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  • Stock recommendation: Adani Ports and SEZ - BUY - TP Rs.485

    Publish date: 7th August, 2018

    Result Update

    Significant depreciation of the rupee leading to forex loss which impacted the PAT, zero SEZ port-led development income, total volume of 48.1 mn tonnes (+9.3% YoY) lead by crude (+65% YoY) and containers (+16% YoY) and expansion of EBIDTA margin (with INR depreciation as most revenues are in USD) were the highlights of Q1FY19 revenues for APSEZ.

    Key Highlights

    • APSEZ has once again delivered volume outperformance versus major ports in both total cargo and containers. The performance has been well complemented by all the subsidiary ports including one in Australia. Strong growth was witnessed in container, coal and crude leading to 9.3% overall cargo growth in Q1FY19 (+7% YoY in FY18), in line with our estimate.
    • A combination of volume outperformance, a contribution from Australian operations, and zero port-development income led to revenue of Rs 24.11 bn (-12.2% YoY) for Q1FY19. The decline in revenue was led by zero SEZ port-led development income (vs. Rs 6.6 bn in Q1FY18)
    • Strong volume growth, improvement in realisations, reduction in other cost and zero SEZ port-led development expense in Q1FY19 expanded the operating margins of the company
    • As per Indian Accounting Standards (IND- AS) applicable from 1st April, 2016, all international currency loans should be marked-to-market through the Profit and Loss account. INR depreciated by 5% in Q1FY19. Accordingly, APSEZ has provided a mark-to-market loss of Rs. 3.83 bn in Q1FY19 vs Rs. 320 mn gain in Q1FY18. This has resulted in reporting lower PBT and PAT. However, from a cash flow perspective, there will be no impact.
    • The management targets 1.5x accelerated total cargo growth and 2x container volume growth 2X versus major ports. In order to achieve the growth objective, the company is expanding operations at several locations. The company targets Rs 20-22 bn of capex across all its subsidiary ports and diversify across product segments.
    • The company expects FCF to further improve on a conservative basis FY19 allowing proportionately higher dividend payout (company targets 15% payout).
    • With deleveraging efforts, the company expects net debt/EBITDA and interest cost to reduce.

    Valuation and recommendation

    We believe that the company has diversified its offering product wise and geographically, making efforts to enhance non-port revenues, making operations more integrated, taking measures to bring down cost of debt and other cost and have made related party transactions completely nil. We estimate the benefits of these efforts to have already started accruing to APZ and would continue to accrue in future as well. We estimate the consolidated entity to report volume CAGR of 11% over FY18 to FY20E with the new ports of Dhamra, Hazira, Dahej, Kattupalli and the container volume at Mundra contributing the maximum. Our TP is based on SOTP valuation with a weighted average cost of capital (WACC) of 12.0% and book values for other investments. Maintain BUY with an unchanged TP of Rs 485.


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