Adani Ports and SEZ, a leading player in the port logistics business with presence in key locations and owning huge infrastructure and capacities, is witnessing better times. In last three years its share price hasn’t changed much due to growth concerns, delay in its SEZ plans and huge debt in the books. However, a large part of these concerns are abating.
The company also reported better than expected performance in December 2012 quarter and announced plans to sell stake in Abbott Point, an Australia based port operator with 50 million tonnes capacity, to bring down the consolidated debt. The Street’s optimism is also reflected in Adani Ports’ share price, which is up almost 16% in last one week to Rs 150.
However, there is room for further gains. Analysts have recently raised their fair valuation estimates to Rs 165-175 a share. But, this does not include the possible gains that could accrue as a result of the stake sell in Abbott Point.
Adani Ports has accumulated huge debt, which was largely raised to acquire Abbot Point for about Rs 8,600 crore in 2011. Ever since, the debt has moved up four times to Rs 17,565 crore in FY12, and analysts’ estimates are anything to go by, the company could incur an interest cost of Rs 1,060 crore in FY13 (six times more than it incurred in FY11).
However, recently Adani Ports’ board has in principle decided to divest a significant stake in Abbot Point to the promoters (Adani family). Though details about the stake and valuation are not provided, this could help alleviate debt concerns. "We value Abbot Point at Rs 7,900 crore. Stake sale at higher valuations would be value accretive to our target price of Rs 172 a share," says Bhavin Vithlani of Axis Capital.
Of the total debt, about Rs 11,000 crore pertains to Abbott Point. Even on the basis of current borrowing cost of 4.5-5% (for foreign debt), the company should save about Rs 500-550 crore in interest cost, which is almost half of projected outgo in FY13. This should add to earnings as presently Abbott Point is loss-making. In the nine months to December 2012, Abbott Point reported a loss of about Rs 250 crore thereby impacting Adani Ports’ consolidated financials.
Meanwhile, despite the slowdown in India's external trade, Adani Ports managed to report consolidated revenue and profit growth of 49% and 13%, respectively on year-on-year basis. This is explained by it locational advantage in handling coal and crude cargo, which continues to generate volumes led by higher demand. For instance, domestic port volumes grew at 29% led by 103% jump in crude volumes.
Uptick was also seen in coal as a result of Adani Power and Tata Power witnessing increase in cargo to 4.5 million tonnes compared to 2.5 million tonnes a year ago. Volumes are expected to remain high due to rising demand in user industry, robust port infrastructure and recent capacity expansions.