Event update: Adani Ports & SEZ (Outperformer) - Cargo volume to double in next 6 years

At its annual analyst meet, Adani Port (ADSEZ) management dwelled on the vision of long term growth especially over FY19 –FY25E. ADSEZ expects to grow the cargo volumes to 400mt by FY25E while maintaining fiscal discipline. Its long term vision is to achieve ROCE of >16% by FY25E (from 13.5% in FY19). Besides, it guided that new projects will have a pre-tax IRR target of 16%. 

Cargo volumes to double over FY19-FY25E: ADSEZ cargo grew from 36mt in FY09 (capacity of 80mt) to 208mt (capacity of 395mt) in FY19 at a 19% CAGR primarily through capacity expansion at Mundra and acquisition of Dhamra port. ADSEZ intends to increase cargo from 208mt to 400mt (includes 10mt at Myanmar) over FY19-Y25E, a growth of 11.5% CAGR while capacity of ports will be increased from 395mt in FY19 to 570mt by FY25E entailing a total capital expenditure of Rs175bn

Rise in market share in Container and Coal Cargo to drive volumes: Indian port volumes likely to increase at 5.5% CAGR over FY19-FY25E from 1300mt to 1790mt in FY25E. ADSEZ expects to grow at 2x time overall India growth rates. 176mt of incremental volumes of ADSEZ is expected to come from 109mt of container volumes, 14mt of non-coking coal, 13mt of crude, 13mt of gas and 30mt of other cargo. As a result, ADESZ market share in Container is likely to grow from 34% in FY19 to 48% in FY25E and coal market share to grow from 29% in FY19 to 51% in FY25E

Growth with financial discipline: ADSEZ management intends to pursue the growth while maintaining fiscal discipline. ADSEZ intends to a) maintain consistent investment grade rating b) increase the maturity of its debt profile c) reduce cost of capital and d) enhance return on capital employed (from 13.5% in FY19 to 16%+ in FY25E). It reiterated that company will maintain net debt to EBITDA of 3.0 to 3.5x in long term except for possibility of aberration for a short duration. Revenue/ EBITDA/PAT in FY25E are expected to be >Rs200bn/Rs130bn/>Rs80bn

Valuations & view

ADSEZ is reaping benefits of diversified cargo profile and diversified geographic presence across both the coasts. 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 and PAT CAGR of 16%. With operating leverage playing out in key ports, FCF have will futher improve in FY19-FY21E. ADSEZ trades at 14.1x FY21E earnings and 10.Ex FY21E EV/EBITDA. Maintain Outperformer with a PT of Rs472.