Adani Ports Share Price soars 4%, here is what Kotak has to say

Adani Ports Share Price: The first nine months of transition of Krishnapatnam (KPCL) to an Adani Ports asset reflects three decades of learnings of Adani Ports. The cost savings realized and unbridled growth prospects ahead yield an asset worth 3X invested value for Adani Ports and means to leverage its ability to raise low-cost FX debt. Kotak reflects the wonder lap that Covid-impacted FY2021 is turning out for KPCL and outperforming the base portfolio of Adani Ports in Kotak revised Rs 495 FV. SBI funding the group’s endeavor in Australia is the key upside risk to benign implied 12X FY2022E EV/EBITDA multiple. Kotak recommends a BUY on Adani Ports shares.

Three decades of learnings on display as 70% margin levels reached in six months KPCL’s Rs 3 bn of annualized margin boost to EBITDA achieved over the past few months reflects competencies that the Adani group has built over the past three decades. Another Rs 3.5 bn of interest cost savings help leverage the growing relevance of the container portfolio of the parent and strength of its balance sheet. Including savings on interest cost, Adani Ports has yielded Rs 6.5 bn of annualized savings to the bottom-line in year one. Just to appreciate the quantum, such cost savings would be sufficient to pay-back the equity value of the asset over seven years. The base EBITDA or EBITDA prior to the transaction is sufficient to repay the loan with interest in 11 years (in no-growth scenario) or earlier. Residual life of the asset is 40 years.

Kotak Insti values Krishnapatnam at 13X implied FY2022E EV/EBITDA, noting scope for upside From a valuation perspective, Kotak Insti values the Krishnapatnam asset at 13X EV/EBITDA on EBITDA equivalent to FY2020 base of Rs 12 bn and Rs 3 bn of cost savings. Adani Ports consider such multiple reasonable in context of the large 40 year residual life and first 20 years of static royalty regime. Through the transaction and cost savings realized, Adani Ports has trebled its equity investment in the port on a fair value basis. The asset adds to the list of acquisitions that have generated meaningful value addition for the listed asset.

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While noting the scope of further value addition we stop at 12X FY2022E EV/EBITDA or 3X equity. Note that we value Dhamra Port at 15X FY2022E EV/EBITDA or 5.5X equity after six years as Adani Ports’ asset.
Kotak Institutional Equities increase FV by 14%; note key upside risk in SBI’s approval to group’s Australian endeavor We increase our fair value by 14% to Rs495 on a combination of (1) higher value of Krishnapatnam asset (4%), (2) continuation of 8% growth trajectory seen for the base port portfolio over the past four months (7%) and (3) roll-forward to December 2022E (3%). Our DCF-based FV implies a 12X FY2022E EV/EBITDA valuation for the overall portfolio and still builds in a high 11.25/13.25% WACC/cost of equity. The approval of SBI funding for the Adani Enterprise coal mine in Australia can pave the way for a higher fair value. Do read our detailed report titled “Australia the last hurdle in way of start of rerating” released on October 22, 2020 for assessment of risk profile of the group over the next two years.