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Strong quarter; Auditor issues qualified opinion

Adani Port and SEZ(APSEZ) reported Adj. EBITDA of INR 32.7bn for 4QFY23, +27% YoY/+21% QoQ and 4% above JMFe (5% above Street estimates). Adjusted PAT was INR 17bn (assuming 17% tax rate), up 57% YoY/33% QoQ (15% above JMFe/9% above Street estimates). Consolidated revenue grew 40% YoY to INR 58bn, largely led by Ports (+42% YoY) and Logistics (+47% YoY). Adjusted for Haifa consolidation, port EBITDA margin was steady at 69% (+30bps YoY/-50bps QoQ). Logistics business continues to show strong growth momentum (Revenue/EBITDA up 47%/24% YoY in 4QFY23). The management indicated port volume of 370-390mnt for FY24 (9%-15% YoY) while maintaining its FY25 volume target of 500mnt. It maintained revenue (INR 240bn-250bn), EBITDA (INR 145bn150bn), capex (INR 40bn-45bn) and debt reduction guidance for FY24. We raise our estimates by upto 3-4% to reflect 4QFY23 performance and outlook. We maintain BUY rating with SoTP-based Mar’24TP of INR 850 (earlier INR 800).

* 4QFY23 summary: Consolidated revenue grew 40% YoY/21% QoQ on the back of a) port revenue (+42% YoY/+28% QoQ), and b) logistics segment (+40% YoY/+21% QoQ; +17% 4-year CAGR). Adjusted for forex loss/gains, EBITDA was INR 32.7bn, +27% YoY/+9% QoQ and 4% above JMFe. Excluding Haifa, we estimate port EBITDA grew 24% YoY while margin remained stable at 69%(+30bps YoY/-50bps QoQ). The EBITDA beat coupled with lower depreciation and higher other income resulted in adj. PBT of INR 21.9bn, +76%YoY/+42% QoQ and 30% above JMFe. Adjusted PAT was INR 17bn (assuming 17% tax rate), +57% YoY/33% QoQ and 15% above JMFe.

* Maintain bullish outlook on port volume growth: Port volume grew 10% YoY/9% QoQ to 86mnt (9% above JMFe) and was led by a) Krishnapatnam (+38% YoY), b) Ganavaram (+13% YoY), and c) Haifa port consolidation (c. 2.7mnt, our estimate). From a commodity perspective, container and other cargo (dry bulk+liquid) led the show (+14%/+10% YoY respectively) while coal grew at 6% YoY. While it maintained target of 500mnt for FY25, a range of 370-390mnt was indicated for FY24 (including 8-12mnt of Karaikal), thus implying back-ended growth in volume in FY25 (28-32% YoY). It continues to be bullish about prospects and also indicated c.3-4% hike in tariff at the company level (to be reflected from 2QFY24 onwards).

* Qualified Audit Report for FY23: APSEZ’s statutory auditor has provided qualified opinion on its FY23 financials basis a) one of APSEZ’s EPC contractors ‘HOWE’ is mentioned in the allegations made in the Short Seller Report/ The company has provided security deposits and capital advances to HOWE (INR 20.36bn is outstanding, as of 31 Mar’23), and b) APSEZ has not conducted an independent external examination of these allegation given ongoing investigation by SEBI, as directed by the Supreme Court. The management clarified that HOWE is not a related party and undertakes several civil and construction projects for APSEZ at various ports from time to time. This qualified opinion may be revoked as and when the investigations conclude.

* FY23 summary: Revenue/EBITDA/PAT grew 22%/15%/5% respectively. Adjusted for forex items and one-offs (provided for write-off of investment in Myanmar subsidiary), EBITDA grew 23% YoY while PAT was flat YoY at INR 53.8bn (assuming 17% tax rate). Volume grew 9% YoY, partly helped by consolidation and scale-up of recent acquisitions.

* Raise estimates; Maintain BUY: We raise our estimates by 3-4% to reflect 4QFY23 performance and outlook. We maintain BUY rating with SoTP-based Mar’24TP of INR 850 (earlier INR 800). We value operational ports on DCF basis given the specific concession of the ports. We follow FCFF methodology assuming WACC of 11.8% with Cost of Debt (10%) and Cost of Equity at 14.1%. We maintain BUY. Any adverse development on group entities is a key risk to our call.

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