Trading at 11.1x FY21F Ebitda; maintain ‘neutral’ with a TP of Rs. 430.
Net debt covenants still offer headroom for potentially large acquisitions: The management stated that bond covenants allow up to 4.0x net debt/Ebitda to sustain an investment grade credit rating (management’s target is 3.0-3.5x). This implies scope for further leveraging of up to Rs. 9,000-10,000 crore in FY20. Thus, ADSEZ, in our view, is still in a position to bid for large acquisitions. Potential capex deferment (guidance of Rs. 4,000 crore in FY20) and higher land sales would allow further headroom for leveraging.
Ebitda margin disappointed on forex impact of debt and lower crude oil volumes: Q2FY20 Ebitda margin, adjusted for a forex impact of Rs. 480 crore, was 63.5% (down 180 bps y-o-y), as higher-margin crude volumes declined 30% y-o-y at Mundra port. The lower crude volumes were on account of planned maintenance shutdowns by key refining customers.
The management reiterated 8-10% volume growth guidance for H2FY20 with a relatively positive view: Volume growth in Q2 was flat y-o-y (52 million tonne) and October 2019 also appears to have been a weak month based on our analysis of GMB data. However, the management is optimistic of meeting its 8-10% growth target. A pick-up in coal volumes in H2FY20, recovery of crude oil volumes and addition of new liners can lead to a revival in overall volume, according to the management
Trading at 11.1x FY21F Ebitda; maintain ‘neutral’ with a TP of Rs. 430. We cut FY20F/21F Ebitda by 5%/4% on lower Ebitda margin assumptions but our DCF (cost of equity: 12.5%) based TP increases to Rs. 430 on lower tax rates and a roll forward to Sep-20F. We maintain ‘neutral’ with ~11% upside potential and prefer Concor (CCRI IN, Buy). Weaker volumes and rising debt are downside risks while strong OCF generation is an upside risk.