Stock Call. What makes Adani Ports and SEZ a buy, despite the current slowdown?

The current economic slowdown has largely been driven by weak domestic manufacturing activities. But a slowdown in other global markets and a decline in the global trade are also hurting the Indian economy.

Hence, Indian ports have been witnessing a drop in volumes this fiscal. Consequently, the investor sentiment around ports and logistics-related stocks has taken a beating.

But the correction has also opened up pockets of opportunities for those looking to invest with a long-term perspective. Adani Ports and SEZ (APSEZ),the market leader in terms of both installed capacity and the throughput (cargo volumes) handled, is available at reasonable valuation.

The stock of APSEZ has corrected by about 11 per cent (from its peak in June 2019) due to declining port volumes across the country. While the stock did see some intermittent rally on account of share buyback in September 2019, the euphoria was short-lived. The stock plummeted 14 per cent following weak Q2 numbers across the logistics space. However, the company continued to post numbers above the industry average, which is a key positive.

That aside, low-debt levels, good margins and capacity additions through the inorganic route (acquisition of Krishnapatnam port) make it a strong bet for the long term. The stock is currently trading at 17.5 times its FY20 (projected) EPS (earnings per share), which is at a discount to its three -year average of 19.6 times.

Krishnapatnam port buy

With its 10 strategically located ports and terminals, encompassing 395 million tonnes (MT) of installed capacity, the company accounts for about 24 per cent of India’s total port capacity.

The ongoing acquisition of 75 per cent stake in Krishnapatnam port, which has a capacity of 64 MT that can be expanded to 100 MT in the next five years, can also help increase its market share.

That apart, thanks to the huge land bank of 6,800 acres in the port, the capacity can be expanded to 250 MT.

In FY19, APSEZ’s ports cumulatively handled 208 MT of cargo volume, accounting for 22 per cent of the market share. During the same period, Krishnapatnam port alone handled 54 MT of cargo volume — it is the second largest port in the country after Mundra port, which is already owned by APSEZ.

Aside the ports business, the company also owns and operates three logistics parks and a special economic zone (SEZ), which together contribute 12 per cent to the consolidated revenues and about 4-5 per cent to the consolidated EBITDA.

With two other logistics parks (at Mallur and Nagpur) under development and the recent acquisition (December 2019) of 40.25 per cent stake in Snowman Logistics (which owns 30 per cent capacity of integrated organised cold chain service providers in India), the company plans to scale up its logistics business as well.

Healthy financials

Geographical (10 ports and three logistics parks across the country) and cargo diversification, highly integrated operations, and long-term customer contracts have helped the company’s cargo volumes grow above the industry’s.

During FY14-19 , the company’s throughput recorded a compounded annual growth rate (CAGR) of 13 per cent. Ports contributed about 81 per cent to the company’s consolidated revenues, which grew 18 per cent CAGR during the same period to ₹10,925 crore.

Given its years of expertise in mechanisation, the company enjoys a superior average turnaround time and lower pre-berthing.

That apart, super cape size, large containers to carry the dock, and reliable road, rail and air connectivity at all its ports help the company sustain its EBITDA (consolidated) margins at 60-65 per cent level.

Growth through the inorganic route — acquired Dhamra port in 2014 and Katupalli Port in 2016 — has been earnings accretive. Besides, the company has improved margins further by debottlenecking and mechanising existing operations of the newly acquired ports.

Similar measures towards achieving operational efficiencies in the Krishnapatnam port would help margins.

Despite being aggressive on acquisitions, the company has maintained healthy debt levels.

In H1FY20, the debt-equity ratio and interest cover were at 1.56 and 2.78 times, respectively.

While the acquisitions may increase debt by 18-20 per cent, Moody’s believes the refinancing risk is manageable because of the cash flow visibility, staggered nature of the debt maturities and the diversified funding sources of the company.

Weak Q2 near-term risks

However, near-term risks remain, given the current slowdown. In H1FY20, the company recorded 9 per cent y-o-y growth in total throughput at 109 MT (against 15 per cent in the same period last year).

Revenues grew 12 per cent y-o-y to ₹5,616 crore and EBITDA by 10 per cent y-o-y to ₹3,634 crore — in line with the management’s guidance for FY20 (consolidated). While near-term growth challenges could persist, APSEZ is well-placed to benefit from a revival.

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