Given its $1.9 billion unhedged foreign currency exposure, Adani Ports SEZ (APSEZ) is caught in the recent USD/INR crossfire. We observe that every 10% depreciation of USD/INR: 1) impacts the company’s P&L to the tune of $ 105–110 million given positive adjustment of $ 40 million on revenue and negative $150 million on the principal and interest components; 2) raises gearing to 1.13x from 1.08x currently; and 3) does not impact cash flow (first tranche of bond repayment due in June 2020).
APSEZ remains vulnerable to forex risk and up-fronting of losses would hit P&L in the near term, but the exposure is positive up to 100USD/INR considering cost savings in absence of hedging, making forex risk manageable. However, the cost of debt (currently 3.8%) would eventually rise (beyond FY20) given hardening US bond yields. That said, volume growth momentum is strong with major ports logging 6% volume growth in July/ August, which bodes well for APSEZ.
APSEZ’s unhedged USD borrowing is largely $1.65bn foreign currency borrowings (FCB) payable in three tranches (first one worth $650 million falls due June 2020). Since hedging involved additional cost of 5–5.5%, APSEZ had kept open the FCBs, thereby saving about $100 million per year. Our analysis suggests USD/INR depreciation up to 100 is P&L-positive over a five-year period factoring in cost savings in absence of hedging. The INR’s sharp depreciation against the greenback would hit P&L by a notional loss of Rs 8–9 billion (Rs 3.8 billion recognised in Q1).
Looking at major ports’ growth for July and August, APSEZ is likely to report another strong quarter with volume growth of 10%-plus. Growth in cargo is led by substantial growth in coal imports (up 34% Y-o-Y). Container volume growth has averaged about 6.5%. We believe APSEZ is on track to meet its FY19 guidance of 200MT cargo and has a cushion of 4–5MT since the resumption of operations at Adani Mundra power plant.
We are optimistic on APSEZ’s long-term prospects given its strong positioning among shipping lines and focus on sweating out assets. We maintain ‘BUY/SO’ with a target price of Rs 451 (20% upside), implying an exit P/E of 19x and EV/EBITDA of 13x.