Adani Ports, a well-known Indian company specializing in port operations, has garnered a positive recommendation from global brokerage firm CLSA. The firm maintains a “buy” rating for Adani Ports’ stock, setting a target price of ₹878. This suggests an 8% potential increase in the stock value from its closing price of ₹809.60 on the BSE as of September 7th.
CLSA’s endorsement of Adani Ports is based on the company’s impressive performance expectations for the second quarter of fiscal year 2024 (Q2FY24). Despite a slowdown in global trade, Adani Ports appears to be on a solid trajectory. In August 2023, the company witnessed a remarkable 17% year-on-year increase in port traffic (13% YoY when excluding Haifa mergers and acquisitions).
CLSA emphasized that this surge in port traffic was primarily driven by container shipments and a diversified cargo mix, including gasification. Additionally, coal imports surged due to increased demand, improved feasibility, and government support.
Mundra Port, Adani Ports’ flagship facility, experienced an all-time high in traffic during August 2023. This surge was primarily fueled by increased container and coal traffic, driven by rising power demand met by more viable imported coal. Notably, logistics also stood out with a significant increase in bulk volume (up 42% YoY) and a 24% YoY increase in rail container traffic. CLSA believes that Adani Ports remains strategically positioned to gain market share and outpace the industry, warranting a reevaluation.
CLSA predicts a 50% growth in volume from fiscal year 2023 to 2026. This growth will be driven by various factors, including the inauguration of a new terminal at Mundra, the commencement of Vizhinjam operations, merger and acquisition activities (such as Krishnapatnam and GPL), and developments at Dhamra and Kattupalli.
Despite the uncertain macroeconomic environment, Adani Ports has upheld its guidance for double-digit growth in port traffic, revenue, and EBITDA. CLSA estimates revenue in the range of ₹14,500 to ₹15,000 crore, compared to their previous estimate of ₹14,000 crore for fiscal year 2024. CLSA views Adani Ports as a valuable asset with long-term port concessions, trading at a 43% discount on the price-to-earnings ratio compared to Container Corp. Additionally, Adani Ports appears attractively priced in terms of both PE and EV/Ebitda when compared to Concor.
It’s worth noting that Adani Ports’ stock is currently trading below its long-term average PE of 18.8 times and PB (price-to-book value) of nearly 3 times, compared to its long-term average PB of 3.1 times. This indicates a potential recovery following a significant drop, as observed by CLSA.
However, there are certain risks to consider. These include trade weaknesses, the viability of imported coal, the shift of cargo to Mumbai ports due to the start of the Dedicated Freight Corridor, and slow capital expenditure at Special Economic Zones (SEZ). Additionally, CLSA highlights concerns related to past related-party transactions and the promoter’s pledge of Adani Ports stock.
As of 9:40 am on the BSE, Adani Ports’ share price traded at ₹813.15, representing a 0.44% increase. While the stock has declined by approximately 1% this year, the broader equity benchmark Sensex has recorded an approximately 9% gain.
Adani Group stocks experienced significant losses in January and February this year following certain controversies. The Organized Crime and Corruption Reporting Project (OCCRP) recently reported that individuals with connections to the Adani family may have held substantial stakes in group entities, possibly in violation of the country’s regulations on maximum ownership by promoters in listed companies, through certain funds.