>Mundra Port & SEZ Ltd. (MERRILL LYNCH)

■ PAT +22% On SEZ; 70% Hike in Adani Power Mundra Capex +ve; Buy
MPSEZ 2QFY10 recurring PAT grew +22%YoY despite slow growth in port income +5%YoY on rebound in high margin SEZ income +41% & 30% lower tax on SEZ benefit on port income. Adani Power has scaled-up its Mundra Project by 70% to 7.9GW, which will drive long-term assured volume for MPSEZ’s new coal terminal. Maintain Buy on rebound in its port traffic in FY10E and SEZ monetization in FY11E, which should drive its EPS at a CAGR of 35% over FY09-12E. A scaleable and deep draft port on the western coast, a low-cost 18k acres of contiguous land bank – India’s largest port-linked SEZ – and un-leveraged balance sheet (net D/E 0.4x), which supports new project wins, are key arguments for our Buy rating.

■ Cargo +9%YoY led by crude +43% & liquid +55% growth
Mundra Port was one of the few Asian ports to report 2QFY10 cargo volume growth of +9%YoY to 10.1mmT led by liquid cargo +55% and crude cargo +43%, Coal cargo +19% despite Minerals & other cargo -57% and Fertilizer cargo -35%. Rec. PAT at Rs1.7bn was +22%YoY led by 11% growth in Revenue, 193bps YoY improvement in EBITDA margin and 30% lower tax incidence on notification of port as an SEZ. Reported PAT was +56%YoY on account of Rs22mn non-recurring exchange gain (v/s Rs292mn exchange loss in 2QFY09). To factor in +6% recurring PAT, a better than expected 2Q and improving global trade supporting robust earnings environment, we upgrade our earnings estimates ~2% over FY10-12.

■ SEZ pick-up; larger deal ahead in FY11E
SEZ revenues were up 41%YoY after a long time signaling monetization pick-up. Pickup in private industrial capex should material improve the prospects of land monetization at MPSEZ given the core competitive advantages. This should also unlock potential value in its non-processing zone of 18K acre land-bank.

■ Superior assets drive RoCE is > WACC; Maintain Buy
We have valued MPSEZ at Rs670, based on SOTP of project DCFs. We don’t yet value MPSEZ’s SEZ scale-up plan to 32k acres (18k now). New infra concession wins and potential SEZ land bank scale up to 32k acres are future catalysts. Risks: Global recession impacting traffic at ports and slow private capex at SEZs.

To read the full report: MUNDRA PORT