NEW DELHI: Adani Ports & SEZ (APSEZ) is in the news these days, thanks to a flurry of deals, including the acquisition of majority stake in Gangavaram Port and a 100 per cent stake purchase in Sarguja Rail Corridor (aimed at integrating rail assets).

The Gautam Adani-led transport utility, India’s largest, has also completed the acquisition of Dighi Port and has committed a Rs 10,000 crore investment to develop it as an alternate gateway to the Jawaharlal Nehru Port Trust (JNPT).

Add to that the announcement that the company would develop the West Container Terminal (WCT) in Sri Lanka on a build-operate-transfer (BOT) basis under a partnership.

Among other noteworthy developments, the company recently allotted Rs 800 crore worth shares to Warburg Pincus for a 0.49 per cent stake, valuing the company at Rs 1.63 lakh crore compared with its current market cap of Rs 1.46 lakh crore. The promoters also recently released 3.21 crore pledged shares.

Analysts said the Adani company has in the past managed to turn around its inorganic bets. They believe despite a 215 per cent surge since March 2020 low, the stock has the potential to rerate further, given the company’s ability to grow inorganically and its renewed focus on corporate governance.

Inorganic boost
Rating agencies have said the recent acquisitions do not affect the company’s rating profile. The Gangavaram Port will be fully funded through APSEZ’s internal accruals and cash balance and is believed to support APSEZ’s port portfolio by diversifying concentration away from the west coast of India.

The company has bought an additional 58 per cent stake in Gangavaram Port (GPL) for Rs 3,604 crore, which was in addition to a 31.5 per cent stake it had acquired from a Warburg Pincus affiliate on March 3. With this, the company would own 89.6 per cent in GPL.

Morgan Stanley said that the deal can be value accretive and maintained its ‘overweight’ call on the stock.

Citibank has maintained a ‘buy’ on the stock, with a price target of Rs 935, while initiating a 90-day positive ‘catalyst watch’ on the stock, as it expects to see a greater clarity on the impact of recent acquisition on the company’s medium-term growth trajectory.

The brokerage believes the company’s market share gain would continue in the March quarter; it sees better cash flows and attractive acquisitions ahead.

On Wednesday, the scrip traded at Rs 731.30 on BSE, down 0.9 per cent.

With GPL acquisition, Adani Ports expects the proportion of cargo from the western and eastern coasts to shift from 67 per cent and 33 per cent currently to 60 per cent and 40 per cent, respectively. APSEZ’s share of pan-India cargo volume will also increase to 30 per cent from 27 per cent, consolidating its market leadership.

“GPL’s Ebitda 59 per cent margin is lower than APSEZ’s 70 per cent margin from port operations. However, APSEZ intends to improve GPL’s profit margin by increasing operational efficiency. We believe APSEZ has a strong record in turning around acquired port assets, such as Dhamra Port in 2014, Kattupalli Shipyard in 2015 and more recently, Krishnapatnam Port, which APSEZ acquired in October 2020. GPL is a debt-free asset and has growth potential through expansion, new cargo types and enhanced logistics solutions,” Fitch Ratings said.

The Sarguja Rail acquisition, analysts said, would help APSEZ enter the 100 million tonnes market for coal transportation. Incremental capex for capacity expansion would be limited to setting loop lines, aiding expansion of business returns, they said.

Also, the Dighi Port acquisition opens another 70 million tonnes volume market in Maharashtra beyond JNPT, said Kotak Securities.

“A meaningful part of the equity outgo for the three acquisitions would be funded by equity issuance to the promoter and Warburg Pincus. The remaining equity commitment would get paid back over a period of two years from the incremental cash profits. We envisage APSEZ’s consolidated net debt to Ebitda to move towards 2 times over FY22-23. This creates scope for further acquisitions,” Kotak said.

HSBC said it is optimistic on the Sri Lankan project given tight capacity, success of CICT and capacity to handle mega vessels.

Corporate governance
In a note to clients, Edelweiss said Adani Ports & SEZ’s focus on corporate governance, a hitherto missing spark, is more than a flare-up and is evident from a 30 per cent cut in promoter pledge, formulation of related-party transaction framework that it is adhering to, thereby protecting minority shareholder rights.

The brokerage said the company’s pledge stood at 18 per cent and is likely to be immaterial over the next six months, while suggesting that the trinity of strong macros, robust financials and improving corporate governance would make APSEZ a solid infra play.

Q3 numbers
Adani Ports grew volumes 20 per cent YoY to 67 million tonnes in December quarter, ex-Krishnapatnam Port. The company had completed the acquisition of Krishnapatnam Port in October 2020 at an EV/Ebitda of 10 times, and it has been value-accretive from Day 1.

For the quarter, the company reported a 16 per cent YoY rise in Q3 net profit at Rs 1,577 crore from Rs 1,356 crore. Operating revenue for the company rose 12 per cent to Rs 3,746 crore, with port Ebitda coming in at 71.7 per cent, up 140 basis points over 70.3 per cent YoY.

Krishnapatnam Port handled a cargo volume of 10 million tonnes. Mundra port registered a growth of 25 per cent during the quarter led by container and liquid cargo including crude. While the container segment grew 38 per cent, growth in liquid cargo including crude stood at 22 per cent.

What analysts said
BofA Securities in a recent note said that 17 per cent of port traffic is still handled by smaller private sector and state owned ports and the government is planning to allow private operations within central government-owned major ports that account for 53 per cent of port traffic.

“Combined with Adani Port’s under-levered balance sheet and strong free cash flows, we expect such acquisitions to continue. We believe markets are likely to ascribe premium valuations for this ability to grow inorganically, and hence we see room for current valuation at 21 times 2-year forward PE to expand further. We maintain a ‘Buy’ rating on the stock,” the brokerage said.

Edelweiss said GPL is an excellent port with robust financials, providing access to new hinterland. “The growth potential is huge, as the businesses are yet to mature. As an aside, Warburg Pincus’s investment of Rs 800 crore in APSEZ at Rs 800 per share shows its ability to raise equity,” Edelweiss said.

The brokerage has a price target of Rs 875 for the stock which does not include a Rs 45 per share contribution from Surguja and Rs 70 from a likely 90 per cent stake holding in GPL.

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