a true picture. As against just port operations of the other players, MPSEZ has diverse revenue streams and a number of growth triggers in the next few years, such as the start of its SEZ and the commissioning of its coal terminal. We believe that with these growth triggers in place, the company should see extremely strong growth over the next few years, which should make the stock’s forward valuations look much better in comparison with its international peers. We believe that the company’s diverse business model, strategic location and world-class port infrastructure coupled with the strong growth seen in international trade in India would also help it command a premium over its peers.
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