Adani Ports & SEZ's Q1FY19 results (Outperformer) - Strong operating performance

Q1FY19 result highlights

• Adani Ports & SEZ’s (ADSEZ) Q1FY19 PAT declined 9.2%yoy to Rs6.9bn, below estimate of Rs7.9bn, due to steep MTM loss of Rs3.8bn on fx borrowings of ~USD 2bn. The impact of MTM loss was partly offset by higher core EBITDA, lower interest cost and lower tax rate.
• Cargo grew 9.3%yoy to 48.1mt, above estimate of 47.2mt, due to higher container and higher non-coal bulk cargo. Container cargo grew 16%yoy to 21mt (1.4m TEUs), coal cargo declined 6%yoy to 14.4mt and crude and others grew 20.1%yoy to 12.8mt. Non-CGPL and non-APL coal at Mundra grew 9%yoy and coal cargo at Dahej grew 32%yoy due to higher coal imports by cement and steel industries. Cargo at Dhamra declined 16%yoy to 4.4mt due to lower availability of rakes.  
• ADSEZ’s yoy performance remains impacted by high base of water front monetization revenue/EBITDA of Rs6.6bn/Rs2.8bn, against which SEZ income in Q1FY19 is only Rs1.3bn. Revenue declined 12.2%yoy to Rs24.1bn (est Rs24bn), EBITDA declined 24.6%yoy to Rs12.1bn (est: Rs15bn) and EBITDA margin stood at 50% against 58.2% in Q1FY18 (includes MTM fx loss of Rs3.8bn). Core Port revenue grew 16%yoy to Rs19.7bn, EBITDA grew 17%yoy to Rs13.8bn and EBITDA margin grew 100bp yoy to 70%.
• FY19 guidance maintained: i) cargo of ~200mt (+11%) ii) 100bp increase in port EBITDA margin to 71% iii) capex of Rs25bn and iv) SEZ income of Rs8bn-10bn and iv) free cash flow of Rs17.5bn-Rs20bn. 

Key positives: Strong growth in containers and recovery signs in coal.

Key negatives: Weak performance of logistics business and of Dhamra port due to shortage of rakes. 

Impact on financials: Downgrade in FY19E earnings by 5.5% mainly due MTM loss on fx debt. No material change in FY20E earnings.

Valuations & view

ADSEZ is lowering its dependence on coal cargo by adding cargo like liquids and finished products besides aggressively scaling up the container business. Meanwhile it continues to deliver on balance sheet and profitability improvement targets. ADSEZ’s earnings should also 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 10.5% over FY18-20 leading to CAGR of 13.8% in port EBITDA. ADSEZ trades at 17.8x FY20E earnings and 12.0x EV/EBITDA. Maintain Outperformer with a price target of Rs464.