The outlook for Mundra port is intertwined with one’s view on domestic industrial production and demand and a positive trend in the latter will lead to improved outlook for the stock. This is significant both for its cargo volumes as well as the SEZ (special economic zone) performance.
The stock has underperformed the Nifty in the last few months but saw some bounce-back post its second quarter results announced October 30, 09.
Lacklustre results
The results per se were tepid, with revenues growing 7% y-o-y to Rs 317.78 crore. A tight lid on expenses boosted Ebitda 14% y-o-y to Rs 233.7 crore and lower interest outgo (down 63%) helped post tax profits increase nearly 58% to Rs 175.8 crore. Operating margins at 70.5% stayed more or less flat contracting 40bps over the previous quarter while expanding 120 bps y-o-y.
Operationally, cargo handled increased 16% y-o-y in the first half of FY10. In terms of total cargo handled in this period by the top ten ports in India, its market share expanded 78 bps y-o-y to 6.94%, as per data from a Kotak Securities research report.
Bulk cargo handling for the first half of FY10 increased by 21.4% y-o-y to 10.3 MMT, crude handling was up by 19.6% on YOY basis to 4.3 MMT however container cargo was almost flat y-o-y, at 5.3 MMT compared to 5.09 MMT in the same period last year.
The company saw about 140 acres of SEZ sales in the first half of FY10 (135 acres in 2QFY10 as per Citigroup research). This was below Citi group analyst expectations. The company is expected to sell about 160 acres in the second half of FY10 (total sales of about 300 acres expected in FY10) according to Kotak Securities research.
The company has a lot of positives going for it especially in terms of its strong balance-sheet and low net debt to equity ratio of 0.3x. Its capex plans are well funded and low gearing allow room for additional leverage.
Citigroup estimates pitch cargo volumes to grow at 28%, revenues to increase 36% and a 69% rise in profits CAGR over the next two years. Margin expansion is estimated at 677bps over FY09-11 with ROE improving 28%.
However, the outlook for cargo volume growth in the near term continues to be grim in Citigroup’s view as the corporate capex cycle and therefore domestic trade is not expected to pick up dramatically any time soon. This leads them to be bearish in the short term outlook for the SEZ as well implying that current valuations are stretched.
A results review by Edelweiss also cautions that higher volumes and realizations in coal and container cargo are key for further upsides. Factoring in about 32000 acres of land sales, the SEZ is valued at Rs 257 per share. SEZ land sales, already slowing, are a key risk, it adds.
The stock closed at Rs 540, up 1% on 19 November, 09. It trades at about 36x consensus analyst diluted FY10 EPS estimates and about 20.2x Citigroup FY11 diluted EPS estimates.
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