Adani Port recovers 26% from recent lows ahead of Q3 results

The stock, which had been struggling with intense selling pressure and had declined by more than 50% in the past two weeks, received a boost from two brokerage firms that upgraded their ratings.

Shares of Adani Ports and Special Economic Zone Ltd, one of the cheapest stocks in the Adani Group, recovered as much as 26% from its lows despite its other group firms slumping amid allegations made by the American short-seller Hindenburg Research.

The stock price has surged 26% from its recent low despite a downgrade by S&P Global Ratings to negative from stable. However, Moody’s and Fitch Ratings maintained their credit assessments. Moody’s noted that the recent developments could hinder the company’s ability to secure funding, while Fitch stated that there is no immediate impact on the ratings and no expected changes to their cash flow forecast following the recent allegations of malpractice.

The stock, which had been struggling with intense selling pressure and had declined by more than 50% in the past two weeks, received a boost from two brokerage firms that upgraded their ratings. Recent developments, such as the release of pledged shares and positive statements by the company and some lenders to quell the turbulence in Adani Group firms, also helped to boost investor confidence, market sources said.

In a report on January 31, Credit Suisse upgraded the stock to “outperform” from “neutral”, citing attractive valuations and a robust outlook for earnings growth. The report stated that this growth is expected to come from a 9% cargo compound annual growth rate, 14% revenue and EBITDA compound annual growth rate, and over 20% earnings compound annual growth rate, driven by lower growth in depreciation and interest costs.

“Strong underlying business (178 MT volumes and 1H FY23 EBITDA of Rs65.5bn) with growth (Indian EXIM growth and company-specific share gains on incremental assets, etc.) provide downside support”, the Credit Suisse report said. ” We acknowledge risks related to (1) large capex plan in areas such as warehousing, (2) inorganic acquisitions (recent ones integrated well and were at reasonable valuation), (3) coal volumes (100 MT p.a.; may be sustainable given imported coal is cheaper at coastal locations)”

The stock also got an upgrade view from Kotak Institutional Equities to buy from add on 26 January report. The brokerage firm has kept its target price to Rs 860 a share. “We upgrade ADSEZ to a BUY (from ADD) at its current 11.5X FY2024E EV/EBITDA. ADSEZ is a strong player in India’s port sector, having attractive characteristics – pricing power, and prospects of privatization. ADSEZ also has a strong right to win in offering an end-to-end logistics offering. Our 13.5%/11.5% CoE/WACC assumptions provide comfort for any unforeseen risks that may arise over time”, Kotak said in its report.

Following the recent decline in stock prices, Adani Ports is now trading at an enterprise value-to-operating profit ratio of 10 based on the estimated enterprise value-to-operating profit for the fiscal year 2025. This is compared to the previous range of 10 to 16 times. Kotak said this suggests a flat year for stock returns in a bear-case scenario. “Our estimates bake in sub-7% volume CAGR over FY2020-25E in existing assets and 16% CAGR in overall volumes”, Kotak report added.

Adani Port is one of the most attractive stocks within the Adani Group. It currently has a one-year forward price-to-earnings ratio of 13.43, whereas other companies in the group, such as Adani Enterprises, trade at a much higher 40x one-year forward PE. Adani Green and Adani Total Gas have even higher valuations, at 156x and 88x respectively, while Adani Wilmar’s one-year forward PE stands at 39.99x.

Adani Port is India’s largest port developer and operator comprising 12 ports and terminals and 538 MMT of operating capacity. It has established a widespread presence throughout the logistics value chain and is steadily increasing its market share in the railway transportation industry.  The Company also possesses the largest container handling facility in India. Nearly 62% of the Company’s capacity is on the west coast of India and 38% on the east coast.

The firm’s cargo volume grew 26% to 312 MMT in FY 2021-22; The firm also intends to build railway tracks of 2000 kilometers, a 200% growth, and build 15 MMLPs, or three times the current count. It now holds a rail portfolio of 690 km, including 70 kms of rail lines acquired during the last year. On Earnings, the firm has reduced its net debt by operating profit to 3.4% in FY22 from 4.4% in FY16.  Aggregate consolidated operating revenues increased by 27% to Rs15,934 crore in FY22, backed by the cargo growth and additional revenue streams achieved following track consolidation. However, it reported a 5% decrease in net profit in FY 2021-22, mainly on account of adverse foreign exchange fluctuations.

” At APSEZ, we are attractively placed to grow our business even faster from this point onwards. In the space of just three years, we expect to increase cargo volumes 60% to 500 million metric tons, grow our rakes count from 75 to 200 and emerge as the world’s largest private ports company and the country’s largest transport utility by 2030″ the company said in its outlook.

Analysts said that Adani Ports is a strong candidate for purchasing the government’s share in Container Corp, due to its aspirations for growth in logistics, complementary port services, and its strong financial position with low debt. Following the Supreme Court’s approval for the company to bid on significant port projects, Adani Ports has acquired several assets including Haldia and Tajpur, and has also taken on Karaikal Port.

According to Kotak, the National Monetization Pipeline presents an opportunity worth Rs 15,000 crore for private sector players in the port industry, such as Adani Ports. The brokerage firm predicts that Adani Ports will secure Rs 5,000 crore worth of orders by the fiscal year 2025. The company has already won Rs 1,500 crore through the Haldia and Karaikal ports and plans to make further investments in the Karaikal port.

Adani Port was trading 6.5% higher ahead of its December quarter earnings on Tuesday. According to 9 Bloomberg analysts’ estimates, the company is expected to post revenue of Rs 4811.70 crore while net profit will be at Rs 1501.60 crore.

Recently the company shared its monthly updates and said the company reported handling approximately 27.6 million metric tons (MMT) of cargo in January 2023, an increase of 11% compared to the same period in the previous year. This represents a 9.96% rise from the 25.1 MMT handled in December 2022. From April 2022 to January 2023, the company processed a total of 280.5 MMT, representing a growth of 8% year-on-year.

Kotak Securities predicts a 13% increase in its comparable revenues for the year, partly due to its special economic zone (SEZ) income. The brokerage firm stated that growth in volume will be modest, with a low-to-mid single digit increase, as a result of weaker demand. However, the consolidation of Gangavaram port volumes from Q2 of the fiscal year 2023 is expected to result in a 15% year-on-year growth in volumes. The brokerage firm expects 30% year-on-year growth in revenues to higher realizations and the SEZ boost.

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