CLSA says Adani Ports new deal with the HPCL Barmer Refinery will add more sticky cargo, Maintain Buy Rating

CLSA maintains Buy rating on Adani Ports with a target of Rs 425. Q2 traffic up 8% led by exports with October up 21% on imports. Adani Ports saw a strong traffic rebound in Q2 and an even stronger Oct 2020. While it gained 100 bps share in containers to 39% it regained previously lost overall share up to 24% as its volume grew 38% QoQ versus major ports at 18%. Volume was supported by container and crude, while the recovery in coal was slow. Adani ports EBITDA margin increased 87 bps to 71% on price hikes and cost cutting. Oct 2020 volume surprised, up 21% YoY, and management remained confident of its sustainability led by a pick-up in imports versus an export driven Q2. New deal with the HPCL Barmer Refinery will add more sticky cargo.

Q2 FY21: Volume rebound and a new large customer added - HPCL Barmer Refinery:

Led by crude (+65%) volume and LNG and LPG facilities (659k mt), Adani Ports consolidated volume grew 8% YoY. Mundra Port was the number 1 container port beating JNPT due to higher volume from the Mediterranean Shipping Company (MSC) and Container CMA CGM SA Group (CMA) JVs. Adani Ports total volume growth was far ahead of other major ports. The recovery in coal volume was slower, at 5% YoY, at its top two customers due to domestic demand destruction and the government's focus on discouraging coal imports as part of its self-reliant India movement. Port EBITDA grew 4%. Cost-cutting helped it keep its port margin in the 68%-71% range despite slower volume. Part of this cost cutting may be back as it moves from fixed pricing to variable. Adani Ports signed a new deal with HPCL Barmer Refinery, which will drive a land monetisation deal in short term and traffic of 5 – 18 mtpa in the long-term.

Debt and indebtedness rose but is nothing to worry about & working capital better:

Adani Ports gross debt rose 24% YTD despite improved operating cash flow and slower Capex. However, debt rose due to a timing difference of the U.S. $750 mn bond issue in Q2 and the refinance of Krishnapatnam (KPCL) project debt in Q3, though CLSA is not worried about it. Reported debt should normalise in Q3. Also, Adani Ports had commendable working capital improvement with debtor days down 20% YTD and 8% YoY.

See Zee Business Live TV Streaming Below:

Guidance back with improved visibility; buy this strategic asset:

As Covid-19 domestic economic uncertainty decreases, Adani Ports reinstated its guidance: FY21 volume (245 – 250 MMT), revenue (Rs 125 bn – Rs 130 bn), EBITDA (Rs 80 – 85 bn) and net debt / EBITDA (3.5x). CLSA maintains BUY rating as Adani Ports trades at a 29%-58% discount to competitors such as Container Corp & International Container Terminal, on FY22CL EPS, though it is at a premium to competitors on EV / EBITDA of 22%-33%. Adani Ports remains the best long term infrastructure asset as this strategic asset accelerates port EBITDA growth to 29% post M&As versus 17% currently.