>MUNDRA PORT & SEZ (MACQUARIE RESEARCH)

Concerns not in sync with reality

Event
■ MSEZ has declined significantly by 17% over the past week amid, we believe, unjustified concerns over its earnings post the increase in the Minimum Alternate Tax (MAT) in the union budget, and also over its volumes amid economic concerns. We believe the sell-off is overdone and presents an attractive opportunity to enter the stock.

Impact
■ Not impacted by an increase in MAT: Contrary to perception, Mundra Port enjoys a tax holiday under section 80IAB, which deals with tax benefits for SEZs and not 80IA, which is for infrastructure developers. Under 80IAB, there is no MAT requirement.

■ Volume growth could come in healthier than expected: Volume growth at Mundra Port could surprise on the upside in the near term and come closer to 20–25% over the next 1–2 quarters versus our estimate of back-ended growth in FY10, driven by coal (both 3rd party and Adani power plant), fertilisers and Maruti (MSIL IN, Rs1,102, UP, TP: Rs680, downside: 38%) car exports (13,336 units in June 2009 vs 4,836 in June 2008).

■ Upside to our volume estimates: We are building in 21% volume growth in FY10 and only 13% in FY11. Given the strong traffic growth that could come in 1Q FY10 along with the long-term contracts kicking in earlier than expected, we believe significant upside remains to our estimates.

⇒ Adani power plant ramp-up ahead of schedule: We are currently building in the commissioning of the entire Adani power plant capacity by FY14 (1,500MW by FY12 and the entire 4,620MW by FY14). However, activity on the ground is ahead of our estimates with the first unit of 330MW already commissioned and commissioning of three more units of 330MW is in the advanced stages. The rest of the 5X660MW units could be commissioned by FY12. If the entire capacity of 4,620MW comes up by FY12, the coal requirement of 17.5mn tons could come in by FY12 itself versus our estimate of FY14.

Earnings and target price revision
■ No change.

Price catalyst
■ 12-month price target: Rs617.00 based on a Sum of Parts methodology.
■ Catalyst: Traffic growth in 1Q and 2Q FY10 and any large deals on SEZ land.

Action and recommendation
■ Maintain Outperform with a target price of Rs617: We continue to maintain that MSEZ remains an attractive play for long-term investors, given extensive expansion in capacity, possibly at the port site, and monetisation of SEZ assets over a long period. 1Q FY10 results could surprise on the upside driven by robust volume growth, which could act as a short-term trigger, in our view.

To see full report: MUNDRA PORT