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Adani Ports & SEZ Rating: Buy-Numbers were below expectations

Our assumptions factor in some market share gains and 68-73% margins in FY22E-25e. Management is gearing for 80% margins by FY25e.

Q4FY21 EBITDA is 17% below expectations given lower margins but should recover as volumes rise and the April 2021 price hike reflects in FY22e. We believe 3 drivers will re-rate the stock from current levels: (i) Market share rise from 21% to 32% with recent acquisitions by FY25e; (ii) ROE back at 20% with asset sweating; (iii) further drop in promoter pledges. Our revised DCF based PT of Rs 910 (v/s Rs 670) reflects 13% PAT upgrade in FY23e and higher implied multiple.

Gangavaram (GPL) acquisition adds 6% to FY23e Ebitda: Adani Ports will shell out Rs 56 bn for 89.6% stake in GPL – 9.2x FY21 EV/Ebitda vs Adani Port’s 23.2x. The port is a net cash asset. Mundra Port gained market share from JNPT between service efficiency, lesser distance to hinterland and JNPT’s capacity constraints. Mundra’s container cargo market share rose to 49% in FY20 vs just 15% in FY07 within the JNPT, Mundra and Pipavav pie. We assume GPL’s share rises to 42% by FY25e from 32% in FY20 in the Gangavaram and Vishakapatnam ports’ pie. Adani group’s increased service levels and ability to give shipping liners the benefit of berthing at its different ports should drive this.

Adani Ports & SEZ Rating: Buy-Numbers were below expectations

Krishnapatnam continues to focus on hinterland expansion: KPCL is 13% and 14% of consolidated revenues and Ebitda and annualised 40 mnt on 227-mnt FY21 base ex KPCL. Margins rose to 71% in Q4 from 55% since FY20 when take-over discussions were on. Chennai port, Machillipatnam, Kakinada are key ports around KPCL, with combined volumes of around 70 mnt. Our assumptions factor in some market share gains and 68-73% margins in FY22E-25e. Management is gearing for 80% margins by FY25e.

Factored in some lower margins in FY22E: Lower Q4FY21 margins led to FY21 margins disappointing by 170 bps at 63.6%. It is likely that Q4 saw acquisition linked costs and some residual expenses booked that led to lower margins. Hence, we have reduced our FY22e margin assumptions by only 40 bps to 64.9% and lowered FY22e Ebitda by 3%.

Promoter pledges down to 16% of holding from 45% in Nov. 2020: Adani Promoters have dropped pledges sharply post their 20% stake sale in Adani Green. Management commitment is to further drop this to negligible levels. Our DCF based PT of Rs 910 implies 16.6x EV/Ebitda FY23e, which is the average of the 10-year trading band. Mgmt was clear if its Myanmar port project comes under the sanction purview, it will abandon the same.

Judicious B/S use playing out in growth – PAT should rise 2.4x in FY20-25E (13% CAGR FY20-22e): APSEZ is a good blend of geographical and cargo diversification. We believe ROE should return to 20% by FY25e (19% in FY20, 16-17% in FY21-22e) with 16% volume CAGR, higher payout and sweating of acquired ports. Operational strength in pricing and working with liners to berth at Adani’s ports could lead to volume upside surprise. 10% volume change is 13% change on FY23e EPS.

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