The Gujarat-based Adani group’s flagship firm Adani Enterprises provides a play on some of the emerging sectors of the country, apart from exposure to a few other core segments. Its holding of 70-77 per cent stake in Adani Power and APSEZ (worth Rs 33,770 crore currently), which operate in two promising segments, accounts for a large chunk of its valuations (total market cap of Rs 41,427 crore).
With sentiments turning weak last year, interest rates rising and economic growth slowing, it led to Adani Enterprises’ stock under-performing broader markets, especially in the second half of 2011. However, given that its longer-term prospects look healthy and stock valuations are reasonable, investors with a one-two years perspective may consider it.
APSEZ: Better outlook but fairly valued
APSEZ has reported strong performance over the past three quarters and its future outlook continues to be robust. Says Amit Agarwal, analyst, Kotak Securities: “We believe the company would continue to deliver superior growth (29 per cent CAGR vs 10 per cent for global companies), superior return on equity (20 per cent plus versus 15 per cent for global companies) over FY11 to FY13.”
| STRONG GROWTH | |||
| Rs crore | Adani Ent | Adani Ports | Adani Power |
| Revenues | 28,718 | 1,841 | 2,951 |
| % chg y-o-y | 70 | 44 | 136 |
| Operating profit | 3,963 | 1,256 | 881 |
| % chg y-o-y | 77 | 44 | 27 |
| Net profit | 1,530 | 839 | 258 |
| % chg y-o-y | 6 | 29 | -26 |
| P/E (x) (FY13E) | 12.0 | 17.0 | 13.0 |
| P/BV (x) (FY13E) | 1.7 | 4.5 | 2.2 |
| E: Estimates Source: Companies, analyst reports Note: Figures for nine months ended December 2011, except valuations | |||
The company has aggressive scaling-up plans to emerge as one of the largest port operators and total cargo capacity is expected to more than double by FY14 from 54 million tonnes in FY11. Faster monetisation of SEZ (land bank scale up to 32,000 acres) is also a key catalyst as the entire SEZ revenues are added to operating profit.
However, in the near term, the stock has limited upside. Says Bharat Parekh, analyst, Bank of America Merrill Lynch, in his report dated February 7: “We rate APSEZ as neutral as rebound in port traffic during FY11-14 and SEZ monetisation from FY13, that would drive its EPS at a CAGR of 30 per cent over FY12-14, is well reflected in its premium valuations at 14 times FY13 earnings. Besides, lower returns on Abbot Point Terminal acquisition and leveraged consolidated balance sheet (net debt to equity of 2.5 times) limit upside potential.” Compared to Rs 139 on February 7, the stock is now around Rs 143.
Adani Power: Fuel issues
Adani Power’s profitability in the first nine months of FY12 was hit by extremely disappointing performance in Q3, which witnessed significantly lower plant load factor on the one hand and almost doubling of fuel cost on the other, along with forex loss and higher fixed costs on account of commissioning of projects.
Going ahead, its performance will continue to be plagued by high fuel costs. Besides, it has lagged far behind its FY12 capacity addition target of 6,000 Mw (2,600 Mw in December 2011) pushing analysts to assume delays in capacity additions. Arun Kumar Singh, analyst, HSBC Global Research expects a higher proportion of coal from sources other than Bunyu (owned by Adani Enterprises) to 50 per cent from the earlier 35 per cent (due to lower production at Bunyu), which means higher spot coal purchases.
Analysts have, thus, downgraded earnings estimates for FY12 and FY13 in the range of 60-80 per cent and 40-70 per cent, respectively. Consequently, recommendation on the stock (now at Rs 75.85) is also downgraded and the target price is lowered by 15 per cent to average Rs 75.30. Unless issues relating to fuel (sourcing and cost) get resolved, the stock at best will track broader markets.
Adani Enterprises
Adani Enterprises has diverse interests spread across trading, coal mining, real estate, shipping, bunkering, city gas distribution, power generation, edible oil refining, grain storage and food processing. Its consolidated performance in FY12 has been healthy with strong growth in revenues and operating profit. However, a sharp rise in interest costs and depreciation has curtailed net profit growth. Going ahead, analysts are convinced about its long-term prospects and business strategy to drive growth.
According to Shankar K, analyst, Edelweiss Securities, domestic coal mining operations in FY13 will be the next big trigger. Says Venkatesh Balasubramaniam, analyst, Citigroup Global Markets: “We are in consonance with the company's strategy of forward/backward integration and exploiting the synergies in its ports, power, contract coal mining, coal ownership and coal trading businesses.” Above all, valuations are also reasonable.
