Adani Ports & SEZ's Q2FY20 results (Outperformer) - Guidance revised downwards on weak macro

Q2FY20 result highlights

• Total cargo grew by 1.5%yoy to 53mt in Q2FY20 (below our estimate of 57mt). The muted growth was primarily on account of decline of 5% yoy volumes at Mundra offset by strong volume growth of 48% yoy at Dhamra port. Coal cargo declined by 12% yoy to 15mt while container cargo volumes grew by 11% yoy to 23mt.  H1FY20 cargo growth was 9% to 109mt.
• Revenue for Q2FY20 grew by 8% yoy to Rs28.2bn (est Rs28.4bn) aided by 78% yoy growth in logistics business.  EBITDA came in at Rs13.1bn (below our est of Rs19bn) on account of steep forex MTM loss of Rs4.8bn (related to forex debt of USD2.7bn and rupee depreciation of 3%) during Q2FY20. Adjusted for forex loss,  EBITDA was Rs18bn
• As a result, Adani Ports & SEZ’s (ADSEZ) Q2FY20 adjusted PAT grew by 25% yoy to Rs6.9bn (est of Rs10.8bn; including forex loss of Rs4.8bn).  Note that profit has been adjusted for deferred tax write back of Rs3.0bn on account of reduction in deferred tax liabilities due to new lower taxation regime.
• ADSEZ  had revised it guidance downwards to i) 8-10% (earlier 10-14%)  volume growth in FY20E to 224-228mt led by better volumes in H2 ii) EBITDA growth of 12-14%yoy in FY20E (earlier 14-16% growth)

Key positives: Container volumes grew by 11% yoy in Q2FY20

Key negatives: Downward revision of guidance for volumes and EBITDA growth for FY20

Impact on financials: Downgrade our FY20E/FY21E estimates by 7%/2%  on account of weak Q2 volumes.

Valuations & view

ADSEZ is reaping benefits of diversified cargo profile and diversified geographic presence on both the coasts of India. As the container cargo continues to be strong, coal and liquid cargo are expected to improve in H2 due to increased off take from key clients. ADSEZ’s earnings should also be supported by sustained water front and land monetization incomes at Mundra and Dhamra over the next 3-5 years. We expect 10.2% volume CAGR leading to EBITDA CAGR of 15.1% in port EBITDA over FY19-21 and expect free cash flows to improve based on limited capex. ADSEZ trades at 15.1x FY21E earnings and 10.9x EV/EBITDA. Maintain Outperformer with a revised price target of Rs466.