Adani Ports: Improving balance sheet offers comfort

Reduction in borrowing, expanding share of non-coal products and non-Mundra ports are positives

The stock of Adani Ports is among the biggest large-cap gainers, with returns of over 30 per cent year-to-date. Data indicate that foreign portfolio investors (FPIs) have been buyers of the stock since September 2016, with a shareholding of FPIs increasing from 17.14 per cent as of September 30, 2016, to 23.25 per cent on March 31, 2017. The reasons for heightened investor interest is interesting and even ironic as Adani Ports, which was once liked for its strong hold in Mundra port, is now finding favour for its ability to reduce its dependence on the port. But, the most important point is Adani Ports’ ability to maintain its promise on reducing its loans to group companies and also the overall debt. 

A year ago, the management assured its investors that it would square off outstanding loans (Rs 3,700 crore) to its group companies. This being one of the long-time investor concerns, as it was a drain on Adani Ports’ cash flows; it was fully addressed by the end of FY17. Adani Ports’ net debt (gross debt less cash) has also reduced by Rs 1,830 crore to Rs 18,600 crore, bringing down the net debt-equity ratio to a comfortable level of 1.1x. That said, gross debt in absolute terms has only declined by 3 per cent to Rs 21,490 crore in FY17. Capital expansion of Rs 2,500 crore-2,800 crore is lined up in FY18, and could involve some debt funding. But, with the management being prudent on expansions (by avoiding acquisitions), leverage may not increase significantly going forward. 

Going ahead, Adani Ports’ ability to continue outpacing industry growth will be a key catalyst for the stock. In FY17, Adani Ports’ volume growth at 13 per cent was ahead of industry’s 8 per cent growth, led by non-coal trade (container, crude and other non-bulk facilities grew at 11-28 per cent year-on-year versus a 2.4 per cent decline in coal volume). 

A diverse product mix has also improved utilisation at ports such as Dahej, Hariza, Dhamra and Katupalli. Volume share of non-Mundra ports has risen from 31 per cent in the March 2016 quarter to 33 per cent in the March 2017 quarter. While operating profit margins increased to 73 per cent in the March quarter as against 65 per cent a year ago, partly helped by Rs 300 crore of foreign exchange gains, investors to realistically expect it be around 63-65 per cent going ahead.

There is one grey area though. While analysts say Adani Ports’ management has categorically denied any plans to fund Adani Power after the adverse Supreme Court ruling on compensatory tariff, some of them are still sceptical. “Given Adani Ports has demonstrated its commitment to reduce its funding to group companies, it is unlikely it would fund Adani Power’s losses,” says a fund manager. But, an analyst at Citi says, “The Supreme Court’s decision on Adani Power’s tariff petition has increased uncertainty. Until the final resolution becomes clear, it is likely to be an overhang on stock performance.”