Adani Ports rating: Buy – Growing heft on display in Q1

Q1FY21 would BE remembered as a revealing quarter that established the increasing relevance of APSEZ within its ecosystem. APSEZ was able to (i) take its usual price increase in key cargo classes and (ii) meaningfully alter cost structure to maintain port margins despite volume decline. This is comforting at a time when chinks in cost structure of other listed logistics plays are coming to the fore. We retain estimates and increase our Fair Value to Rs 400 from Rs 390 on roll-forward.

Stamp of increasing relevance quite visible in a revealing Q1FY21

APSEZ reported a better-than-expected y-o-y decline of 21%/23% in adjusted port revenue/Ebitda. We ascribe limited relevance to the 27% y-o-y volume decline in Q1 and by the same standard, to the 6% y-o-y growth in July for APSEZ’s portfolio. We, however, find the relatively modest decline in port revenues and Ebitda quite revealing. It reflects the impact of a 2.5% constant currency realisation increase APSEZ was still able to take in the quarter. We also note that the sharp volume decline was led by coal and crude, verticals impacted the most by Covid-19. Beyond these two verticals, the yoy decline in volumes was in low-teens, reflecting (i) outperformance in container volumes and (ii) and several new cargo classes added over the year.

Closing in on assets that would help enter unexplored domestic markets

We take comfort in APSEZ acquiring Krishnapatnam port asset (to be closed in Q2FY21) and Dighi Port asset (to be closed in Q3FY21). These two will open up the ~25% of market for port volumes in Andhra Pradesh and Maharashtra where APSEZ lacks presence. The other prospect in Concor would now likely materialise only in FY2022 or beyond, giving APSEZ enough time to improve its balance sheet as it acquires the above two assets.

APSEZ the preferred play in sector

APSEZ stands out in the transportation space on several counts. Its primary business, ports, is an asset class with (i) interest business leverage from major ports; (ii) pricing power; and (iii) almost cost elements in one’s control. Within port names, it has relevant scale, a meaningful share and broad-based regional/cargo exposure. As discussed earlier, it has enough say within its ecosystem in deciding pricing and cost structure. Share pledges, a concern for long, have been declining and are well under control. We retain estimates for now and roll forward to August 2021-based DCF.