Adani Ports & SEZ trades at low valuations despite strong earnings visibility

Jitendra Kumar Gupta

Moneycontrol Research

In 2018, the International Monetary Fund expects global trade volumes to grow at slightly lower pace of about 4.8 percent as against a strong 5.1 percent in 2017 but far better than the 2.2 percent growth in 2016. Despite rising trade challenges and shortage of railway wagons, Adani Ports & SEZ has been growing higher as a result of huge capacity build up at key locations.

Volume-led growth

Adani Ports, which is handling close to 24 percent of India's port capacity, reported an over 9 percent year-on-year growth in cargo volumes to 48.1 million tonne. Despite higher volumes, sales fell by about 12.2 percent as a result of the 81 percent decline in SEZ revenues, which tends to be lumpy. If one removes the SEZ revenues, which constitutes about 5.6 percent of total revenue in Q1 FY19, consolidated revenue is up 16 percent. Similarly, operating profits, excluding the impact of SEZ revenues, grew 23.4 percent, with margin expanding to 66 percent.

Core business remains profitable

Margin improves and remains on a growth trajectory as a result of cost controls and better utilisation particularly in case of new assets. Excluding Mundra Port, the rest (10 ports and terminals), which are largely new additions done by the company in the past, reported a strong 18 percent growth in volumes, which is quite encouraging.

Despite the significant improvement in the core business, profitability was hit as the company reported a 9 percent decline in profit to Rs 691 crore on account of non-cash adjustments relating to mark-to-market losses on its forex loan. If we remove the impact of foreign exchange loss and derivative charge from the reported quarterly numbers, like-to-like profit before tax has grown 7 percent to Rs 1,237 crore in Q1 FY19.

Outlook and valuation

The key to its growth is not just volumes, which are on a rising trend, but also improving utilisations at most of its facilities. Further improvement would lead to higher profitability and earnings as well as better return ratios. In FY18, the company's utilisation stood at 48 percent and generated a return on equity of close to 20 percent.

Valuations too remain supportive, based on the FY19 estimates earnings of Rs 20 a share. At the current market price of Rs 370 per share, the stock is trading at 18.5 times, which is quite reasonable.

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Original Source: https://www.moneycontrol.com/news/business/earnings/adani-ports-sez-trades-at-low-valuations-despite-strong-earnings-visibility-2816481.html