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APSEZ reported an expectedly weak print in Q4. Its capex plan aims to provide the path for APSEZ to (1) reach 500-mn ton port volume target by FY2025 from 350-360-mn FY2023 guidance and (2) become a transport utility with a strong logistics offering. Up-fronting of capex and fluid market conditions would make the path to 16% RoCE target for 2025 from current 11% difficult, more back-ended and less clear. We retain operational estimates and increase FV on roll-forward to Rs 735. Reduce stays, with 15X FY2023E EV/Ebitda trading valuations.

Weak end to the year on expected lines

Adjusted for Sarguja rail acquisition, APSEZ reported a flattish y-o-y Ebitda and a decline of 4/0/2% in port volumes/revenues/Ebitda. This represents a marginal 4% miss versus our Ebitda estimate adjusted for the delay in consolidation of the Gangavaram port asset. The firm has managed to contain its overall net debt to Ebitda at 3.5X despite reasonable capex spends and investment in acquiring Gangavaram and Krishnapatnam.

Guidance reasonable on volumes and aggressive in terms of timing on capex

Volume guidance for FY2023 appears reasonable to us at 350-360 mn tons versus 312 mn tons in FY2022. The guidance lacks the punch on a low y-o-y base. The guidance on capex suggests a sharp jump to Rs 86 bn or more than 2X versus FY2022 levels. Key movers of the incremental

Rs 50 bn capex are warehousing (Rs 25 bn capex), Gangavaram (Rs 8 bn) and Mundra+Dhamra (Rs 12 bn). From a port perspective, the capex intensity is doubling in Mundra and Dhamra. In logistics, the focus is more on warehousing – equipment capex to build in land bought by Adani Ports last year. The up-fronting of capex and fluid market conditions imply that realisation of the business returns envisaged on the incremental capex may take time. This can impact the realisation of the 16% RoCE target by FY2025. Currently, the APSEZ portfolio operates at 11% RoCE (down 100 bps y-o-y).

We retain estimates and increase FV

We increase our FV to Rs 735 (from Rs 710), largely on account of six months of roll-forward and higher value for Gangavaram asset, with half of the increase negated by higher capex assumptions. Retain Reduce given punchy 15X FY2023E EV/Ebitda entry valuations.

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Author: Howard Caldwell