ADANI PORTS OUTPERFORM

WE MET Adani Ports’ CEO Karan Adani recently. Having taken note of investor concerns about loans and advances (L&As), management is looking to reverse some of the L&As. Container volumes continue to be its focus area as they drive the overall volume growth medium term. We maintain our Outperform rating, and believe that addressing balance sheet concerns will be the key for stock re-rating. Impact

Dealing with L&A concerns: The company has taken note of investors’ and rating agencies’ concer ns about related party transactions and the build-up of L&A over the last three years, and is looking to reverse some of the transactions. Its total L&As increased from R14 billion in FY12 to R100 billion in FY16, with related party L&As rising from R6.8 billion to R25.3 billion.

Focusing on Containers: Adani continues to move away from its long-term pivot of Coal & Bulk to focus on the Containers segment. Mundra Port’s massive infrastructure allows it to tap into trans-shipment volumes of the Middle East and Africa. While it expects Containers to contribute 30-35% of overall volume over the next three years, Gas and Fertiliser are the other areas the company plans to focus on over the medium term. We build in 18% overall volume growth for the next two years.

Pursuing growth outside India: Further, management believes that it has several longterm growth prospects including expansion into markets such as South East Asia and Africa. It will further explore opportunities in other related areas such as logistics. Management aims to use future cash flows to fund these expansion plans.

Some improvement in noncoal bulk volumes, coal continues to decline: Non-coal bulk volumes should stabilise in the near termonthebackof growthiniron ore exports, which benefit Dhamra Port. Iron ore volumes at the major ports were 7.5m in AprilMay 2016 versus 1.2m in AprilMay 2015 on account of a significant rise in exports. Coal imports continued to decline in April-May 2016, by a 17%, with total volumes reaching 32.3 MMT. Earnings and target price revision: No change. Price catalyst — 12-month price target: R261.00 based on a Sum of Parts methodology.

Catalyst: Higher volume and resolution of balance sheet issues. Action and recommendation

Attractive on valuations: ADSEZ is trading at 10x EV/Ebitda, a 25% discount to the long-term average multiple. However, addressing balance sheet concerns will be critical for a re-rating. Loans & Advances shot up in FY16

Adani’s total L&As increased from R14 billion in FY12 to R100 billion in FY16, with related party L&As rising from R6.8 billion in FY12 to R25.3 billion in FY16. The company has taken note of investors and rating agencies’ concerns and is looking to reverse some of the transactions. Focusing on the Containers segment

The company is still striving to move away from its long-term pivot of Coal & Bulk to focus on the Containers segment. While it expects Containers to contribute 30-35% of overall volume over the next three years, Gas and Fertiliser are the other areas it plans to focus on over the medium term. We are building in 18% overall volume growth for the next two years. Some improvement in non-coal bulk volume, coal continues to decline

Non-coal bulk volumes should stabilise in the near term on the back of growth in iron ore exports, benefiting Dhamra Port. Iron ore volumes at the major ports were 7.5m in April-May 2016 versus 1.2m in April-May 2015 on account of a significant rise in exports. We build in a 28% CAGR in non-coal bulk volumes over FY16-18.

Coal imports continued to decline in April-May 2016, by a 17% y-o-y, with total volumes reaching 32.3 MMT. Coal imports declined 16% in FY16 on account of higher production at Coal India. We build in a further 6% pa decline in coal volumes over FY16-18. —Macquarie