Event update: Adani Ports & SEZ (Outperformer) - ADSEZ acquires agri logistics business of AEL; strong rationale but expensive

Event

Adani Logistics (ALL), a 100% subsidiary of Adani Ports & SEZ (ADSEZ), has announced the acquisition of Adani Agri Logistics Limited (AALL), owned 100% by Adani Enterprises Ltd (AEL).

Acquisition details

With an equity consideration of Rs9.5bn, the transaction is valued at an EV of Rs16.6bn (4% of ADSEZ’s FY18 capital employed). AALL has a debt of Rs7.2bn, comprising ~Rs4.8bn from banks and ~Rs2.4bn from its parent AEL. We expect higher cash outflow of ~Rs12bn for ADSEZ, as AEL’s debt too is likely to be taken over. AALL is engaged in agri storage and warehousing businesses, and has long-term take or pay agreements (20-30 years) with Food Corporation of India (FCI) and other state-owned agencies. AALL has a total contract of 1.58mt capacity (45% market share) of which, 0.85mt is operational and the rest is expected to be commissioned by FY22E at a capex of Rs4.3bn. AALL has strong scalability potential with FCI targeting to bid another 6.5mt of capacities for development. In FY18, AALL posted consolidated revenue of Rs1.3bn and EBITDA of Rs920m (72% margin), incurring net loss of Rs20m. AALL’s EBITDA is likely to rise 85% to Rs1.7bn by FY22, based on its contracted capacities (without any future bids). Implied valuation of the acquisition is 11.6x/9.8x FY21E/FY22E EBITDA, respectively. E&Y was the independent valuer for transaction.

Rationale for the acquisition

AALL will add bulk cargo to ALL’s container logistics business, in which it primarily operates. ALL is present in 5 locations, predominantly in India’s western and northern markets. AALL on the other hand, is present in 10 states across all 4 regions. The deal will result in capex savings of Rs750m-1bn, given ALL’s ability to leverage AALL’s rail sidings. ALL would be able to use AALL’s surplus land of 96 acres for expanding its container business, which will help the company save Rs1.25-1.5bn and gain incremental EBITDA of Rs150-200m through lower time to market.

Our view

ALL will be able to add scale and diversify post AALL’s acquisition. The company would be able to accelerate growth by leveraging AALL’s surplus land at its existing locations. We also expect predictable cash flow streams, as AALL predominantly operates through long-term contracted capacities. At 11.6x FY21E EBITDA, the acquisition seems expensive, as ADSEZ already trades at 11.3x FY20E EBITDA (caps near term upside). ADSEZ remains our preferred asset play with robust underlying cargo growth, robust profitability and strong cash flow generation.  We maintain Outperformer rating with a TP of Rs446.