L&T Shipbuilding deal: Positive for Adani Ports
The deal will give a head start to Adani Ports' Ennore operations without weighing on its balance sheet, while helping it diversify revenue mix in the long run
After the Dhamra Port acquisition, Adani Ports and Special Economic Zone (APSEZ) is again set to do business with the Larsen &Toubro group.
A recent agreement will allow APSEZ to evaluate port operations of L&T Shipbuilding at Kattupalli, Tamil Nadu. APSEZ would operate and manage (O&M) the port and be entitled to profits/losses before interest, depreciation, taxes and amortisation accruing from it. Non-operating gains or losses shall belong to L&T Shipbuilding, which will continue to operate its shipbuilding business. This deal should benefit Adani Ports, as it is close to starting its Ennore port.
The Kattupalli port’s revenue stood at ~18.44 crore in FY15. While it reported a loss before interest and tax of ~113.52 crore, a large part is due to depreciation, which could be around ~80-100 crore given the asset base of ~2,000 crore. It is also not running at optimum capacity. Given APSEZ’s record of generating good margins at its ports, it should not be a difficult task for the company to replicate the feat at Kattupalli. However, Kattupalli might not add significantly to APSEZ in the initial years. With the port business contributing to only about three per cent of L&T Shipbuilding’s revenues, JM Financial believes revenue from Kattupalli Port could account for less than half a percent of APSEZ’s revenues.
That said, the incremental capacity which APSEZ could pocket from Kattupalli port is the takeaway from this deal. The port, which has a capacity of 1.2 million TEUs (20-foot equivalent unit) with potential to expand up to 1.8 million TEUs, is separated by a wall from APSEZ's Ennore terminal (now referred to as Kamarajar Port). APSEZ's Ennore facility (0.8 million TEUs) is expected to commence operations by early 2016, with potential to scale it to 1.4 million TEUs.
While the deal with L&T Shipbuilding can lead to APSEZ’s total capacity rising to 3.2 million TEUs capacity, together they stare at the opportunity to attract traffic from the congested Chennai Port (2.4 million TEUs capacity). The huge investments planned around the Chennai-Bengaluru industrial corridor itself speaks of the potential for APSEZ.
Over a period of time, Ennore and Kattupalli ports could also reduce APSEZ’s dependence on Mundra Port, currently accounting for over 75 per cent of its volumes. Growth at Ennore port at 10 per cent between April-August 2015 was way above the overall sea port traffic growth of five per cent compared to the same period a year-ago.
Another positive is that unlike APSEZ’s Dhamra Port acquisition or the pact with the Kerala government for development of Vizhinjam Seaport, this deal is not capex-heavy. Hence, profits (as they accrue) from the Kattupalli port would strengthen the company's profitability without denting its balance sheet. At a consolidated level, APSEZ’s total debt has risen by a third in FY15 to ~17,773 crore, according to data. Though the company is well-placed to service it, the debt-equity ratio now stood at 1.65 for FY15.
Q2 expectations
Meanwhile, for the quarter ending September 2015, the Street will keep an eye of APSEZ’s Mundra performance given that overall traffic for ports remains sluggish. Operating margins could improve in the September quarter due to the nine per cent increase in rates implemented in April this year.
In a recent note, Bank of America-Merrill Lynch estimates APSEZ to register 15.1 per cent year-on-year growth in volumes driven by 15 per cent increase in volumes at the Mundra port and contribution from its new port assets. Excluding the ~200crore construction revenue from land reclaimed at Mundra, the LNG project reported in Q2’FY15, total sales in the September 2015 quarter is expected to increase by 23 per cent year-on-year, while recurring profits are seen increasing by 19.4 per cent, helped by lower interest costs. Any miss on expectations could hurt sentiment given that stock valuations are not cheap at the current level of ~321. Indications from the management on funding for its capex, now pegged at ~1,000 crore, and its inter-corporate receivables will also reflect on sentiment.