Adani Ports & SEZ's Q3FY20 results (Outperformer) - Decline in crude oil offtake impact volumes

Q3FY20 result highlights

• Total cargo in Q3FY20 grew by 5%yoy to 56mt (with 9mFY20 growth at 8% yoy to 165mt). The growth during the quarter was led by strong volume growth of 41% yoy at Dhamra port to 8.3mt offset by 2% decline in Mundra ports. Decline in Mundra port volumes was primarily due to lower off take by IOCL and HPCL. Overall, Coal and container cargo grew by 13%/16% yoy to 20mt/24mt respectively while crude & other cargo declined by 20% yoy to 12mt in Q3FY20.
• Revenue in Q3FY20 came in at Rs33.3bn, a growth of 18% yoy (vs volume growth of 5% yoy) on account of recognition of gain of Rs4.3bn from sale of stake in Dhamra LNG terminal. Total.  Forex loss during the quarter was Rs1.4bn (vs gain of Rs3.7bn in Q3FY19), resulting in a decline of 3% yoy EBITDA to Rs21.4bn.
• Adani Ports & SEZ’s (APSEZ) Q3FY20 adjusted PAT declined by 7% yoy to Rs13.5bn (vs est of Rs10.8bn; including forex loss of Rs1.4bn). 
• APSEZ has revised its cargo throughput guidance to a band of 224-226mt, growth of 7.6%-8.6% yoy (vs 224-228mt earlier) in FY20E and revenue growth guidance to 12-14%yoy in FY20E (vs 11-13% earlier)
• During the quarter, it entered into agreement to acquire 75% stake in Krishnapatnam port at EV of Rs136bn.  As a result,  Adani port has revised its FY25 volume guidance to 429mt (vs 400mt earlier)

Key positives: Agreement signed to acquire 75% stake in Krishnapatnam Port and 40% stake in Snowman Logistics, a cold chain logistics player.

Key negatives: Decline of 2% yoy of Mundra volume to 34mt 

Impact on financials: Maintain our FY20E/FY21E estimates and introduce our FY22E estimates

Valuations & view

APSEZ 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 Q4 due to increased off take from key clients. APSEZ’s earnings should also be supported by sustained water front, inorganic acquisition 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 FY19-22 and expect free cash flows to improve based on limited capex. APSEZ trades at 14.5x FY21E earnings and 10.5x EV/EBITDA. Maintain Outperformer with a target price of Rs466.