Analyst Corner| Adani Ports: Downgrade to ‘neutral’; TP higher at Rs 630

Volume outlook robust into FY22F and the COVID-19 linked impact now behind us; stock fairly valued Raise our EBITDA forecasts by 8%/9% for FY22/23F factoring in higher volume estimates; however, we downgrade the stock to Neutral with a higher TP of Rs 630 on a strong earnings outlook likely factored in ADSEZ has delivered strong underlying volume growth of 20% (ex Krishnapatnam) in 3QFY21, highlighting a strong recovery post the lockdown. While revenue at Rs 37.47bn (+12% y-y), in line with our forecast, the core EBITDA margin (ex forex) at 66.4% (down 215bp y-y) was ~200bp ahead of our forecast despite the USD3mn one off acquisition- related cost in other expenses. However. we downgrade the stock to Neutral, given.

Strong volume outlook into FY22F+; WDFC (Western Dedicated Freight Corridor) linkage can lead to further market share gains: Based on our recent expert session on global container outlook (link), we estimate global container traffic should rebound to 9% in CY21 despite some near-term headwinds like container shortages. Further, we believe efficient ports like ADSEZ may be able to take price hikes as well due to the better handling of congestion vs ports in neighboring countries. Moreover, we expect market share gains from JNPT (unlisted) as rail bound port cargoes shift to Mundra, as it connects to WDFC in 1QFY22. Thus, overall volume and pricing outlook appears favorable for ADSEZ.

The sharp spike in share price relative to the NIFTY valuation multiples (Fig. 2 and Fig. 3 ) suggests the positives are largely factored in: ADSEZ shares have outperformed NIFTY by 25% in the past 12 months with almost entire outperformance in past three months as ADSEZ demonstrated strong volume growth and market share gains. Furthermore, EV/EBITDA consensus multiples appear elevated.

Trading at 12x FY22F EV/EBITDA; raise TP to Rs 630; downgrade to Neutral We increase our FY22F 23F EPS by 12%/13% to factor in volume growth higher than we had previously estimated. We continue to value the port assets on a sum-of parts basis applying DCF metrics, with cost of equity unchanged at ~11%, to arrive at our TP of INR630, implying ~9% upside and hence downgrade to Neutral.