Volume recovery, margin gains positive for Adani Ports

Corporate governance changes could lead to re-rating

The gradual recovery of port volumes and market share gains are expected to reflect positively on volumes and revenues of India’s largest private port operator, Adani Ports and SEZ (Adani Ports). This along with cost cutting efforts and higher realisations are expected to offset some of the pain on the volume front.

The bottoming out of cargo volumes is a key trigger for the company. After a slight growth of 1.7 per cent year-on-year in financial year 2019-20 (FY20) because of the global slowdown and trade wars, cargo volumes dipped 20 per cent due to Covid-19. While volumes con- tinue to be weak, they have recovered relatively, declining 13 per cent in July.

For Adani Ports, after a 27 per cent fall in the June quarter, volume increased 6 per cent in July. The management said the worst was behind and volumes should stabilise in August and September. Its acquisitions and expansions should add to overall volumes as the recovery gathers pace.

The acquisition of the Krishnapatnam Port in Andhra Pradesh is expected to be completed in a month, while Dighi Port in Maharashtra could take a couple of quarters. Analysts at Elara Capital indicate that a rebound in volume at existing ports coupled with the addition of Krishnapatnam and Dighi ports would drive annual revenue growth of 17 per cent over FY20-22 period.

Additionally, the development of the Vizhinjam Port in Kerala and

After a slight growth of 1.7% YOY in FY20 because of the global slowdown and trade wars, cargo volumes dipped 20% due to Covid-19

Myanmar project will be completed over the next year-and-a-half, and could offer further upside when fully on stream. A diversified cargo mix and presence across both the east and west coasts of the country not only helps Adani Ports derisk but also gain market share. Product mix, volume gains and its ability to raise prices should help improve margins.

Another trigger is measures taken by the management on corporate governance issues. The company has indicated that there would not be any related party loans and advances, while related party acquisitions will be carried out on the basis of well-defined policies. The management also said it will gradually reduce promoter pledges over a two-year period with the current pledge at 28 per cent. If this is achieved it could trigger another rerating in the stock, analysts at Nomura Research believe.