With or without Abbot, gearing set to fall: Despite Abbot Points (Adani-owned coal terminal in Australia) divestment addressing gearing concerns at APSEZ, concerns over the $807m of corporate guarantees provided to Abbots lenders continue to exist. While such concerns are valid, our analysis suggests that APSEZs consolidated gearing is set to decline (from 3.4x as on Mar-2013 to 1.4x as on Mar-2016) even in the worst-case scenario of Abbot Point returning to APSEZs balance sheet. This is likely to be driven by strong core operating cash flows from flagship asset, Mundra Port and reducing losses at Abbot Point.
Further, APSEZ has already incurred a bulk of capex in the development of its port assets and incrementally, we expect only Rs 28 bn capex until FY17. However, reported operating cash flows have been impacted by a sharp increase in loans and advances (Rs 47 bn during FY13/H1FY14), which the management has attributed to cash deployment to earn higher yields.
Concern of Adani Power stress spill-over overstated: Potential diversion of port cash flows towards Adani groups stressed power business (Adani Power) is another key concern for APSEZ. However, APSEZ should continue to largely remain insulated from stress at Adani Power. In the worst-case scenario, our analysis still suggests no downside for APSEZ (from CMP-current market price) even if it is forced to fund up to 85% of Adani Powers cash deficit over FY14-18e from Mundra Ports free cash flows. For this analysis, we assume that Adani Power does not get any PPA (power purchase agreement) renegotiation for its Mundra power projects, lenders do not agree to restructure any of Adani Powers loans, and Mundra Port is forced to fund Adani Powers cash flow deficit (for all years over FY14-18e) from its free cash flows, which we believe is an extremely pessimistic assumption.
Coal imports to drive Mundras 14% cargo CAGR: We expect Mundra's 14% volume CAGR (compound annual growth rate) to be driven by 21% CAGR in coal volumes and 15% CAGR in container cargo. Our analysis suggests that Indias coal import needs should reach 247 mt by FY17 led by demand from domestic coal deficits. Mundra Port, due to its surplus coal capacity (100 mtpa by end-FY14) and superior handling facilities, should be a key beneficiary. While long-term contracts with Tata Power and Adani Power were the key drivers of Mundras coal volumes so far (51% CAGR FY10-13), third-party coal imports should drive growth ahead.
EPS CAGR of 28%, RoE of 25%+: Operational ports and Mundra SEZ contribute R183/share to our TP of R186, and the new ports (Mormugao, Vizag and Kandla) are expected to contribute only R2/share as tariffs for these ports are regulated and margins are expected to be lower at 40-55% due to revenue share clauses.
We expect APSEZs consolidated earnings to witness a 30% CAGR over FY13-16e and RoE to remain robust at 25-26%. APSEZ trades at 2.9x FY15 BV (book value) and 11x EV/Ebitda versus the global average of 1.9x FY15 BV and 12x EV/Ebitda. However, we believe the premium is justified considering APSEZ's superior returnsFY15 RoE of 26% versus the global average of 11%, FY15 RoA (return on assets) of 11% versus the global average of 6%. Notably, the stock trades cheap at 12.4x FY15 earnings for 28% EPS CAGR.