TP revised to Rs 460 from Rs 360 given positive outlook on growth and reasonable valuations with clear balance sheet and strong cash flows
We revisit Adani Ports and reiterate Outperform with a revised TP of Rs 460 (from Rs 360). It is driven by (i) positive outlook on container growth on sector as well as capacity expansion, (ii) no incremental decline in coal, (iii) growth across other commodities (specific contracts), (iv) reasonable valuation (20x FY19E P/E) with strong balance sheet/ cash flows and likely dividend increase. Exports momentum has recovered with a 14% y-o-y growth in 5M18 after five sedate years, and container growth has doubled to 13% in Q1FY18 vs. last the two-year average. Adani Ports is best placed to leverage this growth based on capacity and liner relationships. We build coal volumes to be flattish, with marginal trading coal decline counteracted by coastal and coking growth. ADSEZ is likely to generate strong cash flows (FY17: Rs 43 bn pre-capex) and has cleared the balance sheet of inter-company loans. We move to consolidated modelling and set out TP based on 14x EV/Ebitda on Sep-19E earnings (implying 22X P/E) and tweak our EPS by 1/2% for FY18/FY19E. Key risk relates to cash flow utilisation (acquisitions, etc.) and concession extension.
Strong exports and capacity expansion to drive growth
Exports momentum has recovered with 14% growth in 5M18, v/s – 10% to 5% growth over FY15-17. Container volume growth has doubled to 13% in Q1FY18 vs. average of 6% in FY16-17. We believe that Adani Ports is advantageously placed to capture this growth and incremental market share based on new capacities (CT-IV), Ennore and spare capacity at Hazira and Katupalli. Upcoming PSA terminal would pose limited challenge, given Adani Ports’ shipping relationships as well as emerging status as a gateway port for North India.
Coal volumes stable; coastal/ contracts can add more
Total coal volume decline remains modest and was just 4% in Q1FY18. Coal volumes on Adani’s key bulk ports (Dahej, Dhamra and Mundra) remain flattish at about 12.5 MT in Q1FY18.
Clear balance sheet with very strong cash flows
Adani Ports had a clear balance sheet at FY17-end without any intra-group loans with cash flows of Rs 43 bn. While investor concerns on Adani Power financials sustain, we highlight that Adani Power is able to meet its interest cost ex of compensatory tariff, and its debt was flat in FY17 over FY16. We believe its near-term drag on financials of Adani Ports would not be acute, particularly given recent reversal of inter-company loans.