Adani Ports & SEZ - Beyond Mundra - Phillip Capital

Adani Ports was recently awarded the contract for development of container terminal at Ennore port. The company had emerged as the highest bidder, quoting 37% revenue share (against 27% quoted by DP World) for the 1.4mn TEU terminal, to be built at a cost of Rs12.7bn. This marks the foray of ADSEZ on the eastern coast of the subcontinent, with its first project of significant capacity.

With the acquisition of Dhamra port now a formality, we see ADSEZ's project portfolio growing much beyond Mundra. The portfolio now consists of seven projects with total cargo handling capacity of 332mn tones (200mn tones at Mundra) and capex of Rs200bn (Rs100bn at Mundra). We expect the next leg of growth for ADSEZ to come from the other' ports, complementing Mundra, which we expect to continue reporting robust growth.

We expect the total cargo handled by ADSEZ to increase from 87mn tones in FY13 to 170mn tones in FY16, driven by 26mn tones of incremental cargo at Dahej, Hazira, Vizag and Mormugao ports. Beyond FY16, we expect Kandla to start contributing. If we also include Dhamra port, the company will handle 188mn tones of cargo in FY16 - a CAGR of 23% over FY13-16.

Also we find ADSEZ extremely well placed - both in terms of balance sheet strength and operational capability, to win multiple port projects to be awarded by the IPA. Over the last two quarters, divestment of APCT & CT-3, and the IPP have led to cash accrual of ~Rs33bn (currently invested in various ICDs and capital advances). There was never any doubt over the company's execution capability, and with a fleet of 13 dredgers of its own (as many as DCI), the company would remain a frontrunner in grabbing and executing new projects.

The project pipeline for IPA has swelled to Rs200bn over the years, on the back of delay in awarding projects due to multiple reasons (security clearance, environmental clearance etc). We expect things to improve going forward, and many of the projects on the anvil to be awarded over the next three years, starting with container terminals at Chennai (Rs 37bn) and Vizhinjam (Rs40bn) - which have already seen multiple rounds of bidding.

All along, we expect Mundra port to continue reporting robust growth, driven by the 3Cs - Coal, Crude and Container. Coal cargo has grown at CQGR of 10% over the last seven quarters, while Crude and Container at CQGR of 7% and 9% respectively. The capex phase for the port has also completed, with the commissioning of dry-cargo berths in FY12 and CT-3 in FY14. The port has now reached total cargo handling capacity of 200mn tones, as against cargo volumes of 100mn tones expected in FY14.

We remain positive on the stock with the high ROE (+24% over FY13-15E) and cash generating business at the helm. The divestment of APCT removes the cloud of ambiguity surrounding the consolidated earnings.

We now include Vizag and Kanlda ports in our valuation but not Dhamra and Ennore (awaiting deal closure and final approvals). We revise our price target to Rs192 (earlier Rs187), which offers +18% upside from current levels. We maintain BUY.

Source : Equity Bulls

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