Adani Ports & SEZ's Q1FY20 results (Outperformer) - Strong coal volumes led to beat in estimates

Q1FY20 result highlights

• Total cargo grew by 16%yoy to 57mt, ahead of our estimate of 54.5mt led by 16% yoy growth at Mundra and 43% yoy growth at Dhamra  Containers cargo grew by 8% to 22mt (1.5 m TEUs) while Coal and bulk cargo grew up by 38% and 33% respectively. 
• Revenue for Q1FY20 grew by 16% yoy to Rs27.9bn (est Rs26.6bn) in line with increase in volumes.  EBITDA came in at Rs18.5bn (ahead of our est of Rs16.7bn), a growth of 53% yoy on account of higher volume in port business. EBITDA margin (without adjusting for fx) was 66.1% (up 1606bp yoy). Note that non port revenue declined by 17% yoy to Rs3.7bn
• As a result, Adani Ports & SEZ’s (ADSEZ) Q1FY20 adjusted PAT grew by 73% yoy to Rs10.8bn (est of Rs9.1bn). Higher port EBITDA was offset by decline in EBITDA from SEZ business.
• ADSEZ  had guided for i) 10-12% growth in cargo in FY20 (led by incremental 9mt of coal and 10mt of container) ii) EBITDA growth of 14-16% iii) 150bp increase in port EBITDA margin iv) Capex of Rs25bn (in core business),  Rs5bn in  logistics and Rs10bn in Myanmar v) Dividend pay-out of more than 15% of PAT from FY20.

Key positives: Strong growth in volumes of 16% yoy

Key negatives: Adani Port guided for lower end of cargo volumes on weak Exim outlook for FY20

Impact on financials: Maintain our FY20E/FY21E estimates

Valuations & view

ADSEZ is reaping benefits of diversified cargo profile and diversified geographic presence across both the coasts. Even as container cargo continues to witness sustained growth, there has been a strong improvement in coal cargo at most of its ports, which has added to both its cargo growth as well as profitability due to improved asset utilisation. 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 13.3% volume CAGR over FY19-21E leading to EBITDA CAGR of 17.6% in port EBITDA. With capex peaking out, FCF have started to improve. ADSEZ trades at 14.8x FY20E earnings and 10.7x EV/EBITDA. Maintain Outperformer with a revised price target of Rs472, rolled over to FY21.