The company completed the acquisition of Krishnapatnam Port in October at an EV/Ebitda of 10 times, and it has been value-accretive from Day 1, analysts said and believed Adani Ports has turned around its new acquisitions way better than estimates, thus warranting price target upgrades.
A reduction in promoter share pledges and efficient utilisation of cash flow would be key for a further re-rating of the stock, Jefferies said and upped its price target for the stock to Rs 525 from Rs 475. Jefferies said the acquired port has given significantly better returns and is turning out to be value accretive. Its price target suggests 16 per cent potential upside for the stock.
Nomura said it stays positive on the stock due to strong turnaround of new acquisitions i.e. KPCL and Dhamra Ports, and volume momentum. The global brokerage has upped its price target on the stock to Rs 530 from Rs 454.
“The approval of SBI funding for Adani Enterprise’s coal mine in Australia can pave the way for a higher fair value,” said Kotak Institutional Equities, which has revised its price target for the stock to Rs 495 from Rs 454.
“We expect new assets like Dhamra and KPCL to exceed 12 per cent ROCE by FY21 and FY22. In future, if the new assets like Dhamra and KPCL are turned around to achieve a steady ROCE of 16 per cent — the management’s target for KPCL is 20 per cent on a steady state– the stock would have a potential valuation range of Rs 540-560,” Nomura said.
On Monday, the stock closed at Rs 470 on BSE. It is a consensus ‘buy’ among analysts now, with 13 ‘buy’ and 11 ‘outperform’ ratings on the publicly available Reuters Eikon database.
The company’s KPCL Port is located on the east coast of India in Nellore district of Andhra Pradesh, nearly 180 km north of Chennai Port. It is largest private port on the East Coast and the second largest private port in the country.
The port, the company said, has an enterprise value of Rs 12,000 crore and the Ebitda for FY21 is projected at Rs 1,200 crore, resulting in an acquisition EV/Ebitda multiple of 10 times. Adani Ports has 75 per cent stake in the port.
Analysts said even excluding the KPCL acquisition, Adani Ports’ underlying port volume growth was strong at 22 per cent year-on-year for October and 10 per cent for November. Continuing strength in volume and improving imports provide comfort on growth outlook for the second half of FY21, they said.
“Cargo volume over October-November stood at 49 million tonnes, which was 85 per cent of the quarterly high of 58 million tonnes hit in the March quarter last year. With a similar run rate in December, it is likely to set a new record,” Elara said.
The company is targeting cargo volumes to reach 54-70 million tonnes in FY22-23 on strong customer relationships, cargo diversification, addition of new revenue streams and efforts to increase the proportion of sticky cargo in the overall mix. It expects to nearly double Ebitda for KPCL by FY2023 via operational efficiencies and cargo growth.
Margin expansion possible
Elara Capital said re-engineering and optimum utilisation of existing assets have led to Ebitda margin expansion for the company to 70 per cent in October, which was in line with the guidance against 54 per cent in January 2020.
“Without incremental capex, a reorganisation of operational processes, contracting processes and rationalisation of overhead resulted in Ebitda improvement of Rs 300 crore. There is scope of an expansion in Ebitda margin to 78 per cent by FY25, led by capacity expansion from 64 million tonnes to 100 million tonnes over next five years with a capex of Rs 750 crore and value addition through cargo diversity and capital management,” it said.
This brokerage has a price target of Rs 560 on the stock.
Pledge levels high
Data showed Adani Ports’ share pledge level for Indian promoters stood at 42.56 per cent compared with 39.54 per cent at the end of the June quarter. At its Q2 conference call, the company said by September 2021, the share pledge will reduce significantly. In the short term, there can be volatility due to realignment and it should start coming down by November, the company said.
Edelweiss Securities said a key risk to Adani Ports’ investment thesis is any further increase in promoter pledge, which stands at 43 per cent at present.
“If the company does manage to reduce share pledges to zero and maintains a 20-25 per cent dividend payout going forward, further de-risking may occur and equity beta may further reduce to 0.75 times, similar to those of Gujarat Pipavav Port and DP World (unlisted), in which case the bull-case fair value of Rs 562 may be justified, implying a 24 per cent potential upside from current level,” Nomura said.
Kotak Institutional Equities values Dhamra Port at 15 times FY2022 EV/Ebitda or 5.5 times equity after six years as Adani Ports’ asset. It values Krishnapatnam asset at 13 times EV/Ebitda on an Ebitda equivalent to the FY2020 base of Rs 1,200 crore and cost savings of Rs 300 crore. The brokerage sees such a multiple reasonable in the context of the 40 years residual life and first 20 years of static royalty regime.
“APSEZ continues to be on a structural growth trajectory on the back of inorganic growth, not to mention the extended gate operations. With the global trade momentum on the rise in the wake of economic recovery, APSEZ’s scale and leadership should allow it to exploit the opportunity. The long-term target of being an integrated logistics solutions provider remains the best-case scenario for investors,” Edelweiss said and raised its price target for the stock to Rs 520 from Rs 435 earlier.
Elara has raised its cargo volume estimate for FY21 to 241 million tonnes from 235 million tonnes earlier, and earnings estimate by 14 per cent for FY21E, 14 per cent for FY22 and 17 per cent for FY23.
“We expect FY20-23E revenue to grow at a CAGR of 15 per cent and earnings at a 25 per cent CAGR with the average ROE of 18.5 per cent,” the brokerage said and valued the stock at 15 times FY23 P/E.
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