Rating: Buy; Adani Ports: Rebuilding momentum

Adani Ports and SEZ (ADSEZ) reported impressive financial results for Q4FY23. The port’s earnings before interest, taxes, depreciation and amortization (Ebitda) stood at Rs 30.7 billion, marking a 12% q-o-q increase and aligning closely with our estimates. The Ebitda margin for Indian ports was reported at 69.7%, surpassing our estimate by 1.5 percentage points. The total throughput for the quarter grew by 14% q-o-q to reach 86 million metric tons (mmt). This brought the total throughput for FY23 to a record-breaking 339 mmt, reflecting a 9% y-o-y growth. The substantial increase in throughput was primarily driven by a significant rise of 19% in coal trade volumes. ADSEZ has declared a dividend per share (DPS) of Rs 5, which corresponds to a payout of 20%. This demonstrates the company’s commitment to rewarding its shareholders. In May, ADSEZ made a strategic move by selling its Myanmar assets for $30 million. Additionally, the company acquired Karaikal Port for Rs 14.85 billion, at a multiple of 8 times the FY23 EV/Ebitda ratio. This acquisition will contribute to ADSEZ’s annual throughput by adding 8-12 mmt.

ADSEZ has provided guidance for FY2024, indicating a throughput range of 370-390 million metric tons. This increase is expected to be primarily fueled by the resilient coastal coal trade volumes and the full-year contributions from the Haifa and Karaikal projects. The company anticipates achieving organic growth in the low-to-mid single digits. Despite the positive outlook for throughput, the management has reiterated its guidance for FY24 regarding Ebitda in the range of Rs 145-150 billion. Additionally, the company expects capital expenditures (capex) to amount to Rs 40-45 billion and plans to continue deleveraging with a net debt to Ebitda ratio of 2.5x by the end of FY24. To achieve a growth rate of 13-17% in Ebitda, ADSEZ’s projections rely on the ramp-up of its logistics business and the recent acquisitions it has made.

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ADSEZ has been taking active measures to address market concerns over its governance by deleveraging ($130m bond repurchases already completed) and unwinding promoter share pledges to 4.66% of total shares outstanding as of Q4FY23, from 17.31% as of Q3FY23, with an intention to bring it down to nil. It reiterated it would consider M&A including the potential privatisation of Concor, only if it is possible without increasing gearing .

Reiterate Buy and raise target price to Rs 830 (from Rs 750) on the basis of a higher terminal growth rate of 4.5% (up from 4.0%). This revision reflects the improving earnings visibility and potential ramp-up of logistics, as well as recent port acquisitions. We believe that ADSEZ presents a long-term investment opportunity, aligned with India’s trade and infrastructure growth.

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ADSEZ benefits from a diverse and sticky cargo base, which currently accounts for 54% of its total cargo as of FY23. This diversity should help mitigate the impact of near-term trade uncertainties. Furthermore, the company’s vertical integration strategy enhances its capacity and pricing power, bolstering its overall position in the market.