Adani Ports & SEZ Rating: Buy- KPCL buy to aid post Covid-19 recovery

By: |
October 10, 2020 2:15 AM

Acquisition to be value- and earnings-accretive; FY21-23e ports Ebitda up 10-25%; TP raised to Rs 435 from Rs 400; ‘Buy’ retained

Diverse and sticky cargo should help soften the impact from trade uncertainties.

On 5 October, ADSEZ announced that it completed the acquisition of a 75% stake in Krishnapatnam (KPCL, second-largest private port in India), effective from 1 October. The transaction EV declined to Rs 120 bn vs the EV of Rs 136 bn when the deal was first announced in January 2020. The valuation implies a FY20 EV/Ebitda of 10.2x, which is lower than ADSEZ’s valuation of 12.3x FY20 EV/Ebitda. Given that KPCL is profitable at the bottom line, the acquisition is both value and earnings accretive.

Set to emerge stronger post COVID-19: ADSEZ said that KPCL will help to expand its footprint to over 80% of India’s hinterland (from 60-70% earlier) and achieve more parity on the east and west coasts. ADSEZ’s market share would also rise to about 25% (from 21%). ADSEZ said despite a fall in KPCL’s volumes in H1FY21 due to lockdowns, it raised the ASP and Ebitda margin due to operational improvements.

Indeed, KPCL’s ASP per tonne increased 8% to Rs 455 in H1FY21 vs Rs 422 in FY20, while Ebitda margin climbed to 68% (vs 58% in FY20). ADSEZ guided that Ebitda margin could further rise to 72% by FY23. It expects to increase capacity to 90MMT by FY23 (vs 64MMT in FY21) and estimates capex at Rs 10-12 bn over a five-year period. ADSEZ expects this to bring KPCL’s ROCE from 8% in FY20 to as much as 17% by FY23.

We raise FY21-23e ports Ebitda forecasts by 10-25%: While mgmt expects to double KPCL’s throughput to 100MMT by FY25, we forecast it to reach only 70MMT. We are 5% above consensus on FY21e Ebitda and in line on recurring profit estimates. We estimate ADSEZ’s net debt to Ebitda to rise in FY21e to 3.8x, but taper off to around 2x by FY23e.

Reiterate Buy; raise TP to Rs 435 (from Rs 400): Our back-of-the-envelope DCF-based valuation suggests that the KPCL deal accounts for approximately Rs 40/share. YTD, ADSEZ’s share price has declined 3.5% vs a 6.2% decline in the local index. The stock trades at an 11.0x consensus 12-month forward EV/ Ebitda and 2.27x 12-month forward PB, close to 1.4 SD below its historical average since 2011. We see ADSEZ as a long-term play on India’s trade and infrastructure growth. Diverse and sticky cargo should help soften the impact from trade uncertainties. Improving free cash flows and unwinding of promoter’s share pledges should act as positive catalysts.

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