Adani Ports: More room for rerating

Earnings are rising and concerns on related-party loans are being addressed effectively

The strong results posted by Adani Ports in September 2016 quarter reiterate the earnings recovery trend which started in the June quarter. Results exceeded expectations, led by volumes rising 18 per cent year-on-year to 43 million tonnes. While the low-base effect is helping, a majority of analysts say that the change in strategy adopted last financial year is working and this would keep the momentum going for the company. Net revenues increased 21 per cent year-on-year to Rs 2,183 crore, while net profit expanded 61 per cent to Rs 1,091 crore. Operating profit margin also improved to 66 per cent (up 100 basis points year-on-year), driven by higher container cargo off-take and ports other than Mundra contributing to volumes. Blended realisation also rose from Rs 408 a year ago to Rs 460 in Q2.

Dependence on its Mundra port is reducing in a noticeable manner. The port accounted for 66 per cent of total volumes in Q2, as against 74 per cent a year ago. Also, even as coal remains a key commodity, its share in total volumes fell to 37 per cent in Q2, as against 42 per cent a year ago. On the other hand, container cargo is gaining prominence and accounted for 36 per cent of total volumes in Q2 as against 30 per cent a year ago. Rest of the volumes are contributed by crude oil and other cargo, including coastal shipping.

The shift from coal to container cargo was a deliberate attempt by Adani Ports to hedge itself from the overall decline in coal imports into India. Newer additions such as Dhamra (Odisha) and Kattupalli (Tamil Nadu) are also helping Adani Ports reduce its dependence on coal traffic and Mundra port. According to analysts at Edelweiss, volume growth momentum is expected to sustain for Adani Ports as Kattupali scales up, CT-4 is commissioned at Mundra and new service liners commence operations. CT stands for container terminal. Also, as the full impact of CT-4 and Kattupalli terminals will be pronounced next financial year, FY18 too is expected to remain strong. The addition of liquid cargo-handling capacity at Kattupalli, Dhamra, and Vizhinjam will also boost volumes and broad-base its service offerings. Adani Ports has also started construction of liquified petroleum gas (LPG) storage terminal at Mundra.

What’s also comforting is the Rs 1,040-crore reduction in related-party loans in Q2. With this, the total loans outstanding as of September 30, 2016, were at Rs 20,850 crore, down nine per cent since March 31, 2016. As these factors add up in favour of Adani Ports, analysts are increasing their expectations on the stock. Credit Suisse increased the per-share earnings target on Adani Ports by eight per cent after Q2 results. Fifteen out of 17 analysts polled on Bloomberg after results recommend ‘buy’ on Adani Ports with average target price of Rs 335.