Call of a port

IPO REVIEW

Mundra Port and SEZ offers significant growth potential as its operations expand.

In India, alongside the government, private sector enterprises as well as foreign investors doing business with the country have been unequivocal: India needs infrastructure, and more of it.

An Ernst & Young study on investment in infrastructure outlines that by 2012, India expects infrastructure investment to equal about 9 per cent of its gross domestic product (GDP), which is around 5 per cent presently. With the growth in GDP of over 8 per cent every year, one has to only imagine the quantum of investment that can reach the sector.

The report further goes to state that the most attractive sectors are those in which the government has been the most aggressive about promoting privatisation: ports, highways, special economic zones (SEZs), and parts of the power and airport sectors.

Out of an overall $320 billion (Rs 12.7 lakh crore) expected to be invested in Indian infrastructure over the next five years, Ernst & Young estimates ports to garner nearly $12 billion (Rs 47,500 crore). And since India's budget deficit is substantially high at around 53 per cent of the GDP, a large part of these investments are likely to be made by private enterprises.

A brand new deal

One of the pioneers in setting up private ports, the Adani Group has now come up with an initial public offering for its port company Mundra Port and Special Economic Zone (MPSEZ).

MPSEZ aims to aggregate between Rs 1,610-1,771 crore by offloading a 10.05 per cent stake in the company to the public. The offer comprises of 4 crore shares in the price band of Rs 400-440.

The company has elaborate investment plans of Rs 3160 crore for the port and the SEZ. Of this, Rs 2,000 crore is earmarked for setting up a coal terminal in the vicinity of the upcoming power projects, while Rs 700 crore will be invested toward constructing the basic infrastructure and facilities for the proposed multi-product SEZ at Mundra.

Another Rs 286 crore will be invested in group companies Adani Petronet (to construct a port terminal at Dahej), Adani Logistics (to procure 20 rakes for its container train operations) and Inland Conware (to develop 14 inland container depots). Of the total investment, Rs 1,200 crore has been raised via debt, Rs 350 crore from internal accruals and the rest will come from the IPO proceeds.

Uniquely Mundra

Over 95 per cent of the country's total trade volume is handled by ports, amounting to 70 per cent of the total value of India's trade. In 2006-07, the 12 major ports of the country handled around 464 million tonne cargo, while the 187 non-major ports handled around 185 million tonne.

The share of non-major ports in handling cargo has been on the rise from around 8 per cent in 1990-91 to over 28 per cent in 2006-07.

Mundra Port, which started its operations in 2000-01 from scratch, handled around 6.3 million tonne of container cargo, and 13.53 million tonne of bulk cargo in 2006-07, registering a compound annual growth rate (CAGR) of 41 per cent.

The port boasts of some differentiating points such as having the deepest draft on the west coast of India. 
 

DEEP AND DEEPER
Port	Draft depth (in meters)
Mundra	15
Kandla	10
Pipavav	11
JNPT	11.5
Mormugao	10
New Mangalore	12.5
Cochin	12
Source: Companies, Indian Ports Association

"The greater depth of the draft enables Mundra Port to berth large, Capesize vessels, giving it a competitive advantage over other ports," claims Ameet Desai, executive director and chief financial officer, MPSEZ.

Connectivity to the port via pipelines, roads and railways is excellent, as the creation of infrastructure is already underway. Further, the port offers better access to the large hinterland of the north due to its relative proximity compared to the Mumbai Port and JNPT. With more infrastructure, this distance will be further reduced, thus making Mundra Port a destination of choice.

The SEZ

The diverse cargo handling facilities adjacent to the port as well as the 6,568-acre SEZ and the upcoming power projects put the company on a long-term growth path, providing it with captive cargo traffic as well.

The company plans to rent out plots and units in the SEZ on long-term lease contracts to various industrial tenants. MPSEZ will also set up a subsidiary company to provide facility maintenance and related services to its clients occupying the SEZ, which will provide annuity revenues going forward. 
 

LITTLE BLACK NUMBERS
Rs crore	FY07	FY08E*
Revenues	579.5	492.4
Operating profit	174.7	175.3
OPM (%)	30.2	35.6
Net profit	187.2#	49.2
NPM (%)	9.35##	10
EPS (Rs)	1.35	1.23
P/E @ Rs 400	296.3	325.2
P/E @ Rs 440	325.9	357.7
*annualised # FY07 net profit includes a deferred tax credit of Rs 133 crore ## Margin net of deferred tax credit

Valuations

MPSEZ will be the first of its kind stock to be listed on Indian bourses. Globally, ports have emerged as a new asset class with promising prospects, in the infrastructure assets segment. However, there is hardly any benchmark which could be applied to arrive at a comparable valuation.

The company has been profitable for the last three fiscals. While operating margins have been over 30 per cent in the past, the margins could remain stagnant going forward as the company recovers from this phase of large investments.

Since the company is just starting to spread its wings, applying the price-earnings multiple based approach to value the issue would be inappropriate.

However, going forward, with the assured volume growth in its operations there appears a fair visibility of earnings, albeit in the long run. For investors to gain exposure in this emerging segment, Mundra Port is definitely the first port of call. Long-term investors are likely to earn handsome returns.

Issue closes: November 7, 2007