Adani Ports & SEZ's Q2FY19 results (Outperformer) - Strong cargo growth

Q2FY19 result highlights

• Adani Ports & SEZ (ADSEZ) posted a strong operating performance in Q2FY19, even as the reported performance was impacted by higher base of SEZ income of Rs5.5bn in the PY (Rs290m in Q2FY19) and steep Fx MTM loss of Rs5.7bn during Q2FY19 (Rs784m in PY). As a result, reported PAT declined 39%yoy to Rs6.1bn (estimate of Rs5.4bn).
• Cargo grew 21.4%yoy to 52.2mt, above estimate of 49.7mt, due to higher coal cargo. Coal cargo grew 31.2%yoy to 17.6mt aided by strong growth in Mundra, Hazira and Dahej. Coal cargo growth was also aided by improved performance of the three bulk terminals at Major Ports. Container cargo grew 13.7%yoy to 20.3mt (1.42m TEUs) and crude cargo grew 41.7%yoy to 6.7mt on a low base. Cargo at Dhamra declined 7%yoy to 4.6mt due to lower availability of rakes. 
• Core Port revenue grew 26%yoy to Rs22.8bn and port EBITDA grew 30%yoy to Rs16bn (est: Rs15bn) with EBITDA margin growing 230bp yoy to 70.1%. Reported revenue declined 3.6%yoy to Rs26.1bn and reported EBITDA declined 36.5%yoy to Rs11.3bn.
• Net debt increased by Rs13.2bn during H1FY19 driven largely by restatement of Fx denominated debt due to INR depreciation.  
• FY19 guidance maintained: i) cargo of ~200mt (+11%) ii) 100bp increase in port EBITDA margin to 71% iii) capex of Rs23-Rs25bn and iv) SEZ income of Rs8bn-10bn and iv) FCF of Rs17.5bn-Rs20bn. 

Key positives: Strong growth in coal and container cargo.

Key negatives: Weak performance of Adani Logistics and Dhamra port due to shortage of rakes. 

Impact on financials: Downgrade in FY19E earnings by 8.4% mainly due MTM loss on fx debt. No material change in FY20E earnings.

Valuations & view

ADSEZ is striving to diversify its cargo profile by adding cargo like liquids and finished products and also by aggressively scaling up the container business. Meanwhile 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 cargo CAGR of 11.8% over FY18-20 leading to CAGR of 17.2% in port EBITDA. ADSEZ trades at 14.1x FY20E earnings and 9.8x EV/EBITDA. Maintain Outperformer with a price target of Rs460.