Adani Ports and SEZ Rating: buy- Momentum in volumes is likely to be sustained

Adani Ports & SEZ’s (APSEZ’s) volume recovery (13% in past six months) symbolises a Nike Swoosh or V shape? Regardless of the semantics, we believe the volume momentum will sustain driven by: (i) external factors like global & local trade momentum; and (ii) importantly, internal factors like market share gains, cargo diversification, improved hinterland, cargo stickiness, among others. Regular price hikes further enhance earnings prospects. Riding a much sharper-than-expected recovery (7% beat on Q3 volume estimates), we raise FY21-23e EPS by 10%. We also roll forward our valuation to Q1FY23e and accordingly raise our TP to Rs 600 (earlier Rs 520). Maintain Buy.

Pandemic impact on volumes nullified; robust growth visibility
With a pandemic-driven ~30% y-o-y dip in Q1 volumes, FY21 was estimated to be a step back for APSEZ’s growth story. However, it has surprised pleasantly with a sharp 13%/20% organic growth in H2CY20/Q3FY21 (22%/ 37% including KPCL), ending 9mFY21 flat y-o-y (ex-KPCL). This compares with an industry decline of 11% in similar period, denoting further market share gains for APSEZ.

With economic recovery gathering steam, we expect the demand momentum to sustain. Moreover, APSEZ continues to hike tariff in the marine business (seasonal hike in January) as well as contracted customers (70% volumes; hike in March), in line with WPI inflation of ~3%. Thus, we believe, Covid-19 has further entrenched APSEZ’s dominance, which will enable this growth juggernaut to continue to roll.

KPCL: A growth driver in the making
The acquisition of Krishnapatnam Port (KPCL) is already delivering–1,500bps margin expansion in six months. With the approval of industrial area at Krishnapatnam, the opportunity size gets further expanded to 260MT. Additionally, there could be SEZ business as well. We believe the highly scalable KPCL will substantially contribute towards the next leg of APSEZ’s growth and margin expansion as it captures India’s mineral-rich East coast.

Outlook: In smooth waters
We believe the volume rebound is less attributable to pent-up demand and is sustainable. With global trade momentum on the rise, APSEZ’s scale, leadership and extended gate operations should enable it to exploit the opportunity.

We had earlier argued that APSEZ was best prepared to withstand the Covid turmoil. We remain 10% higher than consensus and expect them to follow suit. Our revised SOTP-based TP of `600 implies an exit EV/Ebitda of 11.5x on FY23e earnings, which is reasonable in our view. Promoter pledge and currency fluctuation are key risks, which we have factored in through higher COE at 12.0-12.5%. Any material change could impact our earnings and TP. We maintain ‘BUY/SO’.