Adani Ports: Sailing beyond Mundra

Capex on newly acquired ports & expansion on eastern coastline strengthen its strategy

The year 2016 started on a tough note for Adani Ports and Special Economic Zone but, eventually, turned out as one of the best in recent times. 

While a positive forecast on debt reduction lent significant support in boosting sentiment, the important trigger was its diversification strategy. Just as its flagship, Mundra Port, was losing steam with the decline in coal import, some of Adani Ports’ relatively fresh capacities at Dahej, Hazira, Dhamra and Katupalli started to deliver, helping cushion the moderation at Mundra. 

Also, with the newer ports adding to volumes, the dependence on coal is gradually shrinking. In the next two to three years, the company plans to improve on its volume offtake in crude oil, container cargo and coastal shipping in a significant manner, while retaining its dominance in coal import.

After augmenting its capacity at the recently acquired Katupalli Port (Tamil Nadu), the focus shifted to another it acquired in 2014, Dhamra in Odisha. Iron, steel and coal are the key cargo at Dhamra, with current annual operating capacity of 22 million tonnes (mt). Dhamra now accounts for 10 per cent of Adani Ports’ volumes and 15-17 per cent of its stock price valuation. The plan is to increase the capacity to 35 mt by 2019. This will be primarily by increasing the share of non-coking coal cargo and leveraging its strengths at the east coast. This includes improving the rail network, essential to strengthen its coastal shipping plan. 

With such aggressive plans, analysts at CLSA feel Dhamra as a strategic asset is a play on 'value migration' in the sector. And, that Dhamra port's cargo mix and growth trajectory should resemble Mundra’s. Analysts at Kotak Institutional Equities have raised their volume target for Dhamra port by 5.8 per cent in FY18 and 12.4 per cent in FY19 (31 mt). 

And, if the diversification strategy holds up well, container cargo could be the next big driver for Adani Ports. Analysts at JP Morgan estimate the growth for container volumes would expand by 24 per cent over FY16-19, while coal and crude oil are likely to witness a four to six per cent volume growth. By ramping up its presence on the east coast, primarily Katupalli and Dhamra, coastal shipping volume are likely to grow by 10-12 per cent annually in the next three years. This is likely to translate into annual earnings growth of 10-13 per cent in the next two years. 

For now, all eyes would be on the results in the December quarter, third in the financial year. Q3 assumes importance for three reasons. One, to monitor the performance of smaller ports. Two, official expectation on the ongoing debt reduction exercise. Three and and more important, to gauge the possible impact of demonetisation on Adani Ports’ earnings.

The Street is currently divided on how the note ban could dent Q3 results. “We believe (it) will lead to weakness in export-import  trade, with export more impacted than import,” analysts at Nomura state. They’ve also lowered their India container trade volume growth estimate for FY18 to 7.5 per cent, from the earlier 8.5 per cent. 

However, IDFC Securities feels Adani could remain insulated, as its key ports have outperformed most public and private ones, gaining market share. Analysts feel clarity in the Q3 results could lead to another round of re-rating, given its attractiveness after the recent fall of 10 per cent from its 52-week high price. As many as 13 of 15 analysts polled on Bloomberg recommend a ‘buy’ after the note ban. Their average expectation of where the stock would go is Rs 336, about 18 per cent higher from the current level.