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.
Nothing in this article is, or should be construed as, investment advice.
ROHIT
9868245473
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.
Nothing in this article is, or should be construed as, investment advice.
ROHIT
9868245473
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