CLSA upgrades Adani Ports to buy, raises target to Rs 425; says Krishnapatnam port acquisition is Value-accretive

CLSA has highlighted the key triggers in the report as to how Krishnapatnam port acquisition will be Value accretive for the company. KPCL has a strong presence in the east coast and Adani Ports will be able to increase its volume and EBITDA due to this acquisition. Revenues and EPS of Adani Ports will improve considerably due to acquisition. This acquisition is happening at a 12% discount than what was expected due to Covid-19 situation which indicates good value acquisition for Adani Ports.

4 key important reasons for the upgrade:

1)      Krishnapatnam Port acquisition to solidify hold over the east coast and improve earnings quality

2)      Yield from the acquisition likely to be 17% in FY22

3)      Raise EPS estimates by 6-10% over FY22-23

4)      Trading at discount to competitors

Adani Ports acquires India's No. 2 private port

CLSA upgrades Adani Ports to BUY from outperform rating as it concluded its largest port M&A with Krishnapatnam Port (KPCL) to solidify its hold over the east coast at 12% discount to the earlier value. KPCL is India’s no.2 private port with some solid tenants providing more than 50% of its cargo from long-term contracts. KPCL is a highly scalable port, where Adani ports aims to double its EBITDA over three years & volume over five years. It adds 17% to Adani ports revenue & 17% to our FY22 EBITDA. Adani ports acquired KPCL at an EV/EBITDA of 10x FY21, a 10% discount to its own. Funding is not a problem & the KPCL M&A is likely to improve Adani ports earnings quality, with the yield from this acquisition likely to be 17% in FY22. CLSA believes EPS would improve 6%-10% over FY22-23 & raise their target to Rs 425 from Rs 386 to factor in KPCL acquisition.

Adani Port, the consolidator: Balancing cargo and raise FY25 target 25%

After acquiring Dhamra and Kattupalli in eastern India, Adani ports acquired 75% of KPCL in a cash-plus-debt deal, at 12% cheaper factoring in Covid-19 risk. KPCL is an ultra-low revenue share port with more than 50% of its volume from long-term clients. Adani ports post M&A net debt/EBITDA will be below 3.5x by FY22. Further, Adani ports is likely to pluck low hanging fruit and spend Rs 10 bn- Rs 12 bn to grow KPCL’s EBITDA 119% over FY21-25. Adani ports raised its FY25 target to double volume with KPCL by 25%. A rise in the share of bulk (81% of KPCL) is a long-term risk.

Value-accretive acquisition plus better earnings quality

CLSA likes the KPCL M&A as it offers high-growth potential of its hinterland, scope to expand container cargo and has a land-bank to grow capacity 8x. Adani ports acquired KPCL at an EV/EBITDA of 10x FY21 due to KPCL’s leverage and dependence on low-margin bulk. The KPCL M&A is likely to improve its earnings quality, as it is likely to reduce Adani ports treasury by 23%, add 20% to port EBITDA and this M&A could have an earnings yield of 17% in FY22.

Lift rating to BUY as this strategic asset trades at a discount

Adani ports have underperformed the market 9% over the past three months on concern over KPCL export-import traffic, where the ties seem turning with a rebound in Q2 FY21 volume. Covid-19 also seems to be peaking, reducing volume risk. The 5GW round-the-clock tender should help power PPA to the group's power plants and improve the coal import outlook. CLSA believes Adani ports is a buy at current levels as this strategic asset accelerates port EBITDA growth to 29% post M&A versus 17% currently, and it trades at a discount to comps on FY21 EPS.  

By Rahul Kamdar