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Analyst Corner: Adani Ports & SEZ: ‘Buy’ with DCF-based TP of Rs 910

Adani Ports re-rated back to 15-17x EV/ Ebitda in this period.

Adani Ports has underperformed the Nifty by 14% since questions were raised about the sharp appreciation of three FPIs holding mainly Adani Group shares. Group net D/E is 1.9x, vs 3.4x in 2015 when a material corporate governance issue cropped up. Such instances in the past have been buying opportunities, driven by business strength and the promoter walking the talk. We expect this to remain intact as port volumes and market share continue to strengthen. Buy.

Rise in inter-corporate deposits in 2015 saw valuations de-rate to 10x EV/EBITDA: Adani Power has been a weak link for the Adani group given reported losses. Adani Ports’ inter-corporate deposits (ICDs) rose 58% YoY to Rs 57 bn in 1HFY16 (Sep-15). The stock corrected by 45% on investor concern about minority shareholders bailing out Adani Power’s losses. Karan Adani (CEO) committed to unwinding the ICDs over 18-24 months.
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..that’s when restructuring gathered pace: Adani Enterprises had cross- holdings in Adani Ports and Adani Power, which was demerged in 2015 with Gautam Adani going on to hold a direct stake (vs via Adani Enterprises earlier). Adani Ports’ ICDs were brought down to nearly zero by May 2017 and the stock was up 80% from the lows. Correspondingly, the promoter’s stock pledges rose, pointing to minority shareholders’ interests being protected. Adani Ports re-rated back to 15-17x EV/ Ebitda in this period. On the current issue, management issued an official press release that the three foreign portfolio investor accounts are not frozen and that the reports are misleading and erroneous.

Promoter walked the talk post the Total deal: In 2020, the group committed to bringing down pledges to negligible levels on the basis that these should not be a permanent part of the capital structure. Total (the European petchem company) struck a $2.5-bn deal in January 2021 for a 20% stake in Adani Green and a 50% stake in 2 GW of operating solar assets. Promoter pledges subsequently dropped by more than half in all group firms, barring Adani Power, which is poised for delisting. Group debt is not as heavy as in 2015 when ICD issues cropped up. The promoter dropping pledges further is a positive trigger.

2.5x EPS growth in FY21-25E, trading below 16.7x avg EV/EBITDA: Our DCF-based Rs 910 PT implies 16.7x FY23E EV/Ebitda, which we think has further upside scope if market share gains surprise. Downside risk: 1) Incremental negative news flow on the FPIs; 2) Market share gain at acquired ports disappoints.

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