Analysts’ Take On Adani Ports’ Acquisition Of Gangavaram Port Stake

Analysts remained bullish on Adani Ports and Special Economic Zone Ltd. after it agreed to buy a Rs 1,954-crore stake in the Gangavaram Port from Warburg Pincus.

Windy Lakeside Investment, an affiliate of the private equity firm, will sell its 31.5% in the port to the Adani Group firm, according to an exchange filing.

Adani Ports is also in talks with promoters DVS Raju and Family for their 58.1% stake in the Gangavaram Port. The other 10.4% stake is held by the Government of Andhra Pradesh.

In FY20, the port handled cargo volume of 34.5 MMT, and generated revenue worth Rs 1,082 crore. Its operating income stood at Rs 634 crore, while margin and net profit were at 59% and Rs 516 crore, respectively. The port is also debt free and has a cash balance of Rs 500 crore.

Based on FY20 numbers, the transaction implies an EV/Ebitda multiple of 8.9 times and a P/E multiple of 12 times.

Adani Ports also announced consolidation of its rail track assets under one single entity.

While analysts said the acquisition of the Gangavaram Port stake was done at an attractive valuation, some were not enthused by the railway announcement. But the fact that it was not an all-cash deal gave them comfort.

Shares of Adani Ports gained as much as 10% pre-market open on Thursday but cooled off in the early minutes of trade. The stock is trading 1.7% higher as of 10 a.m. at Rs 741.95 apiece, and is up for the fourth straight session.

Of the 26 analysts tracking the company, 22 have a 'buy' rating and four suggest a 'hold', according to Bloomberg data. The stock is trading 17% higher than its 12-month consensus price target of Rs 666.9 apiece.

Here's what analysts had to say:

Citi

• Maintains 'buy' rating; hikes price target to Rs 935 apiece from Rs 755.
• Remains one of the top picks in Indian infrastructure due to scale, quality and market leading position.
• Likely to continue trading at a premium because the market is becoming more comfortable with the promoter group's financial situation.
• Promoter pledged shares have reduced to 12% from 37% at the end of FY20.
• Market leadership has been further cemented with increase in total cargo market share to 28% in Q3FY21.
• Cashflows remain strong and balance sheet is healthy despite higher debt due to Krishnapatnam acquisition.

Bernstein

• Maintains 'outperform' rating with a price target of Rs 735 apiece.
• Acquisition of Gangavaram port stake at attractive valuations.
• Gangavaram port is debt free, strong RoE and offers room for expansion.
• Two transactions are not too strategic and appear to be led more by the immediate value accretion and future scale-up potential.
• Cash use, extension of Mundra port concessions, lower-than-expected volume growth for coal and market share loss to JNPT are some key risks.

Macquarie

• Maintains 'neutral' rating with a price target of Rs 620 apiece.
• Acquisition multiples paid for two assets are much lower than current trading multiples.
• Transactions appear to be value-accretive.
• Transactions to improve one-stop end-to-end logistics offering that Adani Ports is trying to build.
• Key risk pertains to strong growth assumptions built over the next few years.
• As the company becomes bigger, organic market share gains will be tough as the company's fortunes will get more closely dictated by India's overall economic growth.
• Investors should be careful about discounting aggressive EPS growth over a decade-long timeframe and should maintain adequate margin of safety.

Antique Stock Broking

• Maintains 'buy' rating; raises price target to Rs 790 apiece from Rs 660.
• Gangavaram Port stake buy at very attractive valuations.
• Not very enthused with the acquisition of rail assets from promoter company.
• Consolidation of rail assets not being an all cash deal is a relief.
• Raises FY22/23 Ebitda estimates by 2-3%.