Adani Ports share price: HSBC reiterates Buy rating with Rs 660 target price

Adani Ports EBITDA growth improved to 38% yoy vs 4% yoy in Q2 FY21 due to the inclusion of Krishnapatnam port (KPCL) which was acquired in October, margin improvement and accelerated market share gains. Adani Ports’s throughput growth (ex-KPCL) accelerated to 19% yoy vs 7% in Q2 FY21 and vs 7% for all India cargo growth. Consequently, Adani Ports overall market share increased to 28% (vs 24% in Q2 FY21), while its container market share increased to 43% (vs 39% in Q2 FY21).

Adani Ports Logistics EBITDA margins improved 1.7ppt yoy to 25.9%. However, Adani Ports’s recurring PAT declined 5% yoy to Rs 13.7 bn but was up sharply from Rs 10.3 bn (-1% yoy) in Q2 FY21, mainly due to weaker SEZ revenues. In 9M FY21, Adani Ports generated free cash flow of Rs 56 bn, implying 6.3% annualised yield.

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During the results briefing, Adani ports guided continued strong volume growth in Q4 FY21 and market share gains. Indeed, in January 2021, Adani Ports’s volumes ex-KPCL grew 11% yoy vs only 4% growth for major ports. For FY21, Adani Ports reiterated its volume guidance (ex-KPCL) in the range of 225-230MMT which implies 5-13% yoy growth for 4QFY21. For KPCL, Adani Ports guided about 20MMT in FY21 which implies 10MMT in Q4 FY21, similar to Q3 FY21. ADSEZ expects continued margin improvements driven by higher volumes. For the SEZ business, ADSEZ suspended its guidance due to the weak environment. It expects to complete the Dighi port acquisition in Q4 FY21; HSBC have not included it in our model yet.

HSBC marginally lowered their FY21-22 EBITDA estimates on lower SEZ income offset to some extent by higher port and logistics margins. HSBC forecasts 12.6% volume growth in FY21 (+3.5% ex-Krishnapatnam) vs 14% growth previously. In FY20-23e, we forecast a 16% CAGR for throughput and 22% CAGR for port EBITDA. HSBC are 1% below consensus FY21 EBITDA and recurring profit estimate.

HSBC sees Adani Ports as a long-term play on India’s trade and infrastructure growth. Improving free cash flows and unwinding of promoters’ share pledges should act as positive catalysts. A prolonged COVID-19 outbreak and a rise in inter-group loans would be key downside risks for Adani Ports.