– Recovery in volume growth seen in H2FY20
– Profitability to improve because of lower tax rate and better mix
– Contribution from new initiatives to support growth
– Strong balance sheet supported by cash in the books
This week’s tactical pick is Adani Ports & SEZ (Adani Ports). Its shares have corrected marginally after its September quarter results. During the quarter, the company’s overall volumes grew by merely 1 percent and company delivered 8.2 percent year on year growth in revenue which was lower than market expectations.
The company lowered its volume growth guidance to about 8-10 percent this year as against 10-12 percent earlier. Its shares corrected from levels of Rs 430 seen in October 2019 to current levels of Rs 372 a share.
These are attractive level considering that even at 8-10 percent volume growth, the company’s financial performance should look good due to contribution from other businesses and better realisations. It is now trading at 14.5 times its FY21 estimated earnings, which is near its historical low.
In the September quarter, it was the energy portfolio of coal and crude oil, which got affected due to lower offtake because of excessive rains and maintenance shutdown at the clients’ end. For instance, refineries were shut down as they were being upgraded according to the BS-VI norms. Barring energy cargo, container volumes were up by 12 percent on a year on year basis. Some of these issues which were seen in Q2FY20 are one-off in nature and we expect the company to perform better in the second half of the current financial year. Earlier in an investor call, the management had highlighted that refineries are now fully operational.
Strategic investments to yield higher growth
Another important point is the company has been generating substantial free cash flow from operations, leading to surplus cash reserves. The company has been utilising this cash judiciously by deploying it back in the business through the organic and inorganic routes. Besides, it has also kept a strict control over its net debt, which stood at Rs 22500 crore after adjusting cash in the books or 0.9 times its FY20 estimated networth.
In the current fiscal it aims to invest close to Rs 4000 crore. This will help company augment capacity at Dhamra, Kattupalli and Vizhinjam ports. Besides, it acquired Dighi Port and is looking to acquire stake in Concor’s terminals, which are up for privatisation.
In the logistics business it is operating four logistic parks and two more are under construction, which will be operational by the end of FY20. By the end of the September quarter the company was operating 50 railway rakes which will be increased to 60-plus rakes by the end of FY20.
Since fiscal 2017, its gross block (fixed assets) has jumped by about Rs 10000 crore to Rs 30000 crore by end-fiscal 2019. Another Rs 4500 crore is reported as capital work in progress, as of 31st March 2019. The company has deployed substantial cash strategically into different ventures, whose results should be now seen in the coming years.
A main risk is if throughput volumes decline because of a slowdown in economy or due to the problems facing external trade. A significant increase in debt led by aggressive expansion and acquisition strategy or a sharp drop in operating profits could impact its debt servicing ability.