Adani Port and SEZ - Infra Play At Good Valuations
Date: June 1, 2012
CMP: Rs118. Large Cap - Market Cap 23,600 crores
Advice: Medium Risk, High Gain stock at attractive entry point. Buy systematically.
Target: Firm is valued at Rs147 (a 25% discount to CMP); 181 by 04/13, and 231 by 04/14
Adani’s Mundra Port is the #1 private and #4 overall port in India. Over the last 5 years growth has been rapid, with Sales up by 32%, Profits 53% and EPS 49% CAGR. Debt Equity is 1.18 times. Growth prospects are good. The recent $2b acquisition of Abbot Point Port Australia will double the scope of operations. While uncertainty exists about the viability and returns from this, it facilitates coal imports into India, demand for which is expected to soar. A recent dip in price makes valuations attractive. Investors can hold on and even look at this fall as an opportunity to invest.
Adani Port - Description and Profile
- Adani Port and SEZ (APSEZ, formerly Mundra Port) is a Gujarat based firm with FY12 revenues of 2500 cr and PAT is 1177 cr (standalone). Consolidated turnover is 3209 cr.
- Promoted by Adani Group, its businesses include Mundra, India’s largest private port with volumes of 64 MT (FY12), several Ports operating contracts, Australian operations and an SEZ area adjacent to the port, which is being developed on an area around 18,000 acres. Market share grew in FY12 to 16.4% from 14% last year.
- APSEZ trades in a broad range of products, implying lower business risks. See Fig 1.
It is #4 among all Indian ports, and #1 in terms of private ports in India.
- Being a private port, APSEZ is free to price its services, unlike PSU ports in India. It has ‘take or pay’ arrangements with many of the customers. This protects APSEZ from sudden drops in demand.
- Connectivity and logistical facilities connect the Port, berthing and storage facilities to Roads, Rail, Airstrip and Pipelines for goods transportation.
- Over the last 5 years growth has been rapid, with Sales by 32%, Profits 53% and EPS 49% CAGR.
- The margins have been steady; see Fig 2 - Operating Margins (70%) and PAT Margins (50%).
- APSEZ and Adani group bought the Abbot Point coal terminal in May last year for $2 billion. It is synergistic with Adani’s purchase of Linc Energy's Galilee coal project for $2.7bn in August 2010. - The coal terminal, of capacity 50 MT a year, will facilitate the transport of coal from Australian mines to India.
- It is also developing ports at Hazira, Mormugao, Visakhapatnam and Kandla in India and Dudgeon Point in Australia, in terms of terminal creation or port operator.
- Vision - to increase the annual cargo handling capacity to 200 MMT by 2020.
- Major competition to APSEZ is from Kandla, JNPT and Pipavav on the Western shores. Mundra is able to provide port access to Gujarat, Maharashtra and North India based industry.
- Kandla, JNPT and other govt. ports have not invested sufficiently in infrastructure due to government constraints. Pipavav is at an early stage of development. Also it is in South Gujarat and logistically more remote.
- The IPO in Nov 2007 was very successful. It was oversubscribed 115 times, and provided listing gains. However it was aggressively priced.
- The share price rose to a post IPO high of 264, to 50 in Nov’08, to a high of 185 in Oct’10, to today’s 118.
- IPO investors have seen a 5% CAGR return in price in five years since listing, see Fig 5.
- The Dividend has increased steadily, till the current 50%, ie Re 1 on FV Rs 2.
- Debt-equity is 1.18 on Mar’12 (down from 2.7 at IPO time). This is good, for an infra company.
- For an infra company, cash is critical. APSEZ has improved Cash flow from operations at 44% and EPS (adjusted) 48% CAGR in recent years, see Fig 6.
- The PE range has been 20-50 over 4 years. Current PE of 21 is at the lowest end of this range.
- The chart (Fig 8) plots the market price against the adjusted EPS over a 5-year period.
- EPS shows us a steady quarterly increase indicating stable business performance.
- Healthy return Ratios. Return on Capital employed, ROCE is 14.6%; Return on Equity, ROE is 23%
- PEG is in the range of 0.43, indicating indicates safety and undervalued status
Peer Benchmarking and Financial Projections:
Punit Jain has compared APSEZ with leading listed Peers:
- APSEZ leads on Profitability, and Debt parameters. It also commands a premium Pricing.
- The Financial projections shared below are not inclusive of Abbot Point Port operation, details of which are not available in sufficient detail.
- Falling exports
- Gujarat High court in a May 2012 court order has stayed additional development work at APSEZ
- The Abbot Point Port in Australia was acquired for $2 billion, but there is insufficient clarity on funding /repayment schedule of loans.
- International business uncertainties, such as: new taxes by Australian government and fall in international Coal Prices.
- Recent rumours/ public reports against Adani Group were that it has powerful political linkages, and interests in illegal mining in Karnataka/ Andhra Pradesh.
Opinion, Outlook and Recommendation
- APSEZ will capture market share due to good connectivity, spare capacity, better access and good facilities.
- EPS may slow to 40-50% growth range over the next 3 years due to higher base effect. But this is also high.
- PE has fallen to very low and attractive levels, and combined with robust business performance makes this an attractive entry point.
- SEZ revenues are lumpy, driven by sale of land to industries. However the infrastructure provided and industrialization will drive this business.
- It is the nature of markets that sentiment makes share prices fall far below or appreciate far above the fundamental value. APSEZ is underpriced at these levels. In a falling interest rate scenario, APSEZ will continue to outperform as it lowers its cost of debt and delivers on projects.
- APSEZ is a Medium Risk, High Gain stock. At these levels and in this trajectory, it is a BUY.
- Punit Jain’s valuation prices the share at 147. Thus today it is available at a 25% discount.
- By Apr ’13, the price projection is 181, a 53% appreciation from CMP
- By Apr ’14, the price projection is 231, a 96% appreciation from CMP
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