Adani Ports well placed to post 12% volume CAGR over FY23-25, says MOSL; sees 28% upside

Adani Ports and Special Economic Zone (APSEZ) stock shed 3.5 percent in the last 1 year. However, the stock has pared most of its losses this year to turn completely flat in 2023 YTD.

The year 2023 was a very volatile one for Adani Group firms amid various allegations of fraud and insider trading. After an over 27 percent loss in the first 2 months of the year on allegations, the stock has given positive returns for 7 straight months between March and September.

On the back of this recent recovery, domestic brokerage house Motilal Oswal initiated coverage on the stock with a target price of ₹1,010, implying an upside of 28 percent. With continued growth levers at its existing ports and an expanding portfolio, MOSL expects APSEZ to strengthen its market dominance, achieving a 12 percent volume CAGR over FY23–25. This would, in turn, propel a corresponding 15% CAGR in both revenue and EBITDA, it forecasted.

"Adani Ports is India’s largest private port operator with more than 24 percent market share in cargo handling. APSEZ has evolved from operating just two ports (Mundra and Dahej) in FY11 to a portfolio spanning 14 ports across the country. Improved reach, strategic port locations, operational efficiencies, and a comprehensive range of integrated service offerings (logistics, SEZs, etc.) have contributed to APSEZ’s remarkable growth, with volumes soaring to more than four times the levels recorded in FY11. The company’s: a) market leadership in the ports segment, b) focus on value-added areas such as logistics, and c) focus on strategic acquisitions place it in a sweet spot," explained the brokerage.

Allegations this year

In August, the Organised Crime and Corruption Reporting Project (OCCRP) in an article alleged that millions of dollars were invested in some publicly traded stocks of India's Adani Group via opaque Mauritius funds that obscured the involvement of alleged business partners of the Adani family. The non-profit media organisation also reported that it had found two cases in which investors bought and sold Adani stock through such offshore structures citing a review of files from multiple tax havens and internal Adani Group emails.

However, the Adani group categorically rejected the "recycled allegations" of the non-profit media organisation and said the news reports appear to be “yet another concerted bid by Soros-funded interests supported by a section of the foreign media to revive the meritless Hindenburg report”. It also stated that these are attempts at generating profits by driving down the group's stock prices, further adding that these short sellers are under investigation by various authorities. As the Supreme Court and SEBI are overseeing these matters, it is vital to respect the ongoing regulatory process, the group said.

The OCCRP article comes after US-based short-seller Hindenburg Research in January accused Adani Group of improper business dealings, including the use of offshore entities in tax havens.

Earnings

In the June quarter, the firm reported a rise of 82.6 percent in profit to ₹2,114.7 crore, compared to ₹1,158.3 crore in the corresponding period last year. The port major's revenue from operations in the first quarter of the current fiscal stood at ₹6,247.6 crore, up 23.5 percent, versus ₹5,058 crore in the year-ago period.

On the operating front, the company's earnings before interest, taxes, depreciation, and amortisation (EBITDA) during the June quarter came in at ₹3,766 crore, reporting a growth of 80.2 percent, compared to ₹2,089.3 crore in the same quarter last year. The EBITDA margin stood at 60.3 percent, compared to 41.3 percent in the year-ago period.

The company also recorded its highest-ever quarterly port cargo volumes at 101.4 million metric tonnes (MMT) in the first quarter, reflecting a 12 percent year-on-year jump.

For its guidance in FY24, Adani Ports said that its cargo volumes are expected at 370-390 MMT resulting in a revenue of ₹24,000-25,000 crore and EBITDA of ₹14,500-15,000 crore. The total capex during the year is expected to be ₹4,000-4,500 crore.

Investment Rationale

Diversified portfolio with market leadership: Over FY13–23, APSEZ clocked a 14 percent CAGR in its volumes, far outpacing industry growth rates. This is attributable to: a) expansions at Mundra, b) the commissioning of Hazira, and c) acquisitions of ports such as Dhamra, Krishnapatnam, and Gangavaram. APSEZ’s reach has increased from just two ports in Gujarat in FY11 to a well-diversified portfolio of 14 ports across the western and eastern coasts of the country. In FY23, APSEZ has acquired 70 percent stake in Israel’s Haifa Port in consortium with Israel’s Gadot Group for a consideration of $1.2 billion. Haifa is one of Israel’s two biggest commercial ports and handles nearly half of Israel’s container cargo, informed the brokerage.

Expanding size but with a focused approach: The brokerage noted that APSEZ has adopted a largely focused approach to growth – it aims to deliver continued and steady cargo volumes. APSEZ was quick to spot the containerisation trend in cargo and strategically expanded its container capacities at regular intervals. Notably, APSEZ has achieved this through JVs with some of the largest shipping liners, which have also ensured long-term tie-ups, it added. Over FY16–23, the number of containers handled by APSEZ posted a 15 percent CAGR vs. an 11 percent CAGR for other cargo types. This expansion in container handling has not only aided volume growth but also reduced dependence on commodities such as coal, leading to cargo diversification. The share of coal in APSEZ’s cargo reduced to 36 percent in FY23 from 41 percent in FY16, stated MOSL.

Prioritising growth aided by continued growth levers: As per the brokerage, APSEZ has headroom for growth at its older port portfolio (FY23 utilisation – Mundra: 59 percent, Dhamra: 70 percent, Hazira: 84 percent). It has undertaken various measures, such as 1) optimising existing berths at Mundra to handle higher containers, 2) improving evacuation infra at Dhamra, and 3) adding LNG/LPG terminals at Mundra and Dhamra to raise its volume and utilisation levels. As a result, the brokerage expects APSEZ’s utilisation levels to improve and has built in a 10 percent volume CAGR for its older ports of Mundra, Hazira, Dahej, and Dhamra over FY23–25.

Aiming to achieve east-west parity: APSEZ has been increasing its presence along the eastern coast in a bid to achieve east-west parity. With 1) the recent acquisitions of Krishnapatnam and Gangavaram ports, coupled with APSEZ’s ability to scale up operations and implement efficiency measures, as well as 2) the trans-shipment potential led by the commissioning of Vizinjham, the eastern coast is poised to significantly boost its volumes. It estimates the three ports to contribute 95 mmt to APSEZ’s volumes in FY25.

Transforming into a complete solutions provider: Adani Logistics (ALL) has gradually evolved to provide end-to-end logistic services, encompassing: a) container train operations (CTOs), b) container handling through logistic parks, and c) warehouses that provide storage space and trucking solutions for last-mile connectivity, said MOSL. ALL plans to expand its footprint and build a pan-India presence in the form of logistic parks and warehouses. These strategic initiatives are expected to create synergies with ALL’s port operations, fostering higher cargo throughput and enhancing the overall efficiency of its logistics network, it added.

Estimates

The brokerage expects revenue to record a 15 percent CAGR over FY23–25, led by 1) a 12 percent volume CAGR at its ports, 2) SEZ income of ₹400-500 crore p.a., and 3) an uptick in its logistics business. EBITDA margin has been at 62–64 percent over the past five years. With operating leverage and efficiency measures, the overall EBITDA margin is likely to remain steady at similar levels over FY23–25. This would lead to a 15 percent CAGR in EBITDA over FY23–25. PAT, conversely, would register 22 percent CAGR over FY23–25, it predicted.

Valuation and View

"With the addition of new ports, improvement in utilization levels of existing ports and a moderating capex, the cash flow generation is expected to remain strong. We expect APSEZ to generate ₹38,300 crore of cumulative CFO over FY23–25, which would help keep its debt in check despite the recent acquisitions. We initiate coverage on the stock with a BUY rating and a TP of ₹1,010 (premised on 15x FY25E EV/EBITDA, in line with its historical average of 14x). APSEZ is extremely well-positioned to capitalize on the growth opportunities in the transportation industry," said MOSL.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.