Adani Ports: High debt remains a key concern

The surge in advances and debt are bigger worries, apart from flat volume growth

The 12 per cent fall in Adani Ports and Special Economic Zone's stock is the firm's single largest decline in the past two years. It came on the back of research houses like Citigroup downgrading the stock from ‘buy’ to ‘neutral’ following a sharp increase in net debt, loans and advances. Domestic brokerages suck as Kotak Securities and Elara Capital, too, have reduced their rating from ‘buy’ to ‘add’ or ‘accumulate’.

While debt and related-party advances have historically been an issue with the Street, the 18 per cent increase in long-term debt (Rs 16,305 crore in FY16) and 28 per cent rise in loans and advances (Rs 4,490 crore including long- and short-term loans) in March’16 quarter caught analysts unaware. Kotak Securities says it would remain cautious on the sharp increase in loans and advances in FY16.

Related-party loans at Rs 2,529 crore in FY16 rose 16 per cent year-on-year, the management said in a concall on Tuesday. Although the share of related-party loans to total loans declined from 60 per cent in FY15 to 56 per cent in FY16, it is still big. While loans to Adani Agrifresh have partly reduced, advances to Mundra Solar Technology Park resulted in higher related party loans. As Adani Ports is a sponsor of the project, advances to this business might remain elevated.

  Operationally, too, the performance was barely satisfactory. Firstly, consolidated net revenue at Rs 1,860 crore grew at 12.5 per cent, helped by Rs 344 crore of income from the SEZ division, which leased land to Mundra Solar Park. Excluding this, revenue has declined eight per cent year-on-year (y-o-y). Likewise, net profit at Rs 914 crore (up 38 per cent y-o-y) has been helped by foreign exchange gains of Rs 139 crore in the fourth quarter of FY16.

Volume off-take at 37.48 million tonnes (mt) in Q4FY16 was dismal, up three per cent y-o-y, as coal volumes declined 15 per cent. What’s positive is the volume ramp-up seen in container cargo (up 24 per cent y-o-y). With operations at its newly commenced CT-4 terminal increasing, share of containers (35 per cent of total volumes) might compensate for the fall in coal cargo going ahead. Crude, agro commodities and coastal cargoes are also shaping up, albeit at lower pace. Realisations at Rs 402.61 per tonne also slipped 2.5 per cent y-o-y.

For FY17, the management forecasts 10-15 per cent volume profit growth. But, analysts remain cautious. Analysts at Emkay say transient pain of lower bulk volumes and pressure on port margin might continue in the near term, while adding that “incremental improvement in overall trade remains the key catalyst over the next 12-18 months”.