New strategy clicks for Adani Ports

Sustained volume growth, incremental gains from new ports and plans to reduce inter-corporate loans to keep stock momentum going

After its recent closing low of ~171 due to weak volumes in the business, analysts were perturbed on the way ahead for Adani Ports and Special Economic Zone. However, big investors were thinking differently. Foreign and domestic investors raised their stake from 12.07 per cent in the March quarter to 14.47 per cent in the  June quarter (Q1) of the current financial year. Q1 results confirmed their faith; the stock has gained 11 per cent against 1.2 per cent rise in the Sensex since its results and analysts have raised their earnings estimates.
When coal volumes started declining, Adani Ports began diversifying into dry and liquid cargo. The strategy paid off, with the share of coal declining in FY16 and further in Q1. So, despite coal offtake (37 per cent of Adani’s total volumes) declining yet again by eight per cent, year-on-year (y-o-y), container and crude oil volumes grew 16 per cent and 35 per cent, respectively, in Q1. This helped an overall volume growth of seven per cent to 42.3 mt and to diversify the revenue mix.

With volumes holding up, the management says it expects a full-year volume growth of 10-15 per cent (166-174 mt). Analysts at JPMorgan feel this target is achievable, as annualising of Q1 cargo volumes represents a 12 per cent y-o-y growth in FY17.
Introduction of new services for existing customers at the Mundra, Hazira and Kattupalli ports apart, expansion of operations at the latter two would support targeted growth. Kattupalli, a recent addition on the east coast, is expected to add 55,000 twenty-foot equivalent units (TEUs) of capacity every month by the end of FY17. While this is still only 36 per cent of capacity utilisation (of 1.8 million TEUs a year), it is an improvement from the current handling of 32,000 TEUs a month.

Likewise, Hazira, now handling 30,000-40,000 TEUs a month, will expand operations. Around four mt is expected from Dhamra Port by way of costal shipping (mainly coal). Adani Ports has also secured a contract from Tamil Nadu State Electricity Board for shipment of coal, adding muscle to its coastal shipping plan.
Higher participation from the new ports would compensate for volume losses at flagship Mundra port, where coal is the mainstay. Volumes at Mundra, still half of Adani Port’s revenue, dipped by 3.5 per cent in Q1. However, as Hazira and Dhamra had 15 and 67 per cent improvement in volumes, respectively, apart from the others posting a two-fold increase, this compensated. Growth in realisation remained flat at ~429 a tonne in Q1, while operating margins remained stable at 66.6 per cent. Seen against its peak margin of 68-69 per cent, monitoring the operating efficiencies will assume importance from here on.

Apart from operations, the management intends to reduce its related-party debts by ~1,000 crore in the September quarter. And, by the end of FY17, the management has assured that the bulk of related-party loans and advances will be trimmed. As of March, these were ~4,000 crore, while long-term borrowing was ~16,305 crore. If the issue is smoothened, it would strengthen the investment sentiment, as these have been long-time concerns.
While the recent stock run-up caps the immediate upside, analysts say the convincing return in performance should fuel a further rally. All 15 analysts polled on Bloomberg after the June quarter results have a ‘buy’ recommendation, with an average target of ~275 for the stock, now trading at ~268. Investors could await corrections for an entry into the counter.