Adani Ports & SEZ Rating ‘Buy’; Firm largely insulated from Group entities

MSC Valeria, one of the largest container ships to visit India, docks at Mundra Port in Gujarat. The 165500 DWT (Dead weight Tonnage) ship measuring about 16 meters in length had come from Xingxang port in China. MSC Arica weighing 115518 DWT was the last biggest container ship to visit Mundra in January 2011. Express archive photo.

APSEZ’s share price has declined 15%+ from 11 June 2021 to 30 June (vs. NIFTY flat) after adverse media reports along with other Group entities despite management clarification on the news. We view the current price as attractive and we address some of the investor concerns over other Adani Group entities and the Myanmar project.

APSEZ likely to stay on course with its governance commitments: Mgmt had committed not to provide related party loans to Group entities in end-FY16 and has so far (FY21) maintained this commitment. Further, it has reduced promoter share pledges significantly from the peak levels of FY20 to currently below 10%. Thus, with negligible loans and advances to Group entities and minimal share pledges, we believe APSEZ is largely insulated from the Group’s performance.

Group entities have demonstrated strong cash flow growth and seem financially sustainable at present: Adani Group entities have registered strong cash flow generation as well as a reduction in relative leverage. Further, individual promoter pledge levels have also fallen over FY15-21, highlighting Group entities can independently meet financial needs. Further, APSEZ’s shareholding and those of other entities are different, thus carrying limited risk of concentrated fund holdings. Hence, we believe APSEZ’s financial performance is largely insulated from the Group entities.

Potential sanction impact due to Myanmar project seems overdone: We believe investments in Myanmar port have been adversely singled out by the media despite a UN report (2019) mentioning the military links of other leading Indian and international firms. The port concession was secured from the earlier democratic government and the maximum impact of a likely sanction on our valuation would be Rs 9/share. Trading at 10.4x FY23F Ebitda; maintain Buy with a higher TP of Rs 890

We cut our FY22F PAT by 13% as we align our volume estimates with mgmt guidance while raise FY23F PAT by 10% on lower depreciation. We continue to value port assets on a SOTP basis, applying DCF metrics, with cost of equity unchanged at 9.4%, to arrive at our higher TP of Rs 890, implying ~27% upside, and maintain Buy. Key downside risks are lower-than-estimated volumes and higher debt.