After rating agency CreditSights dubbed Adani Group as 'deeply overleveraged', global brokerage house Nomura gave a thumbs up to Adani Ports.
In a recent report, Nomura noted that Adani Ports is transforming into an integrated logistic play and port volumes are trending above guidance. Nomura maintained a 'buy' rating on the stock with an unchanged target of ₹1,025.
However, it cautioned that the company may be requiring ₹23,000 crore in capex over FY23-25, leading to a capex-intensive phase. But concerns on Group leverage are overdone, it noted. It added that the firm is adequately de-linked from Group companies’ operational and stock performance due to improved governance.
In a recent report, Fitch arm CreditSights had stated that the Group has been investing aggressively across both existing and new businesses, predominantly funded with debt, resulting in elevated leverage and solvency ratios.
In the worst-case scenario, overly ambitious debt-funded growth plans could eventually spiral into a massive debt trap and possibly culminate into a distressed situation or default of one or more group companies, it had warned.
However, in a contrarian view, Nomura said that group-linked concerns are subsiding for Adani Ports as cash flows improve, adding that the company is likely to stay on course with its governance commitments.
It further noted that Adani Ports has honored its commitment to not providing related-party loans since FY16 and also minimizing share pledges.
“With limited exposure to Group companies, we view Adani Ports as well insulated from Group performance. Further, over FY16-22 Adani entities’ cash flows have improved, and adequately cover interest expenses, and relative leverage levels (net debt/EBITDA) has dropped. Additionally, individual entities have also witnessed a lowering of share pledges, leading to adequate headroom to refinance maturing debt and less of a need to pledge Adani Ports shares in a major manner,” explained Nomura.
Nomura also informed that the logistics Adani Ports volumes stood at 91 million tonnes in June quarter and further monthly volumes are trending at 30-31 million tonnes. This rate is higher than 350-360 million tonnes guided by management for FY23, it noted.
“Further, Adani Logistics (ALL) has witnessed significant gain in container train market share from Concor. With a capex plan of ₹23,000 crore and a focus on logistics and warehousing, we expect market share gains to accelerate for ALL and warehousing over FY23-25F,” it said.
That said, the brokerage has slashed its FY23 EBITDA estimate by 14 percent but largely retains FY24 EBITDA estimates. However, it noted that lower-than-estimated volumes and higher debt are key downside risks to the stock’s prospects.
In the June quarter (Q1FY23), Adani Ports reported a 16.1 percent fall in consolidated net profit at ₹1,072 crore. The multi-port operator had posted a net profit of ₹1,278 crore in the year-ago period. Its revenue from operations declined marginally to ₹4,737 crore as against ₹4,672 crore in the same quarter last fiscal.
Sequentially, the profit grew 5 percent from ₹1,024 crore in the preceding quarter (Q4FY22). The EBITDA, however, clocked 11 percent YoY growth at ₹3,005 crore.
Even though CreditSights remained cautiously watchful of the Group’s growing expansion appetite, which is largely debt-funded. It retained its existing market performance recommendations on the two Adani entities under our coverage, Adani Green Energy (AGEL) and Adani Ports and Special Economic Zone (APSEZ).
“As we have looked deeper into the Group, its corporate structure, the credit risks and mitigants faced by the Group, we are not changing our recommendations on the 2 credits under our coverage on the back of this note. If the Group were to face any issues on a broader scale, or if either APSEZ or AGEL were to see continued increases in their leverage ratios/liquidity issues in the future, we may consider revising our stance/recommendations on the respective credits,” it said.
In the last 1 year, Adani Ports has advanced 12 percent and risen 15 percent in 2022 so far. In July and August as well the stock gave double-digit returns, rising 13 percent and 10 percent, respectively.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.