Adani Ports: Flat offtake impacts margins

Lower interest burden may help profit; gains from new capacity at Mundra could boost volumes

Adani Ports and Special Economic Zone (APSEZ)'s performance for the quarter ending December (Q3FY16) was below expectations, with revenue at Rs 1,566 crore, up three per cent year-on-year (y-o-y), well short of Bloomberg consensus estimate of Rs 1,711 crore.

Flat volumes offtake of 38 million tonnes (mt), down two per cent y-o-y, were a bit disappointing, suggesting offtake in liquid and container cargo was yet to compensate for the declining dry-bulk volumes. Coal volumes (imports), which account for 48 per cent of total cargo, fell 13 per cent; this trend is expected to stay in the near term due to improving local coal production.

Analysts at Emkay Global say temporary pain of dry-bulk volumes may give way to increasing share of liquid and container cargo in the overall mix and inorganic growth, but that will take some time, given the weakness in overall trade. On the back of a weak trade scenario, the brokerage house has reduced its volume and realisation assumptions across ports largely in the coal and other bulk segment of APSEZ by five and 2.3 per cent, respectively, in FY17.

Although gross realisations from ports improved five per cent to Rs 471 a tonne in Q3FY16, operating profit (excluding other operating income attributable to income from development of SEZ as there was no revenue from SEZ operations) at Rs 919 crore fell short of estimate of Rs 1,088 crore.

Operating margins shrank to 58.7 from 59.6 per cent in Q3FY15. Sequentially, the drop is steeper compared to 65 per cent in Q2FY16.

Much of the 26 per cent y-o-y rise in net profit is on lower interest burden. Debt restructuring has helped APSEZ cut its interest outflow by 23 per cent y-o-y to Rs 263 crore in Q3FY16.

Also, APSEZ has forecast 150-155 mt of volumes in FY16, indicating that Q4FY16 offtake might replicate or marginally beat the December 2015 quarter level. Increased focus on container and agricultural cargo, along with capturing the coastal cargo movement, should aid in meeting its volume targets.

The Street will also look at the ramp-up in trans-shipment volumes from its recently expanded third container terminal in Mundra Port, and how much it could offset the decline in coal volumes.

Most concerns seem priced into the stock, which has almost halved in five months to Rs 191. Analysts say valuations are reasonable at 13 times the FY17 earnings.