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| Debt overhang weighs on valuations |
| Jitendra Kumar Gupta / Mumbai Aug 05, 2011, 00:05 IST |
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 Mundra Port & Special Economic Zone reported a 20.4 per cent growth in net profit at Rs 254.4 crore for the June quarter, marginally below analysts’ expectation of about Rs 265 crore. The lower than expected growth in profits could be attributed to higher operating expenses and interest costs. Taking a cue from the results, the markets did not react positively and the stock was down almost four per cent in the intra-day trade before closing at Rs 138, down 3.3 per cent over Wednesday’s closing.
Positively, higher coal volumes helped the company report an overall volume growth of about 20 per cent. This is in contrast with the industry’s bulk cargo growth of five per cent, enabling the company to increase its market share from about right per cent to nine per cent. Coupled with a marginal improvement in realisations, the company was thus able to report a strong 28 per cent growth in net revenues.
After the results, analysts believe there is scope for lowering their earnings estimates, albeit to a small extent. While top line growth expectations still remain strong on healthy demand and increase in volumes (due to capacity expansion), the fallout of the slowing global economy and how the company finances its recent Australia-based acquisition are among key things to monitor. For now, analysts remain positive on the stock and currently value it at Rs 210-215, based on sum-of-part valuations.
| HIGHER COSTS LIMITING PROFIT GROWTH |
| In Rs crore |
Q1’ FY12 |
% change |
FY12E |
% change |
| Sales |
518 |
27.9 |
3,697 |
85.0 |
| Operating expenses |
117 |
36.6 |
1,158 |
65.4 |
| Ebitda |
363 |
25.4 |
2,538 |
95.4 |
| Ebitda margin (%) |
68.5 |
-110 bps |
68.7 |
370 bps |
| Net interest expenses |
33 |
34.3 |
-
|
|
| Net profit |
254 |
20.4 |
1,161 |
27.0 |
E: Estimates, % change is y-o-y
Source: Company, Standard Chartered Research |
VOLUME-LED GROWTH
In the near to medium term, growth will be largely driven by higher volumes. The company handled cargo of 52 million tonnes in 2010-11. This is estimated to increase, given that about 115 mt of cargo handling capacity will become operational in 2012-13, taking total capacity to 300 mt (including Abbot Point, an Australian port), as against the current capacity of 135 mt. Led by these expansions and higher utilisation of existing capacities, the company is expecting revenues to grow by a strong 80 per cent in the current financial year and by another 30 per cent in 2012-13.
On the demand side, the outlook remains positive, as the first phase of Tata Power’s Mundra–based ultra mega power project of 4,000 Mw goes on stream. This will become operational in phases starting early 2012 (up to 2014), which along with Adani Power’s 2,600 Mw power project will lead to additional cargo volumes of about 21-22 mt. Additionally, on the back of commissioning of the Bhatinda refinery and expansion of IOC’s Panipat refinery, volumes in the crude oil segment should also increase.
KEY TO WATCH
Though revenue growth is expected to remain high, investors will need to keep an eye on the trend in profits, given the uncertainty over debt levels. In the March quarter, the company acquired an Australian port for $2 billion. If the deal is financed entirely through debt (not a likely scenario), it could lead to a quantum jump in the company’s consolidated debt levels, which analysts estimate could reach to Rs 12,000-14,000 crore as against its estimated net worth of about Rs 5,000 crore in 2011-12. This could mean an increase in interest cost, thereby impacting net profit growth (restricting it to 30-35 per cent) over the next two years.
However, the management is optimistic and believes the analyst’s estimates of debt are on the higher side. It expects to use the cash flow from operations (of the current year) of about Rs 1,000 crore and could also raise some funds through sale of equity (worth Rs 1,500 crore, stake dilution of about 2.5 per cent), which together should help keep debt levels in check. In this scenario, the profit growth could be higher than what analysts are estimating, leading to an upgrade in earnings and, hence, further upside for the stock.
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