ADANI PORTS & SPECIAL ECONOMIC ZONE LTD : HOLD AND ACCUMULATE THIS FANTASTIC BUSINESS !!!

*As the author of this blog I disclose that I do hold ADANI PORT & SEZ LTD in my investment portfolio.


Scrip Code: 532921 / ADANIPORTS

CMP:  Rs. 259.25; Buy at current levels.

Medium to Long term Target: Rs. 285; STOP LOSS – Rs. 238.50; Market Cap: Rs. 53,667.34 Cr; 52 Week High/Low: Rs. 293.85 / Rs. 117.95; Total Shares: 207,00,51,620 shares; Promoters : 155,25,38,715 shares –75.00 %; Total Public holding : 51,75,12,905 shares – 25.00 %; Book Value: Rs. 45.09; Face Value: Rs. 2.00; EPS: Rs. 9.74; Dividend: 50.00 % ; P/E: 26.61 times; Ind. P/E: 31.72; EV/EBITDA: 18.01.

Total Debt: Rs. 8,266.77 Cr; Enterprise Value: Rs. 65,211.13 Cr.

Adani Port and Special Economic Zone LTD: The Company was incorporated in 1998 and is based in Ahmedabad, Gujarat- India. It was earlier known as Gujarat Adani Port Limited and was set up as a Special Economic Zone at Mundra. Gujarat Adani Port Ltd was then merged with Mundra Special Economic Zone Ltd in April 2006 and the company was renamed as Mundra Port and Special Economic Zone Limited, to reflect the nature of business. In January 2012 the company board renamed the company as Adani Port and Special Economic Zone Ltd. Adani Port and Special Economic Zone Ltd is a subsidiary of Adani Enterprises Limited from September 2010 and this company engages in the development, operations and maintenance of multi product special economic zone and related infrastructure in India. The company came with an IPO on November, 1st 2007 offering 4,02,50,000 equity shares of Rs. 10 each for Rs. 440 per share raising Rs. 1,771.00 Cr. The object of the issue were to achieve the benefits of listing on stock exchanges & to raise capital for construction and development of basic infrastructure and allied facilities in the proposed SEZ at Mundra; to utilize the funds for construction and development of a terminal for Coal and other Cargo at the Mundra Port; for contributing towards investment in Adani Petronet (Dahej) Port Pvt Ltd, Adani Logistics Ltd and Inland Container Pvt Ltd. The shares got listed on November 27, 2007 at Rs. 770 a share. The company declared split in face value of its shares from Rs. 10 to Rs. 2 on 17 May 2010. The company through its Mundra port located in Gulf of Kutch, India provides cargo handling & other value-added port related services. It operates port infrastructure facilities of bulk cargo at Dahej, Gujarat, handles bulk, liquid and containerized cargo, single point mooring, storage, and transportation of cargo by road, rail and pipeline. Adani Ports and Special Economic Zone Limited, together with its subsidiaries, develops and operates ports and port based infrastructure in India. The company operates a port at Mundra, Gujarat; a dry bulk terminal located in Dahej, Gujarat; a bulk and container handling terminal at the port of Hazira, Gujarat; and coal handling terminals at the port of Mormugao, Goa and Visakhapatnam in Andhra Pradesh. It also operates 4 bulk terminals with 15 berths to handle dry and liquid bulk cargo, 3 container terminals with 6 berths, and 2 offshore single point mooring facilities for handling crude cargo at the port of Mundra; a dry bulk cargo terminal with 2 berths at the port of Dahej; and 1 bulk terminal with 3 berths to handle dry and liquid bulk cargo, and 1 container terminal with 2 berths to handle container cargo at the port of Hazira. In addition, the company is developing a bulk terminal located in Kandla, Gujarat; a rail corridor; and road and highway projects. Further, it offers port services, including marine, handling intra-port transport, storage, other value-added, and evacuation services for terminal operators, shipping lines and agents, exporters, importers, and other port users; and infrastructure leasing and logistics services at the Mundra Port through its surrounding infrastructure. Additionally, the company provides multi-modal cargo storage-cum-logistics services; and non-scheduled (passenger) services through its aircrafts. The company also operates container trains on specific railways routes; and provides multi-model cargo storage and logistics services through the development of inland container depots at various locations. It operates a fleet of approximately 2517 vessels. In addition, APSEZL provides nonscheduled (passenger) services through its aircrafts. The company has sixteen subsidiaries as of March 2014. Adani Port and SEZ ltd is locally compared with Essar Ports ltd, Gujarat Pipavav Port Ltd, Pipavav Defence and globally with Avia Solutions Group Ab, DP World of UAE, Gemadept Corp, Kuwait and Gulf Link Transport Company, Luka Rijeka d.d, Wesco Aircraft Holdings Inc, Isewan Terminal Services Co., Ltd of Japan, Azuma Shipping Co., Ltd of Japan, Meiko Trans Co., Ltd of Japan, Rizhao Port Co. ltd; Shenzhen Chiwan Wharf Holdings Ltd.

Investment Rationale:

Adani Ports and SEZ is a part of global Adani Group, founded in 1988, India’s leading business houses with revenue of over $8.7 billion. Group’s logistics division denotes a large network of ports, Special Economic Zone (SEZ) and multimodal logistics - railways and ships. Adani owns and operates three ports – Mundra, Dahej and Hazira in India. The Mundra Port, which is the largest port in India, benefits from deep draft, first-class infrastructure and SEZ status. Adani is also developing ports at Mormugao and Kandla in India. India has a coastline of 7,517 kilometers (excluding the Andaman and Nicobar Islands), and with a port industry that has grown dramatically in past decade. India at present has 13 Major Ports and 187 Non-major Ports with total cargo traffic tonnage handled of about 934.88 mmt for the fiscal year 2013. Indian Ports handle approximately about 95 % of India's total trade in terms of volume and 70 % in terms of value. Most cargo ships that sail between East Asia & America, Europe and Africa passes through Indian territorial waters. Port traffic in India is set to rise about a CAGR of 15.9 % over FY12-14 and about 5.5 % for Non- major ports & about 22 % for major ports. It is estimated that in FY17 the cargo traffic may touch 1,758 million metric ton. India’s total external trade is estimated to have grown to $ 79,100 Cr in FY13 implying a CAGR of 17.7 % since FY06. The total volumes are expected to increase further as India continues its economic expansion, with real GDP growth in India is expected to be at an average of 7.3 % and 8.0 % per year for next 5 and 10 years from the fiscal year 2014, respectively, this will make India one of the fastest growing economies in the world. The consequence of strong GDP growth results in rising energy demand, and India currently meets about 75 %, of its total crude oil demand by imports. India’s crude imports touched 185 mmt in FY13 implying a CAGR of 8.7 % over FY07-13, and private ports have been good at attracting crude import traffic and Petroleum, oil and lubricants traffic at both major and non-major ports added up to 353.2 mmt in FY13. APSEZL is the largest private port in India in terms of volume. It handles the third highest container traffic in India and also handles the world’s largest fully mechanised coal terminal with a capacity of 60 MTPA. In FY13, Mundra port alone handled cargo traffic of 72. 3 MMT, from which container traffic contributed the most followed by Coal and Edible Oil, Chemicals and Petroleum, oil and lubricants. APSEZL at its port of Mundra handled 82.13 million tonnes of cargo in financial year 2013, a growth of 28 % year to year. Compared with the major as well as non-major ports of India, it ranks 2nd in terms of total cargo and container cargo handled during the year under review amongst all government owned commercial ports. The Special Economic Zone Policy was framed in April, 2000 with an objective to increase the exports, attract Foreign Direct Investment and to accelerate the economic growth of the country. The company's Multiproduct SEZ of 6,473 Hectare area at Mundra is the largest notified SEZ in the country.  The Exports from Mundra SEZ up to March, 2013 comes to about 7,357 Crores (cumulative). Mundra SEZ with its multi-modal connectivity including road, rail, sea port and airport is expected to attract more and more investments in the coming years. Further, based on approval from Government of India (GoI), the company has set up a Free Trade Warehousing Zone (FTWZ) in an area of 168.41 Hectare at Mundra. The development activities in the FTWZ SEZ have been initiated. The key success factors of the APSEZ is the strong availability of Draft Depth and Waterfront, it is closest port to Northern hinterland, the cargo generation is from its parent firm, they have long term cargo contracts. This makes the APSEZ a good pick in the port sector.

Outlook and Valuation:

Adani Port is the largest private Port in Indian with No.1 position in container cargo. Adani Ports is strategically located for global trade. Situated on the northern coast of the Gulf of Kutch on the west coast of India, it provides a convenient international trade gateway to Europe, Africa, America and the Middle East. Mundra has a deep draft (12.5 - 17 meters) which enables large vessels like panamax and super post panamax carriers to dock alongside its berth. The port has the world’s largest fully mechanised coal terminal with a capacity of 60 million tonnes per annum (MTPA). APSEZ is the only private sector port operator with presence across six ports in India. The company’s aim is to increase annual cargo handling capacity from 112.8 million MT in 2014 to 200 million MT by 2020. Company has its Economic Moat (A competitive advantage that one company has over the other companies in the same industry – by Warren Buffett) and with its expanding moats indicates a very strong sign of a future Multi-bagger stock. Recently, APSEZ acquired Dhamra Port Company Ltd (DPCL), located in Odisha a JV of Tata Steel and L&T Infrastructure Development Projects (L&T IDPL) for about Rs. 5,500 cr. Dhamra Port was commissioned in May 2011 with an 18 km approach channel and a dedicated 62.7 km rail link to Bhadrak. The DPCL as operator had been awarded a concession by the Odisha government to build & operate the port on Dhamra River in Bhadrak district for 34 years including 4 years of construction. This concession period may be extended by two additional terms of 10 years each. The first phase of construction was started in March 2007 with an investment of Rs. 3,500 Cr and following the acquisition the second phase of development will be initiated with 90 days and completion targeted in 30 months. This Port has two fully mechanized berths capable of handling coking coal, steam and thermal coal, limestone and iron ore. In FY14, Dhamra handled a total cargo of 14.3 million tonne. It also has 63 kilometers of private rail connectivity. Dhamra being a port outside federal government, DPCL is free to set its own rates. In comparison, rates at the Union Government controlled ports are set by the Tariff Authority for Major Ports (TAMP). Importantly, it is capable of allowing super cape size vessels, the biggest of the dry bulk ships with a capacity to load as much as 1,80,000 tonnes of cargo to dock. Dhamra after completion will be biggest success so far on the eastern sea board. This expansion will allow Dhamra Port to exceed 100 million tonnes of cargo capacity by the year 2020 and therefore allow Adani Ports to fulfil its stated vision of becoming a 200 million tonne Port business well before 2020. ADANI PORT is among the largest beneficiaries of an increasing demand-supply mismatch in India’s port capacity. APSEZ’s competitive advantages and attractive location plus connectivity provides a strong visibility of traffic for APSEZ. It should be noted that 90 % of APSEZ’s estimated traffic comprises of coal, crude oil, and container. Of this, coal and crude oil are not likely to see any impact from global macro concerns, while container traffic should continue to benefit from the shortage of capacity on India’s west coast. Amongst its other projects, the company sold its 100 % in the Abbot Point Coal Terminal (Australia) to its promoter group, Adani family. The equity portion in Abbot Point acquisition was around $235 million and rest was in debt, the entire equity and debt portion is transferred to the Adani family. The decision to sell off Abbot was to focus on the high growth Indian Port and logistics sector and to maintain its leadership position in India. Despite been in a capital intensive business, the debt situation for APSEZ is at very comfortable level at 0.89. Since inception, Mundra Port & SEZ (MPSEZ) has posted 35 % CAGR in revenue and with the stable cash flows from assured cargo and minimum working capital investment, it would be very important for the APSEZ to make more sensible capex in the future for growth. Based on the SOTP valuation method the value APSEZ comes at Rs. 285 per share, implying an upside of 10 % from current levels. The value of Mundra Port (core operating asset of APSEZ) alone comes at Rs. 147 per share, constituting 51.57 % of total value of APSEZ. Mundra Port, given its strategic positioning & diversified mix of cargo, enjoys competitive advantage and has a deeper economic moat & is expected to deliver strong volume growth. The company having delivered a strong track record of maintaining superior realization & margin in past and is expected to perform on track and the company has emerged as the preferred port due to superior infrastructure and technology, which facilitates faster transit of cargo, thereby reducing the overall cost of handling for logistic companies and end users. At the current market price of Rs. 259.25, the stock is trading at a PE of 25.41 x FY15E and 17.51 x FY16E respectively. The company can post Earnings per share (EPS) of Rs. 10.20 in FY15E and Rs. 14.80 in FY16E. The SOTP (sum‐of‐the‐parts) valuation of Adani Port & Sez comes at Rs. 285. One can buy APSEZ with a target price of Rs. 285.00 for Medium to Long term investment. 

SOTP Valuation :-

Business Subsidiary	Value Per Share (in  ₹ Rs.)
Mundra Port	147.00
CT3/4/5	21.00
SEZ	37.00
Adani Petronet (Dahej) Port	11.00
Adani Mormugao Port	3.00
Adani Hazira Port	19.00
Adani Vizag Coal Terminal	1.00
Ennore Container Terminal	1.00
Adani Kandla Bulk Terminal	3.00
Dhamra Port	23.00
Adani logistics	5.00
Cash & cash equivalents	14.00
TOTAL	285.00

KEY FINANCIALS	FY13	FY14	FY15E	FY16E
SALES (₹ Crs)	3,576.60	4,824.00	6,509.10	7,867.30
NET PROFIT (₹ Cr)	1,623.20	1,739.60	2,102.00	3,062.20
EPS (₹)	8.10	8.40	10.20	14.80
PE (x)	31.90	30.80	25.50	17.50
P/BV (x)	7.80	6.10	5.00	4.00
EV/EBITDA (x)	25.90	21.80	16.40	13.10
ROE (%)	29.40	26.10	21.70	25.40
ROCE (%)	9.40	12.00	13.80	15.00

I would buy ADANI PORTS & SEZ LTD for Medium to Long term for target of Rs. 285.00. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of ₹ 238.50 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

*As the author of this blog I disclose that I do hold ADANI PORT AND SEZ LTD in my investment portfolio.

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