Adani Ports & SEZ still offers value.

After a poor show in the last few years, the cargo traffic at major ports has seen good pick up and is expected to remain buoyant. During April to December period last year, all India cargo volumes registered a 7% year on year growth.

This also brings in more good news for India’s largest private port operator, Adani Ports & SEZ, which recorded strong 16% year on year growth in cargo volumes to 47.6 million tonne in Q3FY18. All three major segments namely container, coal and crude oil reported strong volume growth helping company to post 20.3% growth in revenues to Rs 2,689 crore.

With better demand, the company was able to maintain average port realisation at around Rs 407 a tonne as against Rs 413 a tonne in the corresponding quarter last year. Moreover, higher volumes and income from SEZ business led to improvement in operating margins by 270 basis points to 66.4%, which company intends to maintain or grow even higher with the higher asset utilisation, technology and automation.

Over the last few years the company has made huge investments in building capabilities at the pan India level. This is also a reason its assets and debt has doubled over the last five years. Now with the improving cash flows, it is reducing its debt and depreciation has been flat.

During the quarter the company incurred an interest cost of Rs 303 crore as against Rs 300 crore last year. Adani Port expects free cash flows of close to Rs 1200-1500 crore in FY18 as against Rs 675 crore free cash flow generated in FY17. This will be largely used for the repayment of the debt and paying dividends. By the end of FY18, its net debt to equity will fall below 1 time as against 1.1 time in FY17, thereby reducing the interest cost further and adding to profitability.

Compared to the industry growth, Adani is targeting about 1.5 to 2 times growth in volumes particularly in the light of the dedicated freight corridor, which will connect to north and help diverting some of JNPT traffic to Mundra.

It is strategically adding capacity in markets that are expected to see higher growth. For instance, it is adding another 3 million tonne crude cargo capacity at Mundra in FY19.

At Dhamra Port (acquired from Tata and L&T), it will initially start handling cargo at around 30,000-40,000 TEU and take it up gradually. Most of these initiative along with industry growth would result in higher earnings growth. The market is expecting an EPS (earnings per share) of about Rs 22-23 per share in FY19, which gives a price to earnings of about 20 times at current market price of Rs 436 per share, which is quite reasonable.