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Adani Ports and Special Economic Zone Ltd (APSEZ) reported better-than-expected financial performance for the June quarter. Its shares gained about 2% on Wednesday, and are now only about 13% lower compared to their pre-covid highs. Investors were pleased by the signs of stabilization in Adani Ports’ business volumes. “There has been a steady increase in cargo throughput across ports from July. During July, APSEZ handled cargo volume of 18.3 MMT (million metric tonnes), a growth of 6% year-on-year (y-o-y) and 31% over June. This trend gives us confidence that the worst is behind us and going forward, the cargo volume in FY21 is likely to stabilize," Adani Ports said in a statement. Also, the drop in revenues was lower than the fall in volumes. Total revenue dropped 18% in Q1FY21, slower than a 27% fall in business volumes.

A better cargo mix and cost rationalization measures helped the company. This is reflective in stable profit margins at the ports business on a y-o-y basis. The share of better yielding container traffic in cargo volumes grew five percentage points from the year-ago quarter.

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“Port earnings before interest, taxes, depreciation, and amortization (Ebitda) margins stood at a healthy 69.5% versus 70.5% (despite the impact of negative operating leverage due to lower volumes), benefiting from the renegotiation of operating contracts, strategy of diversifying cargo mix and price hike," analysts at Antique Stock Broking Ltd said.

With the company realigning costs, the incremental improvement in business volumes can positively aid Adani Ports’ profit margins and operating earnings. While pent-up demand may be aiding recovery in business volumes, the management believes that the recent uptick in electricity generation and steel production in the country can help sustain the recovery in its bulk cargo (coal imports).

With the Competition Commission of India approving the Krishnapatnam Port Co. purchase, Adani Ports has decided to complete the acquisition in the current quarter (Q2FY21). The acquisition will strengthen its position in the southern markets. Further, the company also expects to complete the acquisition of debt-laden Dighi Port in Maharashtra by the end of 2020. These acquisitions will raise debt levels, but incremental cash flows are likely to keep leverage in check.

Still, for investors, the pace of recovery remains crucial. With the economy still adjusting to covid-19, the business environment remains uncertain. “The management did not provide any volume guidance for FY21 and would wait for another quarter to assess the situation, although the management believed that the worst is behind them," said analysts at Antique Stock Broking.

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