We interacted with Karan Adani to discuss business dynamics. The Russia-Ukraine war has driven up coal prices 102% YTD. Coal is 33% of Adani Ports’ cargo and concentrated at Mundra, KPCL and GPL ports, which could be impacted given the price rise. We lower FY22E-25E volumes by 7-10% and EPS by 3-5%. We believe EPS should rise nearly 2x in FY22E-25E with Mundra Ports’ success in market share gains replicated at the acquired ports. Remain positive. Buy.
Top-down view: Globally, container freight rates are up almost 4x in the last 12-18 months and would have led to some negative impact on trade. India’s container cargo was down 5% y-o-y in FY21 and up 11% in 9MFY22. Mgmt mentioned that shipping liners have ordered additional fleet, which has seen delayed delivery due to COVID. FY23E should see these commissioned and help temper down freight rates. We believe this could lead to some surprise in our FY23E traffic assumptions of 5% y-o-y rise in container traffic.
Delving deeper into coal – near-term headwind…: Mundra, Krishnapatnam (KPCL) and Gangavaram (GPL) ports are 70% of Adani Ports’ cargo. Adani Power and Tata Power normally offtake 25-30 mnt of coal annually at Mundra, which is likely to be 10-15 mnt in FY22E. We have broadly maintained this in FY23E, given the recent spike again in coal. KPCL and GPL have approx. 60-70% of their cargo also from coal, where we have lowered our assumptions. These three ports have mainly contributed to our 20-38 mnt lower annual volume assumptions in FY22E-25E.
…market share and pricing power – medium-term tailwind: Adani Ports’ market share has risen from 5% in FY10 to 21% in FY21 and should further rise to 28% by FY25E. Profits are up 7x in FY10-21, with our expectation of a 2.3x rise in FY21-25E. Currently, we have not factored in any pricing power from the dominant market share. Our mgmt interaction indicated this is a medium-term possibility.
Volume recovery the upside catalyst over 12 months: Adani group stocks underperformed after questions were raised about the sharp appreciation of three FPIs’ holdings including mainly Adani Group shares in May-Jun 2021. Post clarifications on the same and SEBI clearing Adani-Wilmar IPO in Oct 2021, most group stocks recovered barring Adani Ports. We believe volume weakness is a key reason and as core port Ebitda growth visibility improves with volume recovery from market share gains, the stock should re-rate. Our DCF-based Rs 850 PT (v/s Rs 930 earlier) factoring in revised assumptions implies 14.5x FY24E EV/Ebitda, broadly in line with 5 year average multiple.