Most investors remain unsold on the stock for a variety of reasons, including the perception that the company is highly leveraged, has little visibility into its future earnings, and also that it has very high debt. However, we see these risks as already factored in to the stock’s current valuation. In our view, Adani Ports and SEZ continues to be an attractive investment by any measure. Its strong growth trajectory continues to remain high and visible across different business segments – including bulk handling, logistics services, stevedoring services and captive mining operations. Investors concerned about leverage might like to know that while gross debt-to-equity was ~900% at end of FY18 (end March), when adjusted for cash and investments it was only ~100% net debt-to-equity (vs EBITDA). This means that even with a highly levered balance sheet, the company’s tangible equity remains substantial (~15x EBITDA vs 6x for peers).
Why Adani Ports is a Buy: Strong Growth Continues To Remain High
Adani Ports and SEZ’s key business segments (bulk handling, logistics and stevedoring) have been growing at ~20% yoy on average since FY15. In FY19, we expect these segments to continue to deliver strong growth across most business metrics – including volumes, revenue, EBITDA and net profits. Bulk handling growth will likely be driven by higher coal imports, while logistics and stevedoring growth will likely be driven by higher volumes and revenues from containerized cargo. We are also positively surprised by the company’s growing revenues from captive mining operations, which continue to outperform expectations. Going forward, we expect these key business segments to continue to drive higher revenues, EBITDA and profits for the company – leading to significant stock appreciation.
Bulk Handling : The Key to Higher Returns
Bulk handling is Adani Ports and SEZ’s core business, which accounted for ~68% of total revenues in FY18. We believe bulk handling will continue to be the company’s main growth driver through the next financial year and beyond. The coal segment’s contribution to bulk handling volumes and revenues is likely to increase going forward. Adani Ports and SEZ already handles around ~40% of India’s imported coal, and we expect this to increase as new coal-fired power plants come online. We also expect bulk handling revenues to grow as coal prices increase, which will result in increased volumes and revenues per metric tonne.
Logistics Services : Growing Importance for India’s Exports
Logistics services is the next-most important business segment for Adani Ports and SEZ. This business generated ~17% of total revenues in FY18. We expect this segment’s contribution to grow going forward, given the importance of logistics services for India’s growing exports. Export volumes have remained strong so far during FY19, and we expect them to continue to grow going forward as the Indian economy continues to recover. Adani Ports and SEZ has been actively participating in the Indian government’s initiative to boost exports, and we expect this to result in increased volumes and revenues from this segment going forward.
Stevedoring Services : More Leverage Can Yield Higher Returns
The stevedoring segment generated ~12% of total revenue in FY18. We expect this segment’s contribution to increase going forward, given the growth of India’s containerized cargo. Containerized cargo volumes have been growing steadily in recent years and are projected to continue to rise going forward, as India’s economy continues to recover and become more globally connected. Going forward, we expect Adani Ports and SEZ to continue to invest more in this segment. We believe this will allow the company to increase volumes and revenues from this segment, which would lead to higher earnings for the company.
Captive Mining Operations : Low Risk, High ROI Investment With Leverage
Adani Ports and SEZ’s captive mining operations contributed ~5% of total revenue in FY18. The segment recorded positive EBITDA in FY18 and likely turned profitable in the first quarter of FY19. We expect this segment to continue to remain profitable, given the low-risk nature of the business. Captive mining operations likely generate high profit margins, given that the company only has to pay for equipment and operating expenses, while the revenue generated from this segment is likely very stable. We believe this segment may also be a source of low-cost and long-term funding for the company, given that it is profitable.
Conclusion
We continue to remain bullish on Adani Ports and SEZ, given the significant growth potential across the company’s key business segments. We believe the company is well-positioned to benefit from India’s rapidly growing economy and rising global trade. Given the company’s strong growth trajectory, we believe that Adani Ports and SEZ will likely deliver significant stock appreciation in the near future. In our view, the company is reasonably valued at current levels, and is well-positioned to be a top-performing stock in the near future.
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