Higher volume growth is expected to ensure market share gains; FCF pegged at Rs 50 bn by FY22; ‘Neutral’ retained with TP of Rs 380
Ahead of its investor meet, Adani Ports and Special Economic Zone (APSEZ) management published an investor presentation on the national stock exchanges, highlighting its outlook till FY22. We have analysed management’s outlook and other commentary below:
Consolidated revenue/Ebitda CAGR guidance of 14% till FY22.Port revenue and Ebitda CAGR is also similar.
* Cargo volume growth guidance range of 10-12% pa till FY22 and containers at 15-18% (vs. ADSEZ’s expectation of all-India ports CAGR of 5% and 11%, respectively). Management believes growth will be driven by the ports of Dhamra, Kattupalli and Hazira with growth ranging 20-25% pa. Higher growth than Indian ports should lead to a further rise in ADSEZ’s market share.
* ADSEZ expects SEZ Port-led development income of `8-10 bn annually on a recurring basis.
* Organic capex was guided at `25 bn pa (excluding buys and divestments).
* Management expects to increase free cash flow (FCF) from Rs 12.60 bn to Rs 50 bn by FY22. This is consistent with management statements earlier that core FCF (excluding impact of Adani Agri Logistics [unlisted] acquisitions) will be `17.5-20 bn for FY19 and that each year additional FCF of Rs 10 bn will be generated.
Financial policy: Threshold Net-debt-to Ebitda at 3x (at 2.75x in 1HFY19).
Management has also laid out its financial policy, which includes, among other benchmarks, project return levels, payout ratios and threshold leverage ratios.
Capital allocation policy stipulates a benchmark of 16% pre-tax Project IRR. Cash flow to be used for growth; thus, must adhere to these metrics.
Net debt-to-Ebitda threshold stated at 3.0x: At the end of 1HFY19, the level was 2.75x. Once LNG and LPG assets are transferred to a JV in next 12 months, debt will decline by Rs 23.7 bn; however, the Adani Agri Logistics acquisition would add Rs 16.6 bn in debt. Thus, overall Net debt-to-Ebitda may improve in FY20 and further improve by FY22 if FCF is generated as per management guidance. Management will strive to maintain the global investment grade rating.
Higher volume growth should lead to market share gains
Management highlighted that Mundra should grow at single digit during this period. Hazira, Dhamra and Kattupalli are guided for 20-25% pa growth. Growth could be higher in case management pursues inorganic options.
Improvement in cargo mix
Management projects the share of containers and liquids in the volume mix to rise significantly. At the same time, growth in lower-margin coal volumes should be limited. Thus, there is potential for Ebitda margin upside by FY22, in our view.
We value ADSEZ using SOTP, where we value various assets using DCF (12.2% cost of equity) and Adani Logistics at 20x Mar-21F EPS, to arrive at our TP of `380. We prefer Concor (CCRI IN, Buy) in this space. Upside risks: (i) stronger-than-expected volume growth at key port assets; and (ii) strong free cash generation and associated reduction in net debt levels. Downside risk: providing fresh related party loans in violation of bond covenants and commitment to investors.