Overall volume outlook strong with momentum continuing into 3QFY21; acquisition significantly value-accretive Raise EBITDA estimates by 3-4% over FY21-23F on strong operational turnaround at KPCL acquisition; raise TP to Rs 530; maintain Buy with 17% upside ADSEZ has risen 19% YTD, vs the Nifty 50’s rise of 9%. This outperformance is underpinned by strong volume growth in 1HFY21, which beat our estimates. Based on the strong turnaround of new acquisitions (KPCL and Dhamra) and volume momentum, we continue to be positive.
ADSEZ has turned around its Krishnapatnam (KPCL) acquisition significantly ahead of our previous estimates, leading to earnings upgrade: ADSEZ has turned around the operations more efficiently than anticipated. We estimate that cost measures and operational efficiencies amounting to INR2.4bn highlighted by the management appear sustainable. This in our view leads to opex/t (ex-royalty) declining by 20% y/y in FY21F and further 16% y/y in FY22F . This cost rationalization coupled with ~12-15% price hike leads us to estimate 73.5% EBITDA margin in FY22F and sustainable margin of 75% from FY23F (estimating that mechanization levels will rise from 55% at present to 85-90%). Thus, we increase our EBITDA margin estimate for KPCL by 600bp for FY21F and 900bp for FY22F. We estimate value accretion of INR60/sh from the turnaround of KPCL.
We estimate ADSEZ can deliver 12%+ ROCE on its acquisitions. We expect new assets like Dhamra and KPCL to exceed 12% ROCE by FY21F and FY22F respectively. In the future, if new assets are turned around like Dhamra and KPCL to achieve steady-state ROCE of c.16% (management target for KPCL is 20% on a steady state), the stock has potential valuation range of Rs 540-560, in our view.
3QFY21 also appears promising with strong volume momentum in Oct/Nov’20. Excluding the KPCL acquisition, ADSEZ’s underlying port volume growth has been robust at 22% and 10% y/y for Oct’20 and Nov’20, respectively.
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