————————————————————————————————-

• Date: 20-Sep-12.        CMP: Rs 115           Large Cap – Market Cap 23,450 crores
• Firm is valued at Rs 136 (18% over CMP)    
• Price Target is Rs 215 by Apr 2014, an 84% appreciation.                         
• Advice:  Medium Risk, High Gain stock. BUY with a 2 yr perspective

Executive Summary

Key Reasons to Invest:

• Adani Port’s Mundra Port & Indian operations are excellent infra assets with Sales, Profits and EPS up by 36, 42 and 44% CAGR over 5 years.
• Govt dominated Indian Port sector is overall constrained on capacity, speed and pricing.
• The large Australian Abbot Point acquisition comes from a conviction that the next phase of Port services growth will come from Australian Coal and Mining exports.

Risks:

• Additional debt of 9000 cr on the books, Australian currency and interest rates risk
• Full success of the Australian investment needs many things to fall in place – Coal mining by Adani Enterprises to start by 2014, PPA negotiations in Gujarat and capacity additions at Abbott Port.
• Environmental and Security clearances by Govt. of India

This report is an update of the May 30th 2012 report called Adani Port: Infra play at good valuations V2 by JainMatrix Investments.  

Adani Port – Description and Profile

• Adani Port and SEZ – (APSEZ) is Gujarat based with FY12 revenues 3269 cr and PAT 1093 cr (consolidated).
• APSEZ businesses include Mundra, the largest private port (64 MT in FY12), several Port-operating contracts, an SEZ area adjacent to Mundra port (6,500-hectare) and Abbot Point Port, Australia.
• Market share in India grew in FY12 to 11% from 10% in one year. It is #2 among all Indian ports, and #1 in terms of private ports in India. Promoted by Adani Group, APSEZ trades in a broad range of products, implying lower business risks. See Fig 1.

• It is also developing/operating terminals at Hazira, Mormugao and Vizag in India and Abbot Point in Australia. APSEZ as an operator now has a presence in six ports in India. Through these facilities APSEZ has increased its domestic market share in container handling to 18%, up by 3% in FY12.
• Being a private port, APSEZ is free to price its services, unlike PSU ports in India. It has ‘take or pay’ arrangements with many of the customers. This protects APSEZ from sudden drops in demand.
• Connectivity and logistical facilities connect the Port, berthing and storage facilities to Roads, Rail, Airstrip and Pipelines for goods transportation. Growth in Cargo was 49% in FY12. Table 2.

• The port has in place a dedicated automobile terminal for exports, currently being used by Maruti.
• The SEZ area is organized into a number of clusters to cater to different needs of Industrial groups.
• APSEZ enjoys Indirect and Direct Tax benefits designed to encourage infrastructure growth.
• The Shareholding pattern is Promoter group 77.5%, MFs/ DII 4.9%, FIIs 10.2%, Individuals retail/ HNI 3.7% and Bodies Corporate etc 3.7%. As per delisting norms, Promoter holding needs to reduce to 75% in a year.
• Adani Enterprises is the holding company with cross-holdings in Adani Power and APSEZ. The group has ambitions across Coal, Logistics and Power generation, and these 3 firms execute on this plan.

Events, News and Strategies

• Abbot Point coal terminal, Australia: APSEZ bought the Abbot Point Port in May 2011 in cash for A$1.8 billion (9000 cr). This coal terminal, of capacity 50 MMT with capacity increase provisions, will help transport coal from Australian mines to India. This purchase is expensive, but funded by lower cost Australian finance (6.5%). Refinancing of the loan was done with long-term loans of an AUD1.1bn and US$0.8bn loan. At the same time, a massive loan has been taken, that changes the financials and balance sheet of this company.
  • There is synergy with Adani Enterprise’s purchase of Linc Energy’s Galilee coal project, close to Abbot Point in Australia for $2.7bn in August 2010. This is expected to start producing coal by 2014. Also there is ample growth opportunity in the region, as the local government is mapping out a decade long plan to grow port terminals capacity to 385 MMT from the current 50.
• Coal demand in India is due to Power capacity increase. Domestic supply has not been able to keep up. So Coal imports have increased rapidly, projected at 185 MT by 2017 (99MT today), by the Planning Commission.
• APSEZ recently won a project for development of a dry bulk terminal at Kandla Port, Gujarat. With an investment of Rs 1200 cr., the terminal will have capacity 20 MMT and take 24 months construct.
• The 9MT HPCL‐Mittal Energy refinery in Bhatinda, was fully operationalized in Mar’12. Crude will be imported through Mundra and transported through the 1,017 km pipeline to the refinery.
• Mundra also expects higher coal volumes on account of the commissioning of additional phases at Tata UMPP and Adani’sMundra Power plants.
• Adani Group is exploring a listing of holding company Adani Enterprise on an overseas bourse, to raise cash and help reduce debt at a group level. If this succeeds, it will trigger a price appreciation.
• APSEZ vision is to have an annual cargo handling capacity of 200 MMT by 2020 (current 78MMT).

Industry Note:

• 95% of India’s international trade is done through the Sea Ports. Traffic projections for next 8 years are 11% growth CAGR (Shipping Ministry). As Imports and Exports grow rapidly, the constraint will be Port capacities.
• Mundra is able to provide port access to industries in Gujarat, Maharashtra and North Indian regions. Local competition to APSEZ is from Kandla, JNPT and Pipavav on the Western shores. But Kandla, JNPT and other govt. ports have not invested sufficiently in infrastructure due to government constraints.
• Pipavav Port is at an early stage of development. Also it is in South Gujarat and logistically more remote. Pipavav Port in Gujarat is owned by A.P. Moller-Maersk Group, is one of the largest container terminal operators in the world. Over the next few years, APM Terminals will transfer a lot of India business from other ports to Pipavav, and also build good infrastructure here.

Stock Valuation, Performance and Returns

• The IPO in Nov 2007 was very successful. It was oversubscribed 115 times, and provided listing gains. However it was aggressively priced, at 88 (Rs, adjusted). See Fig 3

• Volatile Prices – Share price rose post IPO to 264, fell to 50 in Nov’08, rose again to a high of 185 in Oct’10, before dropping to today’s 115. This last fall of 38% over 2 years was painful for investors.

• The port has rapidly increased business throughput over the last 5 years, venturing into new categories of goods, and working closely with importers and exporters to improve infrastructure.
• Over the last 5 years growth has been rapid, with Sales, Profits and EPS  up by 36, 42 and 44% CAGR. However, we notice a slowing down of these numbers in the last 4 quarters. However the margins have been steady, with Operating Margins at 70% and PAT Margins at 50%, for APSEZ standalone, Fig 4.
• IPO investors have seen a 4.5% CAGR return in price in five years since listing, see Fig 5. The Dividend has increased steadily, till the current 50%, i.e. Re 1 on FV Rs 2.

•  Debt-equity is 3.41 (sharply up due to Abbot Point purchase). This is high for an infra company, Fig 6.
• For infra sector, cash is critical. APSEZ has a poor free Cash flow due to high investments in operations and the Abbot Point purchase. EPS (adjusted) is up 48% CAGR in recent years.
• The PE has been in a range of 20-50 over 4 years. But current PE of 19.8 is at low end of this range. Fig 7.

• The chart (Fig 8) plots the market price against the adjusted EPS over a 5-year period.  EPS shows us a steady quarterly increase indicating stable business performance, but flattening after Dec 2011.
• Return Ratios are deteriorating – ROCE is 7.8% (14% in FY11) while RONW has stayed at 22%.
• With EPS growth slowing, the PEG (3Yr) is now at 0.55, indicates undervalued status.

Peer Benchmarking and Financial Projections

We have compared APSEZ with leading listed Peers, Chart 9:

APSEZ has high valuations. It has good ROE, but a high DE ratio, and does not stand out on any other parameters.

The Financial forecasts, Chart 10, are now inclusive of Abbot Point Port operations.

The Abbot Point projections embedded above indicate that by 2014, the project will start contributing to the bottomline. Repayment of loans will certainly take longer.

Risks

• The purchase of Abbot Point Australia is a massive bet on an Australian Port, and mining related exports from the region. A debt of Rs 9000 cr has been added to the balance sheet through the new subsidiary. The Coal mines by Adani Enterprises need to start producing coal by 2014. And Adani Power and Mega power plants in Gujarat need to import coal (involving renegotiation of their PPA agreements price with the Gujarat Government, as imported coal is costlier). Further there is Australian currency risk for the loan. Recently global coal prices fell, so some of the demand at Abbot Point may have fallen.
  • India is facing a massive power supply shortage, and Adani’s Coal and Port assets address fuel linkages needed for Power generation. In 2-3 years, the Abbot Point port should be working at full capacity (80-100MMT), feeding coal to Indian power plants. In the process, all these investments will bear fruit. In effect, Adani has set out on The Great Australian Adventure.
• EX-IM slowdown: With a global slowdown, the exports-imports from India have slowed over the last few quarters. This has been aggravated by events such as ban on Iron ore exports and USD appreciation resulting in some fall in Imports.
  • APSEZ will be able to grow domestic market share of exports, but depends on economic conditions to sustain volume growth. Energy imports may be resilient, e.g. Coal, crude.
• Gujarat High court in a May 2012 court order has stayed development work at APSEZ due to unauthorized construction over a 1,840-hectare enclave that was not vacant, and had no Central environmental clearance – this may delay additional construction for the SEZ area. It is also possible that Adani has been very aggressive in the growth and development execution.
  • Central environmental clearances are notoriously difficult to get in time. This is an unknown.
• In Aug’12 it was reported that India’s home ministry has barred APSEZ from participating in two major port project bids because of security concerns. This report has yet to be confirmed.

Opinion, Outlook and Recommendation

• Seaports are critical to India’s growth, as over 95% of imports and exports have to be transported by this route. The 6-9% GDP growth in India is now testing the capacities of Indian Ports. Also Govt. ports so far have been constrained in terms of capacity, speed of execution and pricing.
• APSEZ’s Mundra Port and Indian operations are excellent. APSEZ will capture market share due to spare capacity, good connectivity, excellent facilities and proximity to demand centers.
• It’s almost become routine in India that well established Corporates shake up the status quo and take up a large international acquisition. This invariably has a 3-5 year gestation period. Quarterly profits dry up and Investors see a drop in share prices. But Enterprises see this as part of a larger global strategy. (eg Tata Motors, Bharti Airtel, Hindalco, Suzlon, Renuka Sugar, Tata Steel, etc, etc). Some succeed and some fail.
• Similarly the Abbott Point acquisition is a large investment, which will soak cash for the next 2 years in terms of additional investments and interest. There are also associated business risks. But the plan appears to be well thought out, and investors with a Medium Risk appetite should BUY this stock with a minimum 2-year perspective. Investors with expectations of a quicker and steeper appreciation may be disappointed.
• EPS growth may slow to ~ 40% in the next 3 years.
• PE has fallen to new lows. The premium valuations commanded by APSEZ due to its pioneer status may only be regained over this Medium term.
• Price Projections:
  • Our valuation prices the share at 136. Thus today it is available at a 18% discount to CMP.
  • By Apr ’14, the price projection is 215, a 84% appreciation from CMP 

JainMatrix Knowledge Base:

Additional related research reports from JainMatrix Investments:

• KEC International – LINK
• BGR Energy Systems – LINK
• IRB Infrastructure Developers – LINK
• Yes Bank: The Brave Warrior of Indian Banks

Disclosure: It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it.

Subscribe to JainMatrix Investments, to receive such Investment Reports. SUBSCRIBE NOW See Offering

Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/