Adani Ports share price: Jefferies revised price target to Rs 670

Adani Ports Q3 FY21 sales were 11% below expectations as volume contribution container JVs (lower profitability) was higher. Krishnapatnam port (KPCL) acquisition is fully accounted for in 3Q and has led to some one-off integration expenses also. Jefferies lowered their FY21E-22E EPS by 3-7% but raised it by 2% for FY23E to account for a more gradual margin improvement at KPCL. Jefferies believes in Adani Ports management commitment to drop promoter pledges is a key re-rating trigger.

Adani Ports Volumes up 38% YoY in Q3, up 20% ex-KPCL:

Major ports’ cargo rose just 2% YoY in Q3. Adani Ports continued to gain market share, particularly in container volumes. Mundra, Adani’s flagship port, saw 38% YoY rise in container volumes vs 10% YoY in JNPT. Adani Ports management mentioned that global container shortage should not impact India as end users have adjusted the impact in pricing and it should ease out over the next few months/quarters. Adani Ports EBITDA margins rose 256 bps YoY to 66.4% due to operating leverage and should further improve as KPCL’s cost and pricing structure is revamped gradually.

Adani Ports is truly diversified player:

Adani Ports’ has six ports on the West Coast and five on the East Coast. Four ports accounted for 90% of cargo volumes in FY20, with Mundra having the lion’s share at 63%. Adani Ports management is optimistic on Dhamra and Katupalli seeing strong growth within ports. Interestingly, East Coast has accounted for 38% of incremental volumes in the last three years and is expected to increase to 33% overall by FY23E.

Adani Ports Promoter pledges are 22% of their holding vs 45% in Nov 2020:

Operationally, Adani group’s execution ability in the ports business can hardly be questioned. It’s the perfect blend of cargo and geographical diversification with consistent market share growth seen over the years. Management is walking the talk of efficient cash flow utilisation, no incremental inter-group transactions and discussed a bias to directionally raise the dividend payout. The recent Adani Green-Total deal gives visibility of further promoter pledge reduction, in-line with management guidance of negligible single digit level. Jefferies have lowered their cost of equity to reflect this improved visibility.

Adani Ports Valuations:

Jefferies revised Adani Ports price target to Rs 670 (Rs 636 for Ports and Rs 34 for SEZ) vs Rs 630 is DCF based (COE of 11.0% vs 12.0%) and reflects their revised EPS

Adani Ports Downside Risk:

Sustainable sharp slowdown in port volumes