Adani Ports stock upbeat on warehouse expansion plan
Firm is looking to increase capacity by 150 times over the next five years
The Adani Ports and Special Economic Zone (ADSEZ) stock gained nearly 10 per cent after the company highlighted plans to rapidly scale up its warehousing infrastructure.
The country’s largest port operator is looking to expand its capacity from 0.4 million square feet to 60 million square feet (a growth of 150 times) over the next five years in the Grade A warehousing segment. Half of this expansion will come from its existing land bank (1,850 acres) or organic growth, but the rest will be from acquisitions.
In the warehousing space, brokerages point out that Grade A warehousing stock has grown at an annual rate of 20 per cent over the past five years and is expected to continue on this trajectory over the medium term. One of the key growth drivers recently has been ecommerce and the need for companies to build resilient supply chains. Grade A warehouses, which are technology enabled, are expected to help with this process and improve turnaround times.
In addition to the company’s strong port network, Antique Stock Broking’s Prateek Kumar and Saurabh Dugar believe that the diversified rail and a meaningful airport presence (with dedicated air freight stations) are reasons why the expansion could complement APSEZ’S existing transport utility chain.
The company plans to invest about ~13,000 crore in the warehousing business and expects about ~2,000 crore in operating profit with a return on capital employed of around 18 per cent. Realisations could be higher as the firm is looking at value added services and a one-stop shop for customer needs. Analysts at Edelweiss Research believe the warehousing business could contribute 8-10 per cent to APSEZ’S FY26 operating profit.
Given the large investments over a five-year period, cash flows would need to scale up. Ashish Shah and Vaibhav Shah of Centrum Institutional Research believe with ~10,000 crore of operating cash flows by FY23 and access to low cost overseas borrowings, APSEZ remains comfortably placed to fund its growth ambitions. They, however, add that there could be interim downward pressure on returns due to rapid scale up of plans in logistics/warehousing, but the impact could be mitigated by improving pricing, capex rationalisation and capacity utilisation.
Another near-term trigger for the stock would be the September quarter performance. The firm’s consolidated revenues are expected to grow about 68 per cent over the year-ago quarter. In addition to consolidation of Gangavaram and Krishnapatnam ports, a strong show at Mundra port led to the increase. While operating profit could grow by 50 per cent, the growth is lower than top line gain due to adverse product mix, according to ICICI Securities.
The warehousing move is positive and higher trade would boost port volumes, but investors should await traction on both fronts (volumes, pace of expansion) before considering the stock, which has more than doubled over the last year.