>Mundra Port & SEZ Ltd. (UBS)

■ Factoring increased capacity, longer concession, and stronger cargo growth: We upgrade our rating on MSEZ from Sell to Neutral, factoring: 1) increased capacity of 50mt for the coal jetty (30mt earlier); 2) concession period upto FY51 (FY31 earlier); and 3) stronger volume growth (20% over FY09-12 versus 9% earlier led by higher-than-expected growth and improved outlook). We believe that a pick-up in cargo volumes and long-term growth potential is likely to keep valuations buoyant.

■ We estimate capacity expansion equivalent to 50% of existing facilities
MSEZ has significant growth potential given: 1) large physical capacity (waterfront is 4x of current utilization); 2) healthy internal accruals (Rs40bn over the next five years); 3) low gearing (average net-debt-to-equity ratio of 0.6x over FY09-12); 4) robust demand outlook (also aided by delays in capacity expansion plans at other ports); 5) management keenness to expand facilities; and 6) strong execution capabilities.

Strong growth commands premium

■ Pick-up in private sector capex to drive demand for SEZ land
Alstom-Bharat Forge JV is setting up its facility in MSEZ—120 acres was leased in Q2FY10. In Q1FY10, MSEZ had lease income of Rs50m (~60% of value taken upfront). Though the high rates were due to land usage for hotels/buildings, it provides comfort about potential land valuations in the SEZ. The SEZ leasing activity seen over the last two quarters will further gather steam in CY10 led by private sector capex pickup and aided by the advantage of the port infrastructure.

■ Valuation: sum-of-the-parts-based price target of Rs640 (earlier Rs390)
Our price target, implying FY11 P/BV of 6.3x comprises of: 1) Port – Rs531; 2) SEZ – Rs72; and 3) investments – Rs27 (Dahej, Adani Logistics and Inland Container). We revise our FY10/11 EPS estimates from Rs12.65/16.85 to Rs16.18/19.55.

To read the full report: MUNDRA PORT AND SEZ