We expect Mundra ports traffic/Ebitda growth to moderate over the next three years (11-16% CAGR vs 23-29% in the last three) as committed cargo plateaus out. While other port concessions should help consolidate profit after tax growth to outpace standalone earnings, traffic visibility is relatively lower. Balance sheet risks have also aggravated, with the companys debtors and loans/advances related to group companies rising sharply in FY14. While management had earlier indicated that these loans yield market interest rates and can be called back at a short notice, APSEZ incurred a debt of >R9bn to fund its equity contribution for Dhamra acquisition; interest accrued but not received has also risen sharply in FY14. We downgrade to Sell (from Neutral) with a revised FV (fair value) of R211/share.
Mundra ports traffic growth likely to moderate over FY14-17e: We expect standalone entitys traffic/revenue/Ebitda growth to slow down to 11%/11%/16% respectively over FY14-17e (cf. compared with 23%/32%/29% over FY11-14). This is because Mundra ports traffic growth in the last three years (+23% CAGR) was driven almost entirely by a sharp increase in long-term committed cargo (+69% CAGR), even as spot (non-committed) cargo grew by a modest 8% CAGR (compound annual growth rate). We expect committed cargo to plateau out in FY15e at c.49mtpa (42% of FY15e traffic). Consequently, despite assuming spot cargo growth to improve to about 16% CAGR over the next three years (economic recovery), we think Mundra ports overall traffic growth will be limited to 11% CAGR. The ports Ebitda margins are also unlikely to cross 70% (66-71% in the last five years), as significant op-leverage gains look unlikely to us.
Other port concessions should help consolidated PAT outpace standalone PAT: We think APSEZs Dahej and Hazira ports hold promise and should see a quick ramp up in traffic. Dhamra also appears to be an attractive acquisition to us, thanks to its expansion potential, good hinterland connectivity and flexibility to fix tariffs.
However, Mormugao, Vizag and Kandla ports are unlikely to be as attractive as their tariffs are regulated, and revenue share is high. Ennore port also faces strong competition from Chennai/ Kattupalli ports. Overall, we expect consol revenues and PAT to rise at 31% and 35% CAGRs over FY14-17e.
Negative FCF, related party loans/ receivables concern us: In FY14, APSEZ generated Ebitda of R28 bn, raised R10 bn via a QIP (qualified institutional placement), sold CT-III to AICTPL (realising >R10 bn) and divested Abbot to promoter entity for aboutR13 bn. Despite this, its standalone net debt rose to R85 bn from R76 bn at FY13-end. Rising working capital and higher-than-expected capex have meant that the standalone entity has not generated FCF (free cash flow) in the last ten years.
The sharp working capital rise in FY12-14 is partly attributable to increases in debtors and loans/advances relating to group companies (Adani Enterprises, Adani Power, their subs), which in turn are highly geared. APSEZs debtor days in respect of Adani Power stood at >250 at FY14-end. APSEZ did not draw upon its ICDs (inter-corporate deposits) to fund its equity investments in Dhamra; instead it raised additional debt of >R9 bn. Worse, it also entered into agreements with Adani Power and Adani Enterprises to acquire some of their assets in FY15e.
Rich valuation ignores risks; downgrade: We cut our FY15e EPS by 5% but raise FY16e EPS by 5% as we build-in the newly acquired Dhamra port and assume higher traffic volumes. However, the stocks 80%+ move in last six months is hard to justify, especially in the context of slowing growth at Mundra and rising balance sheet risks. We downgrade to Sell with a revised FV of R211/share (R157/share earlier).
Espirito Santo Securities