Is Adani Ports Stock A Good Investment – Adani Ports and Special Economic Zone Limited, also known as APSEZ, is the largest port developer and operator in India. The company is a subsidiary of the Adani Group conglomerate and is headed by billionaire Gautam Adani. APSEZ operates 10 ports and terminals in India that account for nearly one-fourth of the cargo movement in the country. The company has ambitious expansion plans and is investing heavily to grow its port infrastructure and logistics capabilities.
Here are some of the key factors to consider while evaluating if Adani Ports stock is a good investment opportunity or not:
Robust Financial Performance
Adani Ports has delivered strong financial performance over the past several years. Here are some key financial highlights of the company:
- Revenue has grown at a CAGR of 19% over FY16-22 to reach Rs 15,934 crores in FY22.
- EBITDA has risen at a CAGR of 17% over the same period to Rs 10,906 crores in FY22.
- Operating margins have remained healthy in the range of 60-70%.
- Return on capital employed has averaged around 15% over the past 5 years demonstrating efficient capital allocation.
- The company has one of the strongest balance sheets in the sector with net debt to EBITDA of around 2.5x and interest coverage ratio of over 5x.
The robust revenue growth, high margins and strong balance sheet indicate the company’s strong fundamental position.
Dominant Market Share
Adani Ports enjoys a dominant market share in India’s major port sector. The company has a pan-India presence with operations in Mundra (Gujarat), Dahej (Gujarat), Hazira (Gujarat), Dhamra (Odisha), Mormugao (Goa), Vizag (Andhra Pradesh), Kattupalli (Tamil Nadu), Ennore (Tamil Nadu), Krishnapatnam (Andhra Pradesh) and Gangavaram (Andhra Pradesh).
APSEZ has a market share of over 25% handling nearly 300 million metric tonnes (MMT) of cargo across its 10 ports in FY22. The company is continuously gaining market share from competitors through capacity expansion and high operational efficiency.
The dominant market position offers strong growth visibility and pricing power for Adani Ports.
Strong Parentage of Adani Group
Adani Ports belongs to the reputed Adani Group which has significant interests in ports, power generation and transmission, renewable energy, mining, airport management, gas distribution among others. The group has ambitious plans to invest $150 billion over the next decade across its business verticals.
APSEZ is a strategic business for the Adani Group and a key driver of growth. The company is expected to benefit immensely from the expansion projects of the group and synergies across businesses.
The strong promoter backing provides a significant competitive advantage to Adani Ports.
Extensive Infrastructure at Ports
Adani Ports has created world-class infrastructure at its ports to offer integrated logistics solutions to customers. The ports are equipped with deep draft berths, robust road & rail connectivity, large storage areas, efficient loading/unloading infrastructure, liquid cargo handling facilities among others.
For instance, its Mundra port has over 85 berths, 2300 hectares of land availability, 64 km long rail network inside port and capability to handle dry, liquid and container cargo.
Such extensive infrastructure enables APSEZ to handle a diverse mix of cargo and positions it well to capitalize on India’s growing EXIM trade.
Foray into New Business Areas
In addition to strengthening its core port infrastructure and operations, Adani Ports has forayed into new business areas which provide future growth platforms. Some of these include:
- Logistics services – APSEZ provides end-to-end logistics solutions including first mile, mid mile and last mile connectivity through its wholly owned subsidiary Adani Logistics Ltd.
- SEZ – It has developed India’s largest multi-product Special Economic Zone (SEZ) at Mundra over 15000 hectares. More than 300 clients have setup manufacturing units in this SEZ across sectors like apparel, automobiles, chemicals etc.
- Inland container depots – APSEZ has set up container freight stations and private freight terminals across major cities providing intermodal transport services.
- Ports overseas – The company is also expanding overseas and developing port terminal projects in Sri Lanka, Myanmar and Bangladesh.
The new business expansion by Adani Ports will lead to significant growth in the medium to long term.
Strong Growth Visibility
Adani Ports has guided for strong volume growth ahead owing to its capacity expansion plans and participation in new tenders for port projects.
The company aims to achieve 500 MMT of annual cargo handling capacity and 100 MMT in container handling capability by 2025. This will make APSEZ the largest port operator globally by volumes.
Currently, it is executing expansion projects worth Rs 10,000 crores across its ports which will boost its volumes and profitability going ahead. It has a strong pipeline of new port projects as well which provides revenue visibility.
The healthy growth guidance by the management indicates strong expansion ahead for the company.
High Return Ratios
Adani Ports has delivered high return ratios consistently which underscores its strong capital efficiency. Here are some of the key return ratios of the company over the past 5 years:
- Average Return on Equity of 16%
- Average Return on Capital Employed of 15%
- Average Return on Assets of around 8%
The high capital efficiency coupled with its capacity expansion plans signals potential for healthy growth in shareholder returns.
The high efficiency in generating returns from its assets and equity invested makes APSEZ stock attractive for long term investors.
Industry Tailwinds
Adani Ports is well positioned to benefit from strong tailwinds in India’s ports and logistics industry including:
- Government push towards increasing port infrastructure and connectivity under Sagarmala project
- Rising EXIM trade and Make in India initiative to boost manufacturing investments
- Higher containerization leading to greater need for container handling infrastructure
- Growth in coastal shipping given high logistics costs of land transportation
- Increasing private sector participation in port operations due to PPP projects
APSEZ with its strong capacity, diverse cargo handling capabilities, nationwide presence and advanced infrastructure is well placed to tap into these industry tailwinds.
Valuations
Adani Ports currently trades at a trailing twelve month PE multiple of around 30x which is higher than its historical 5-year average PE of 22x.
The premium valuations reflect the company’s market leading position, high growth visibility and positive industry scenario. Further upside trigger can come from new capacity additions, foray into new business areas and de-leveraging of balance sheet.
While valuations appear slightly stretched in the near term, long term investors could still benefit from future growth in the company’s earnings and cashflows.
Overall, Adani Ports stock provides a good opportunity for investors to gain exposure to India’s rapidly growing ports sector. The company’s strong competitiveness, growth levers and future expansion plans make it an attractive pick for the long run. However, investors need to be cognizant of the premium valuations and closely track the execution of new projects and return ratios.
Is Adani Ports Stock A Good Investment? – FAQs
What is the current share price of Adani Ports?
The current share price of Adani Ports is around Rs. 820 (as of Nov 2022). The company’s market capitalization is approximately Rs. 1.7 lakh crores.
What is the outlook on ports sector in India?
The ports sector outlook in India is strong supported by rising EXIM trade, government thrust on improving port infrastructure under Sagarmala project and increasing containerization. This bodes well for leading port operators like Adani Ports.
How have Adani Ports shares performed historically?
Adani Ports share price has surged over 750% in the last 5 years significantly outperforming benchmark indices. The stock has delivered healthy returns to investors reflecting the company’s strong growth and fundamentals.
What is Adani Ports dividend history?
Adani Ports has consistently paid dividends to shareholders since 2013 and grown its dividend per share at 12% CAGR over the past 5 years. The current dividend yield is around 1%.
What is Adani Ports’ debt position? Is it a concern?
Adani Ports has a net debt of around Rs. 45,000 crores with a net debt to EBITDA of 2.5x as of FY22. While debt levels are elevated, the strong cash flows enable the company to comfortably service its debt. The balance sheet position is expected to improve with ramp up in new capacity additions.
Does Adani Ports face high competition?
Adani Ports dominates the private ports sector in India with a market share of over 25% handling around 300 MMT annually. It does face competition from players like AP Moller Maersk, Essar Ports and Gujarat Pipavav Port but has consistently grown its market share over the years indicating its strong competitive positioning.
Is the stock expensive right now?
Adani Ports trades at around 30x trailing twelve month earnings which is at a premium to its historical valuation multiples. While valuations appear stretched in the near term, its growth outlook remains strong. Investors need to weigh valuations along with its future prospects.
What are the key risks for Adani Ports?
Some of the key risks are execution delay in new projects, high debt, regulatory changes in the ports sector, global trade slowdown affecting cargo volumes and stretched valuations. However, its market position and promoter backing provide strong competitive advantages.
Conclusion
In summary, Adani Ports stock provides a compelling opportunity for long term investors to benefit from India’s port infrastructure growth story. The company boasts of a dominant market position, extensive port infrastructure, healthy return ratios and strong parental support. While competition and high debt remain concerns, its growth plans, strong cash flows generation and economic moats make it well positioned for the future. Investors with above average risk appetite can consider investing in Adani Ports for diversified exposure to India’s ports and logistics sector. However, reasonable entry valuations need to be considered.
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