Stock Views on GAIL, MUNDRA PORT & SEZ

BANK OF AMERICA on MUNDRA PORT & SEZ

Bank of America downgrades Mundra Port to `Neutral' on likely negative impact of the proposed levy of minimum alternate tax @ 20% on developers of special economic zones as well as units operating in SEZs in the Budget 2012. BoA rates Mundra Port `Neutral' despite a compelling asset, as they believe the stock has limited upside versus other infra developers in the coverage and its EPS CAGR of 34% over FY11-13E on rebound in its port traffic, is reflected in its premium valuations at 25x FY12E EPS. MPSEZ is scaling up its ports business beyond Gujarat. It has already started construction at Goa and Hazira, and is close to signing a deal for a port on the east coast of India and ADE/MPSEZ has secured the right to develop a 30-60 mmtpa coal terminal at Dudgeon Point, Queensland, near the existing coal terminals of Hay Point and Dalrymple Bay. MPSEZ may also set up a 35-50 mtpa port to evacuate coal from Tanjung Enim mines of PTBA for ADE. New project concession wins and SEZ land bank scale up to 32k acres are catalysts.

CITIGROUP on GAIL

Citigroup reiterates `Buy' rating on GAIL, given sound business momentum, defensive nature, and recent underperformance. The PNGRB (Petroleum and Natural Gas Regulatory Board) has reset the tariffs for GAIL's DUPL/DPPL (Dahej-Uran/Dabhol-Panvel) pipelines at 6% below existing levels. The new tariffs are w.e.f. November '08, and GAIL may possibly make a one-time provision in Q4 amounting to about 100 crore, to account for the retrospective impact of the new tariffs. Despite this, GAIL is to report a robust Q4 on account of: (1) qo-q higher gas transmission volumes driven by higher LNG imports, (2) increase in petchem volumes (Q3 impacted by shutdown and lower offtake), (3) higher LPG prices, which should offset higher subsidy burden, (4) one-off costs of about 40 crore in Q3. The implied capacity/capex ratio of about 0.8x compares with a ratio for GSPL of about 1.0x. All else being equal, lower the capacity/capex ratio, higher the tariff required to generate a similar IRR, justifying higher tariff for GAIL. Applying this logic, even if Gujarat State Petronet gets a 20% lower tariff approved vis-à-vis GAIL, that is still a tariff of about 775/tcm, in line with its existing realisations.