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Volume growth trajectory to continue

* We released our Initiating Coverage (IC) report on Adani Ports & SEZ Ltd (APSEZ) in Oct’23 (LINK). In this report, we highlighted that the company’s improving utilization levels at its current ports, along with its ramping up of volumes at newly acquired ports, will position the company to exceed its FY24 volume guidance and expand its market share in cargo handling. We reiterated our strong conviction with APSEZ being one of our top ideas for 2024 (LINK).

* APSEZ ended FY24 with 24% volume growth in FY24 volumes, taking the total volumes to 420 MMT, well surpassing even its revised guidance of 400 MMT. In FY24, ~25% of all-India cargo volumes was routed through APSEZ ports. For FY25, the company is targeting cargo volumes of 500 MMT.

* APSEZ is continuously investing in building infrastructure for its logistics business. With 11 multi-modal logistics parks, 116 trains, 2.4 million sq. ft. of warehousing space, and 1.1 million metric tons of grain silos, ALL aims to establish a nationwide presence by further developing logistic parks and warehouses.

* APSEZ continues to gain market share while generating strong cash flows and maintaining its leverage position, with a net debt-to-EBITDA ratio of 2.5x as of Dec’23. We expect APSEZ to register 10% volume growth and a CAGR of 14%/15%/19% in revenue/EBITDA/PAT over FY24-26. With consistent outperformance in cargo volumes, we reiterate our BUY rating with a TP of INR1,590.

Market share gains driven by operational efficiencies and cargo diversification

* APSEZ achieved a notable 2x industry growth, elevating its market share to ~25% in FY24 from 10% in FY13. The incorporation of new cargo classes at Mundra and Dhamra ports, pickup in coal and coastal coal cargo at Gangavaram and Dhamra, supported by robust economic growth has contributed to this growth. Additionally, the advantages of an integrated port-cum-logistics service has significantly helped gain market share.

* Further, the company's strategic sensitivity to specific cargo classes, such as thermal coal and iron ore, is proving beneficial as volume levels normalize in select ports such as Mundra, Gangavaram, and Krishnapatnam.

Building infrastructure for strong future growth in logistics business

* As APSEZ embarks on becoming India's largest integrated transport utility company by 2030, it is strengthening its capabilities in all logistics segments (ports, CTO, warehousing, last mile delivery, ICDs, etc). Hence, it offers endto-end service to its customers, thereby capturing a higher wallet share and also making the cargo sticky in nature.

* Further, DFC connectivity to Mundra will provide faster port evacuation and quicker transit time, improving the overall efficiency

Consistently improving balance sheet position; backed by strong cash flow generation

* APSEZ has consistently generated strong cash flow from operations (CFO) over FY18-23 (cumulative CFO of ~INR433b at a CAGR of 16%). During this period, APSEZ had embarked on an acquisition spree. Going ahead, APSEZ is expected to concentrate on optimizing the assets it has acquired, ensuring consistent robust cash flows in the upcoming years.

* We estimate CFO to register a CAGR of 13% over FY24-26. This, we believe, will be used to fund capex and reduce debt. APSEZ continues to be on the lookout for opportunities outside India via the joint venture (JV) mode with a strong local partner, either in South Asia, Southeast Asia, Middle East, and Africa.

Valuation and view

* Going forward, APSEZ targets to become India’s largest integrated transport utility and world’s largest private port company by 2030. APSEZ has a diversified cargo mix and is looking to increase cargo share of port on the east coast. The operational ramp-up at the recently acquired ports is expected to drive a 10% growth in cargo volumes over FY24-26. This would drive a revenue/EBITDA/PAT CAGR of 14%/15%/19% over FY24-26.

* We reiterate our BUY rating with a TP of INR1,590 (premised on 17x FY26E EV/EBITDA)

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