Abbott Point sale to help earnings at Adani Ports

Adani Ports and Special Economic Zone, a leading company in the port logistics business, with presence in key locations and owning huge infrastructure and capacities, is witnessing better times.

In the past three years, its share price hasn’t changed much due to growth concerns, delay in its SEZ plans and huge debt. However, a large part of these concerns is abating. The company reported a better-than-expected performance in the December 2012 quarter. It also announced plans to sell stake in Abbot Point, an Australia-based port operator with 50 million tonnes capacity, to bring down consolidated debt. The Street’s optimism is reflected in the share price, up almost 16 per cent in a week to Rs 150.

However, there is room for further gain. Analysts recently raised their fair valuation estimates to Rs 165-175 a share. But, this does not include the possible gains as a result of the stake sale in Abbot Point.

FY14: SCALE BENEFITS KICK IN
In Rs crore	Q3' FY13	% change	FY13E	FY14E
Revenues	1,340	52.1	4,509	6,230
Ebitda	904	51.6	3,040	4,158
Net interest cost	369	136.2	1,060	1,304
Net profit	361	12.5	1,277	2,068
EPS (Rs)	1.8	12.5	6.4	10.3
PE (x)	NA	NA	23.4	14.6
% change is year-on-year Source: Capitaline, analyst reports

Adani Ports has accumulated huge debt, largely raised to acquire Abbot Point for about Rs 8,600 crore in 2011. Since then, the debt has moved up four times, to Rs 17,565 crore in FY12, and by analysts’ estimates, the company could incur an interest cost of Rs 1,060 crore in FY13 (six times more than in FY11).

However, recently Adani Ports’ board of directors had, in principle, decided to divest a significant stake in Abbot Point to the promoters (the Adani family). If a deal materialises, it could alleviate the company’s 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 Abbot Point. Even on the basis of current borrowing cost of 4.5-5 per cent (for foreign debt), the company should save Rs 500-550 crore in interest cost, almost half of the projected outgo in FY13. This should add to the earnings as Abbott Point is loss-making; in the nine months to December 2012, it reported a loss of about Rs 250 crore, impacting Adani Ports’ consolidated financials.

Meanwhile, despite the slowing in India’s external trade, Adani Ports managed to report consolidated revenue and profit growth of 49 per cent and 13 per cent, respectively, on a year-on-year basis. This is explained by its locational advantage in handling coal and crude oil cargo, which continues to generate volumes, led by higher demand. For instance, domestic port volumes grew 29 per cent, led by a 103 per cent jump in crude volumes. Uptick was also seen in coal, as a result of Adani Power and Tata Power witnessing a rise in cargo to 4.5 million tonnes, compared to 2.5 mt a year before. Volumes are expected to remain high due to rising demand in the user industry, robust port infrastructure and recent capacity expansions.