Inter-group transactions weigh on Adani Ports’ shares

Stock trades at 30-35% discount; inter-corporate transactions and debt remain key issues

Adani Ports and Special Economic Zone (Adani Ports) is among the most sold stock by domestic investors in February 2019, according to the recent data.

For analysts who were always wary of the company’s debt levels, inter-group loans and advances, and shareholding pledged by its promoters, these concerns once again resurface with the Adani Agri Logistics’ (AAL) acquisition.

The deal hasn’t been welcomed by analysts despite it promising inroads into the logistics sector, given that AAL has 45 per cent market share in modern agri-storage infrastructure.

The deal’s value at 11.6 times enterprise value to earnings before interest and tax, or simply operating profit, has drawn the Street’s flak.

“Since there is always some premium for an acquisition, it is the possibility of overpaying for a group company that was being probed via questions,” analysts at Jefferies note in a post-deal analyst call.

Consequently, Citi has downgraded the stock from ‘buy’ to ‘neutral’, as it says the acquisition might lead to a resurgence of investor concern around related party transactions and capital allocation.

This is why even if the business fundamentals are strong and AAL holds leadership position in the port logistics industry, the stock (Adani Ports) is losing its appeal.

For instance, after a weak September quarter, the December quarter (third quarter or Q3) was once again a strong show by India’s largest in Q3. private sector ports operator. Smaller and newer ports, With total volumes touching acquired in the last 3–5 years 154 million tonne (mt) in Q3, such as Kattupalli, Dhamra, analysts are confident that Goa, and Tuna, grew faster by Adani Ports will meet its 20189-25 per cent as against 19 target of 200 mt. Led by 11 Mundra’s 6 per cent year-onyear per cent volume growth in Q3, volume growth, positioning revenues grew by 5 per cent, Adani Ports favourably while net profit jumped 31 per ahead of the industry. cent, driven by gains from However, a domestic fund derivative instruments. manager says these fundamentals

Operating profit margin, are priced in. “Unless on a sequential basis, clarity emerges on capital allocation remained flat at 65.3 per cent, and inter-group transactions, off the historic 70 per cent the stock may remain average, as new ports are now under pressure,” he adds. contributing more meaningfully. Therefore, even if current valuations Dependence on at 30–35 per cent discount Mundra, Adani Ports’ flagship to historic levels seem port, has gradually reduced appealing, these concerns and was at 65 per cent of volumes override valuations.