Adani Ports Rating: Buy — Cash flow has improved, volumes expected to go up as operations normalise

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May 11, 2020 3:00 AM

Margins impacted due to cargo mix; FY20 volume up 8% y-o-y; traffic likely to rise gradually; FY21-22 EPS down 5-7%; ‘Buy’ retained

Adani Ports reported operationally weak results given cargo mix impacted margins in Q4

Adani Ports reported operationally weak results given cargo mix impacted margins in Q4. Cash flow has improved with working capital reducing and management continues to make the right noises on FCF. Apr’20 volumes are down 20-25% (vs. management expectation) in the lockdown period and volumes are expected to gradually improve as operations normalise. Between leadership competence & clearer commentary on cash flow utilisation, we remain positive. Buy

10% volume change is 17% PAT impact: FY20 cargo volume was up 8% y-o-y. Container and coal volumes rose 8% y-o-y and 4% y-o-y, respectively. Dhamra Port has been the biggest contributor on incremental cargo at 44% y-o-y growth and has offset flattish volumes at Mundra port. Ports are considered essential services and remained active in the lockdown period. Management mentioned that they foresee volumes improving with potential of a V-shaped recovery in 2HFY20. Interesting trend they have seen is volumes shifting to rail from road constraints on vehicular movement and cited Reliance Jamnagar as an example where rail accounted for 80% volume shift in the lockdown vs 20% earlier. Core port Ebitda is up 8% y-o-y in Q4 and 13% y-o-y in FY20.

Realisations rise by 4% y-o-y in FY20: We exclude the SEZ income of Adani Ports while analysing the blended realisation on a per tonne basis. However, cargo mix did have some impact on margins in the quarter (60% vs expected 62%). We believe some impact on higher margin container cargo deliveries from China and also lower crude volumes might have played a role. We have lowered our FY21E-22E EPS by 5-7% accounting for some margin impact and also factoring in 30% y-o-y (v/s 15%) volume decline in Q1FY21E and 8% y-o-y (v/s 3%) decline in FY21E.

Management delivering on B/S the key for upside: Operationally, Adani group’s execution ability in the ports business can hardly be questioned. It’s the perfect blend of cargo and geographical diversification with consistent market share growth seen over the years. Management delivered on its promise of reducing group inter-corporate deposits between Oct 2015 and May 2017. As they gradually deliver on generating free cash flow on increasing the dividend payout and containing working capital rise, stock should see re-rating from current levels.
Valuations/Risk: Our PT of Rs 315 ( Rs 290 for Ports and Rs 25 for SEZ) is DCF based (COE of 15%). Downside risk: 1) Sustainable sharp slowdown in port volumes.

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