Volume recovery, acquisitions key to Adani Ports and SEZ's growth

Reducing promoter pledge further can help drive stock gains

A slew of triggers from a continued recovery in the export-import (Exim) trade, strong performance in the December quarter, falling promoter pledge and the completion of the Dighi port acquisition in Maharashtra are supporting the stock of India’s largest port developer and operator, Adani Ports and SEZ (Adani Ports). The stock, which has gained over 80 per cent over the past year, hit its all-time high of Rs 676.6 intraday on Friday.

The prospects for Adani Ports depends on volume growth, sweating of its assets, which include 12 ports across the east and the west coasts, the revival of the Special Economic Zone business and potential gains from the logistics segment. In addition to organic growth, any acquisition, such as Container Corporation of India (Concor), should help it integrate its operations and help offer end-to-end solutions to customers.

The rise in exports and imports is a key trigger for volumes. Led by robust exports and a recovery in imports, the Exim trade grew 7 per cent in value terms in December. The acceleration in December helped take Exim trade back to pre-Covid levels, with exports posting 3 per cent growth in Q3 and imports moving into positive territory for the first time since the lockdown, according to analysts at Nomura Research.

Some of the gains from the rising levels of trade activity are reflected in the December quarter results. At 76 million tonne (MT), up 37 per cent over the year-ago quarter, the firm reported its highest-ever quarterly volumes. This volume growth includes the recently acquired Krishnapatnam port in Andhra Pradesh. Excluding this, growth was 20 per cent.

This led to an increase in the cargo market share to 28 per cent, from 24 per cent in the September quarter. In containers, the company’s market share went up 700 basis points to 43 per cent, led by an 8 per cent volume increase year to date, as compared to a fall in major port volumes of 4 per cent. 

Given the FY21 volume guidance of 245-250 MT, which is 10-12 per cent higher YoY, the March quarter volumes, too, should be similar to that achieved in the December quarter. If the company manages to do that, it will mean a 42 per cent YoY increase in Q4. 

What should enable the company to sustain volume growth are multiple deals that it signed across ports, such as Dhamra and Mundra. Analysts at CLSA believe the agreement with HPCL Barmer Refinery should result in a land monetisation deal in the short term and traffic of 5-18 MT per annum in the long term. 

Acquisitions, which are part of its ‘string of pearls’ strategy, play an important role in increasing the market share and shall help it drive volumes as demand comes back. The latest acquisition is that of Digha port in Maharashtra for Rs 705 crore. This follows the acquisition of Krishnapatnam port in Andhra Pradesh, the second-largest private port in the country, for Rs 12,000 crore. The buy should help Adani Ports balance its presence on the east and west coasts. 

The Krishnapatnam buy led to the revision of its FY25 guidance of achieving 500 MT (from 400 MT earlier), which should be achieved by diversifying cargo in new bulk categories and expanding, as well as adding shipping lines to boost container growth. The company is interested in buying a stake in government-owned Concor; however, lack of clarity on leasing and rentals can be a hurdle. 

While the SEZ segment revenues have collapsed, logistics revenues, which account for 7 per cent of the overall turnover, offer potential. Analysts at Edelweiss Research believe the segment can achieve 30 per cent annual growth over the next four years by leveraging its relationships with shipping lines, while creating infrastructure through an asset-light model. 

In addition to boosting revenues, revenue growth should also enable the company to expand its operating profit margins. The port segment, which accounts for 88 per cent of revenues, saw a margin expansion of 134 basis points to 72 per cent in the quarter, led by price hikes and cost-cutting efforts. The logistics segment reported a gain of 170 basis points to 25.9 per cent due to high margin routes and improved realisations. 

Free cash flows were at Rs 4,200 crore for M9FY21, and is expected to cross Rs 5,500 crore for the entire FY21. This is positive as the company will need the same to fund expansion at Mundra and Hazira ports, where capacity utilisation is high. While the net debt for the company is at elevated levels, the management has indicated that net debt-to-operating profit will be in the 3- 3.5 times range. 

Though the firm has brought down the promoter pledge from 48 per cent in October last year to 22 per cent per cent now, a further reduction below 20 per cent could act as another trigger for the stock, according to Edelweiss Research. 

While the prospects are strong, the sharp rise in the stock price leaves little room for an upside. Investors should await corrections before considering the stock for investment.