Adani Ports & SEZ's Q3FY19 results (Outperformer) - Strong performance continues…

Q3FY19 result highlights

• Adani Ports & SEZ (ADSEZ) posted a strong operating performance in Q3FY19. Adjusted PAT grew 24.7% yoy to Rs14.5bn and was above our estimate of Rs11.1bn due to SEZ income of Rs2.5bn, higher other income and lower tax provision. Reported PAT grew 41.7% yoy to Rs14.1bn after considering forex derivative loss of Rs404m.
• Cargo grew 11.9%yoy to 53.3mt, marginally above est of 52.3mt, due to higher coal and crude cargo. Coal cargo grew 11.9%yoy to 18.1mt aided by strong growth in Dhamra and Dahej. Coal cargo growth was also aided by improved cargo at Kandla, Mormugoa and Vizag terminals. Container cargo grew 9.1%yoy to 20.8mt (~1.43m TEUs) and crude cargo grew 27.1%yoy to 7.1mt on a low base. Cargo at Dhamra grew 8.9% yoy to 5.9mt with improved availability of rakes. 
• Core Port revenue grew 17.2%yoy to Rs22.7bn and port EBITDA grew 16%yoy to Rs15.9bn (est: Rs15.7bn) with EBITDA margin contracting 70bp yoy to 69.7% (est: 70%). Reported revenue grew 5% yoy to Rs28.2bn and reported EBITDA grew 12.4%yoy to Rs22.1bn.
• FY19 guidance: i) to exceed cargo volume guidance of ~200mt ii) capex of Rs23-Rs25bn iii) SEZ income of Rs8bn-10bn & iv) FCF of Rs17.5bn-Rs20bn.  

Key positives: Strong growth in coal and container cargo. Improved volume performance at Dhamra.

Key negatives: Weak performance of Adani Logistics.

Impact on financials: Upgrade in FY19E earnings by 23.7% mainly due to higher other income, lower tax and lower net MTM loss on fx debt. No material change in FY20E earnings.

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 cargo CAGR of 13.3% over FY18-20 leading to CAGR of 17.6% in port EBITDA. With capex density peaking out, FCF have started to improve. ADSEZ trades at 14.8x FY20E earnings and 10.7x EV/EBITDA. Maintain Outperformer with a price target of Rs450.