Reduced dependence on coal and on short term contracts, investments in the LPG terminal and an integrated service offering will help APSEZ leverage the opportunity of outperformance provided by a growing market. Further decoupling would hinge on the eventuality of Adani Power’s Mundra asset; stance taken by Tata Power on ceding stake reaffirms the impending need to change status quo. We build benefits of an improving funding mix ($0.5 bn 10-year bond issue). Our rolled-forward SoTP of Rs 405 (from Rs 380) carries upside risk from improving port margin (150 bps increase taken over FY2017-20 versus 300 bps guidance).
Improving volume profile and integrated offering to help leverage market: The share of long-term cargo in APSEZ’s volume mix has increased to 62% in FY2017 from 59% in FY2015. APSEZ has also recently awarded the EPC order for its LPG terminal that would start contributing to Mundra Port’s Ebitda from FY2020. Its integrated offering in logistics and SEZ should also help the port portfolio to grow its share. Adani Ports has grown its volumes by 8% CAGR over FY2015-17 within a sluggish market (3.5% CAGR). Market has started growing faster in YTD FY2018.
Recent bond issue to strengthen the balance sheet: The recent $500 million 10-year bond issue raised at a competitive yield of 4.1% would aid the maturity profile of the $3.2 bn end-FY2017 debt of APSEZ. This would increase the dollar cover of APSEZ’s container business.
External events can drive further decoupling of fortunes: Favourable event in Australia related to revised royalty terms of the Carmichael coal mine and related decision of Adani group to invest in it would yield business gains for the Abbott Point port and relieve the pressure on the related $0.4 bn contingent liability on APSEZ’s balance sheet.
While exposure to Adani Power remains in overhang, decoupling of fortunes might be imminent. Marginally revise estimates: We build in the benefits of improvement in funding mix, the recent MoU signed with China’s East Hope group and partial reduction in working capital. We roll forward estimates to June 2017e and increase our SoTP to Rs 405.