Adani Ports & SEZ continues to ride the hope wave

Foreign institutions continue to be positively inclined towards India’s largest multi-port operator, Adani Ports & Special Economic Zone Ltd, despite the 28 per cent returns delivered by the stock over three months.

In the same period, the broader markets have risen 9.5 per cent.

Adani Ports is currently trading at a 39 per cent premium to the broader markets, but this is no different from other port assets across the world, claims Morgan Stanley, as these assets tend to have stable cash flows.

Obviously, the expectations of a favourable government coming to power is one of the reasons, there are several fundamental factors that could also contribute to the stock’s continued outperformance.

A key driver of this stock is expected to be the steady growth in traffic at all its ports in India, Australia and Indonesia.

The company’s Mundhra Port handled 100 million metric tonnes of cargo in FY14 and further widened its lead over Kandla as India’s largest port.

On an adjusted basis, J P Morgan says, cargo realisations at Mundra Port have been fairly stable (Rs 360 a tonne) and port operation Ebitda (earnings before interest, taxes, depreciation, and amortisation) margins have been steady at 69-70

per cent.

The market is also factoring in higher traffic growth between FY14 and FY16, as the economic activity revives in India and across the world.

In its base case, Morgan Stanley expects the company’s traffic to grow by a CAGR of 16 per cent over FY14-16 and a five per cent CAGR (compound annual growth rate) in pricing for the special economic zone (SEZ) land with a target price of Rs 211.

JPMorgan estimates the company’s post-tax profit would grow at 19 per cent annually over FY13-17.

Analysts also like the fact that the company has an SEZ that is adjacent to its port.

Given that the new Land Acquisition Act has made land expensive, the SEZ should benefit whenever demand picks up in the near future. The company’s new projects are also on track.

In the third quarter, the firm completed a coal terminal at Visakhapatnam well ahead of schedule.

In fact, the Street believes Adani Port’s consolidated balance sheet can accommodate Dhamra Port without any extra debt.

However, if the assumptions on traffic growth and new projects pan out, the stock could correct.