Adani Ports & SEZ's Q4FY18 results (Outperformer) - To deliver growth despite odds

Q4FY18 result highlights

• Adani Ports & SEZ’s (ADSEZ) Q4FY18 PAT declined 20.6%yoy to Rs9.3bn, ahead of estimate of Rs8.7bn, due to higher SEZ and higher other income. The yoy decline in earnings is due to increase in effective tax rate to 28.5% from 0.9% in Q4FY17 as Mundra is now out of the tax holiday period (+9.3%yoy growth in PBT in Q4FY18).
• Cargo grew 6.4%yoy to 45.4mt, below estimate of 48.7mt due to lower coal cargo at Mundra (total containers: +11%yoy). Coal cargo at Mundra was impacted due to shutdown of the 4600MW Adani Mundra Power plant (2-3mt impact). Consolidated cargo grew 6.6%yoy to 180mt in FY18 with container cargo growing 19%yoy to 74.5mt (5.1m TEUs).   
• Revenue grew 42.6%yoy to Rs31.8bn in Q4FY18 (est Rs27.3bn), with port revenue growing 6%yoy to Rs19.5bn and SEZ/waterfront revenue jumping to Rs8.4bn from Rs450m in Q4FY17.  EBITDA grew 4.5%yoy to Rs17.1bn (in line) and remained impacted by fx loss of Rs2.2bn vis-à-vis fx gain of Rs3bn in Q4FY17. EBITDA margin (adjusted for fx) was 61% (down 100bp yoy) with Port EBITDA margin at 70% (+200bp yoy).    
• Net debt reduced by Rs6.5bn yoy to Rs179bn with FY18 capex being Rs27bn. ADSEZ signed long term contracts for 7.7mt cargo and has guided for i) cargo of ~200mt in FY19 (+11%) ii) 100bp increase in port EBITDA margin iii) Capex of Rs25bn for next 3 years and iv) Dividend payout of 15% of PAT from FY19 onward.

Key positives: Strong growth in containers and lower net debt.

Key negatives: Lower coal volumes at Mundra. 

Impact on financials: Downgrade in FY19E/FY20E earnings by 6.2%/6.3% mainly due to lower than expected coal cargo volumes.

Valuations & view

ADSEZ is aggressively working towards offsetting the adverse cargo impact due to shutdown of Adani Power Mundra plant while delivering on balance sheet and profitability improvement targets. ADSEZ’s earnings should continue to be supported by sustained income streams from water front and land monetization at Mundra and Dhamra over the next 3-5 years. We expect cargo CAGR of 12% over FY18-20 leading to CAGR of 13% in port EBITDA. ADSEZ trades at 18.4x FY20E earnings and 12.6x EV/EBITDA. Maintain Outperformer with a price target of Rs472.