With better volumes and right cargo mix, utilisation will further improve and should lead to improvement in margin and return ratios, which would support earnings and valuation
The benefit of right assets at the right location and presence in essential commodities have led Adani Ports & Special Economic Zone (APSEZ) to reap benefits in an otherwise slowly growing port logistics market.
During April to September, traffic at India’s major ports grew about 5 percent. Contrary to this, Adani Port’s cargo volumes grew 22 percent year-on-year in Q2 and 15 percent in H1 FY19.
This is also reflected in its Q2 result. Excluding impact of port SEZ led development revenue, the company recorded an 18.4 percent growth in Q2 revenue. For H1 FY19, revenue grew 17 percent to Rs 5,019 crore. During this period, its flagship port, Mundra, reported a 12 percent growth in volumes.
Because of higher volumes, the company was able to sweat its assets and improve assets utilisations, resulting in better profitability. Thus, operating profit, excluding the impact of SEZ revenue and forex loss, grew 24 percent to Rs 3,292 crore. During this period, operating margin expanded 300 basis points to 66 percent.
Improvement in margin is sustainable, considering the continuous volume growth, in light of increasing utilisation for recently added ports. “A greater product mix and logistics will continue to yield positive results. Port earnings before interest, tax, depreciation and amortisation (EBITDA) margin are set to increase from 70 percent to 71 percent over the next one year. Automation and using technology to handle cargo, sweating of enhanced capacity and better cargo mix will drive margin expansion,” the management guided in its result release.Volume growth
Despite concerns over a US-China trade war, rupee depreciation and crude oil prices, the management aims to achieve cargo volume of 200 million tonne in the current fiscal, up about 11 percent YoY. This looks quite achievable considering the company has already recorded a volume of 100 MT in H1 FY19.Outlook and valuations
With better volumes and right cargo mix, utilisation will further improve and should lead to improvement in margin and return ratios, which would support earnings and valuation.Based on FY19 estimate earnings of Rs 18 a share, the stock at the current market price of Rs 313 per share is trading at about 17 times, which is quite reasonable considering the strength of its balance sheet, earnings visibility and improving return ratios.
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