Strong FY22 volume outlook to support Adani Ports' stock after correction

Street believes concerns related to promoter group, Myanmar are overdone

From its highs on June 7, the stock of Adani Ports and Special Economic Zone (APSEZ) lost over a quarter of its market cap in a matter of ten days. Since then, however, it has managed to recoup about 11 per cent of those losses.

The price correction was due to concerns related to the promoter group as well as its exposure to the Myanmar project. Though the investments in Myanmar may be an overhang in the near term, even if a complete write down is undertaken, the company indicated that the project accounted for 1.3 per cent of total assets of APSEZ. In 2020, prior to the coup, the company had signed a 50-year concession for the development of a container terminal at Yangon for an investment of Rs 2,000 crore.

On the governance front, Priyankar Biswas and Neelotpal Sahu of Nomura Research say that APSEZ is largely delinked from the group after improved governance and remains financially sound. They highlight that fund (frozen accounts controversy) with concentrated holdings in Adani Group as of year ended FY21 are not key shareholders in APSEZ.

Further, promoter pledges across group companies have come down as have promoter loans. With leverage levels coming down and revenue/operating profit improving, analysts don’t expect group entities to depend on APSEZ for funding.  

The other positive is the traction on the operational front. The company reported an 83 per cent growth in cargo volumes to 25.54 million metric tonnes (MMT) and similar quantum of growth for the quarter to 75.69 MMT. Even in the container segment, the company reported a 69 per cent YoY growth for the June quarter to 2.09 million twenty foot equivalent units (TEUs).

Analysts at Citi Research believe post the June quarter results, there is a likelihood that the company may increase volume guidance for FY22 which could lead to a stock outperformance. The company has guided for volumes of 310-320 MMT, up 27 per cent YoY; with organic growth expected to be at 9-10 per cent.

Citi Research highlights that the cargo volumes for Q1FY22 are up 15 per cent on a two-year annual growth basis and the container volumes are running well ahead of the run rate needed to exceed FY21 volume of 7.21 million TEUs. Most analysts expect the company to gain market share in line with the historical trends.

Brokerages believe that the reaction to group-related issues and the Myanmar project are overdone and valuations at current levels, given the growth prospects and improving financials, are attractive. The stock is trading at 18 times its FY23 earnings estimates.