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Buy Adani Ports and Special Economic Zone Ltd For Target Rs.613 - HDFC Securities

Our Take:

Adani Ports & Special Economic Zone Ltd (APSEZ) is the largest private integrated ports and logistics company with 10 operating ports with ~490 MMT of augmented capacity in India. It has largest network of ports in India with 327 MMT west coast capacity, and 163 MMT east coast capacity. Starting with just one port, APSEZ has developed 12 ports, where it grew its capacity ~50 times from 10 MMT to 490 MMT, within a span of just 12 years. The company’s Mundra port continues to be the largest container handling port for the second consecutive quarter handling 1.3 mn TEUs (twenty-foot equivalent unit) compared to 1.1 mn TEUs handled by JNPT (Jawaharlal Nehru Port Trust). Its ports have a hinterland reach of 90%, targeting East and West Coast Parity. The port maintains a ~60%+ margins and TAT (Average Turnaround Time) for Mundra is better by 3x (0.56 days in FY20 vs 1.95 days for Major Ports in FY19) of its peers.

The company is the largest integrated logistics player in India, operating 60+ rakes, 5 IFTs (Inland Freight Terminals)and 400,000 sq.ft of warehouse space. APSEZ has a large scale ‘ready to setup’ industrial land (SEZ) with a land bank of ~ 13,000 hectare at Mundra, Dhamra, Kattupalli & Krishnapatnam. APSEZ has an overall market share of 24% in Q2FY21. Its logistics division, Adani Logistics, currently operates 60 rakes and continues to be the largest private rail operator in India.In Q2FY21 it handled rail volumes of 69,061 TEUs versus 76,925 TEUs in Q1FY21.

At Dhamra port the company earns two-way income, from all three of its activities (port income, warehousing income, and rail income). It has also achieved East coast-west coast parity by reducing the skew from west (80% in 2019 vs 70% in 2020) to east coast. Overall market share in its cargo category also grew from 21% to 24% Q-o-Q. Container volume grew 34% on a Q-o-Q basis and market share increased by 100 bps to 39%.Dhamra and Hazira port handled highest ever quarterly cargo volume of 8.3 and 5.6 MMT respectively.Mundra LNG and LPG commencedoperations during FY20 and handled~3,00,000 MT and ~4,00,000MT, respectively during FY20

Recent market share gain in the east has reduced geographic concentration and dependency towards the west. Inorganic growth and extended operations are going to pave the way for structural growth trajectory in APSEZ. The company strives to maintain its cash balance and increase its free cash flow. Gradual ramp up in cargo volumes amid challenging external trade environment due to commissioning of various port projects had been a big positive for the company. Thus, healthy cash accruals, and strong operating efficiencies, better Q2FY21 performance, commissioning of ports, acquisition, increased geographical diversity, diversified cargo mix, long-term contracts, strategic locations of ports, low dependency on coal cargo etc. all will continue to function together to support the company’s operations going forward.

The management has guided for FY21 volume of 225-230MT (plus KPCL-20MT), implying 12-16% growth in H2FY21. It further expects EBITDA of Rs 8000-8500cr with ports EBITDA margin of 70%. APSEZ expects the incremental capex to be lower at 65% of the green-field capex levels. It is also planning to monetise its large land bank for port-led development, primarily for setting up large-scale industries.

Valuations & Recommendation:

As per the Shipping Ministry, maritime trade contributes close to 95% of India’s trade by volume and about 70% by value. India is becoming a preferred trading partner globally. China+1 policy followed by many global corporations is expected to benefit India immensely, given its locational advantage and infrastructure. Ports sector would be one of the biggest beneficiaries. APSEZ could benefit the most from India's increasing contribution to global trade. At LTP of Rs 516, APSEZ trades at 12.1xFY23E EV/EBITDA.

We feel investors can buy at LTP and add on dips to Rs. 460-464 band (11.1x FY23E EV/EBITDA) with a base case target of Rs. Rs 568 (13.0x FY23E EV/EBITDA) and Bull case target of Rs 613 (13.9x FY23E EV/EBITDA) over the next two quarters.

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