At the end of FY21, Adani Ports & SEZ (Adani Ports) outlined its ambition to become the largest port company in the world. In fact, it aims to grow cargo volumes handled by its ports at a CAGR of over 19% to reach the target of 500 million metric tonnes (MMT) by FY25. Notably, it also aspires to expand its market share by 15 percentage points to 40% by the same year. The target to become the largest port company in the world is over this decade.

That was then. Now, two back-to-back quarters of lacklustre operating performance by Adani Ports & SEZ raises investors’ apprehension with regard to its growth targets, which now look like a much steeper climb.

Fall in coal imports affect overall cargo volumes

International thermal and coking coal became costlier owing to supply chain bottlenecks and an export ban by Indonesia in August 2021. Post this, Indian power producers like Adani Power, Tata Power and Coastal Gujarat Power cut-back sharply on their imports. Even the government encouraged them to reduce their reliance on imports and focus on domestic sources. For instance, coal cargo imported by Adani Power via the Mundra port nosedived 86% YoY to 0.7 MMT in Q3FY22. This coupled with inhospitable weather conditions in eastern and southern parts of India led to lower dry bulk cargo volumes for Adani Ports in Q3. 

Dry bulk cargo volumes, other than coal, actually grew 4.6% YoY to 9.84 MMT in Q3FY22. This consists of minerals and metals, steel-based products as well as agricultural inputs such as fertilisers. 

Interestingly, container cargo volumes for the company remained resilient in the face of export-import challenges like higher ocean freight charges. Containerized cargo segment is a key focus area for Adani Ports as transporting cargo in standardised units is way more cost effective and margin accretive than transporting the general bulk cargo. Liquid cargo volumes, inclusive of crude oil and LNG, rose marginally by 1% YoY in Q3 owing to lower throughput at the Mundra and Krishnapatnam ports. 

Mundra port, along the west coast of India, is the flagship port of this Adani Group company. It’s also the world’s largest coal import terminal. This port was primarily impacted by the steep fall in coal imports into India during Q3FY22. Interestingly, its key customers i.e., Adani Power and Tata Power accounted for over 50% of all imports by Indian power stations from March to August 2021. 

The thing to note here is that Adani Ports managed to grow its market share in the containerized cargo segment by 189 bps YoY to 42.2% in Q3FY22. The company also added eight new container service lines with a potential to carry 2.3 lakh TeUs (twenty-foot equivalent unit) worth of cargo per annum. A container service line is a shipping vessel which transports a limited range of standardised load units between two ports. Although Mundra's container volumes rose 5.2% YoY to 24.4 MMT, weak volumes from all other ports led to the total container volumes being as-is on a YoY basis in Q3FY22. 

Cargo volumes remain subdued across six key ports

The newly-acquired Krishnapatnam port which lies along the eastern coast in Andhra Pradesh, witnessed a massive fall of 85% YoY in its container volumes (0.2 MMT) and a 13% YoY fall in its coal volumes (5.6 MMT) for Q3. This led to the lower overall volumes on a YoY as well as a sequential basis for this port. Notably, new products such as dolomite and gypsum and higher agriculture input volumes boosted the overall dry bulk cargo volumes by 1% YoY (8 MMT), despite the fall in coal transshipments.  

Interestingly, the liquid cargo volumes for both Dhamra and Hazira ports (Gujarat) rose over 25% YoY to 1.1 and 1.3 MMT in Q3. Higher chemicals-based volumes in the liquid cargo basket cushioned the overall volume decline for Hazira port while high gas volumes worked for Dhamra port. Notably, Adani Ports established an LNG terminal at the Dhamra port back in Q1FY22 given the high demand of gas-based products. 

Kattupalli port, near Chennai, witnessed a 32% YoY decline in its cargo volumes at 1.7 MMT owing to weakness in the Chennai cluster. The activity in this cluster was weak owing to high incidence of Covid-19 cases. In its Q3FY22 earnings call, the management chose not to comment on the root cause of this dismal trend but assured on a revival in the ‘southern sector’ (Krishnapatnam, Kattupalli and Ennore) from Q1FY23 onwards, backed by launch of new port services. 

Adani Logistics maintains its growth momentum in Q3

Touted as a key growth engine of Adani Ports, the logistics division’s revenue grew over 15% YoY to Rs 299 crore in Q3 led by higher rail volumes and terminal volumes. Double-digit revenue growth and improvement in operational efficiency drove an 18% YoY rise in EBITDA to Rs 79 crore in Q3FY22. The company also doubled its warehousing capacity to 0.83 million sq ft at the end of nine months ended December 31, 2021. 

Adani Ports’ overall financial performance remains range-bound

Adani Ports’ Q3 revenues were flat on a YoY basis at Rs 3,797 crore mainly due to the underlying weakness in its ports business. Higher growth in the logistics and SEZ & port development segments made up for the 4% YoY fall in port revenues to Rs 3,156 crore in Q3. The company maintained its port segment margins at 71.2% which limited the net profit fall in Q3. Notably, the company recognized a foreign exchange gain of Rs 206 crore in Q3FY21 which led to a higher bottomline during that quarter. 

However, if we closely notice the topline trend in the last five quarters, Adani Ports’ operating revenues are largely within a particular range. This is after disregarding the higher port development income (for Dhamra Port, non-recurring in nature) of Rs 764 crore earned in Q1FY22. No such growth trajectory can be established for its profits as well. Notably, profits were lower in Q2FY22 owing to reversal of export benefits to the tune of Rs 405 crore. 

Adani Ports lowers FY22 guidance despite expected recovery in coal imports

Post its Q3FY22 results, Adani Ports & SEZ reduced its FY22 revenue target by nearly 6% to Rs 17,000 crore and EBITDA guidance by 8% to Rs 10,600 crore. This translates to a revenue growth of 17% YoY in FY22 but EBITDA remains flat YoY. However, the company remains hopeful of a recovery in dry bulk cargo volumes especially coal from mid-February as demand for power is steadily rising. The company is also due to acquire the entire stake in Gangavaram port (Andhra Pradesh) and the cargo volume for it should reflect from Q4FY22. The quarterly cargo volumes for this port are roughly around 7 MMT. 

The management expects the coal cargo volumes to be flat over the next 4 years with growth mainly coming from the containers segment, metals and minerals space and the natural gas space. What this means is that either the Indian power companies are going to rely on Coal India for their thermal coal requirements or focus in a big way on the renewable energy space or both. Within the metals and minerals segment, APSEZ is bullish on bauxite, aluminium and steel products trade. The company also expects more cargo volumes from nearby countries like Bangladesh and Sri Lanka via its Dhamra port and under-construction Vizhinjam port.  

The company also has ambitious plans for its logistics business and is all set to bid for Container Corporation of India in the coming quarter which will boost its overall market share in the container train operations (CTO) sector. 

In all, Adani Ports & SEZ remains bullish about the long-term prospects of both the ports and logistics segment. However, ongoing weakness in the cargo volumes and export-import challenges make the outlook hazy for the next 2-3 quarters.