Adani Ports and Special Economic Zone

Even though Adani Ports and Special Economic Zone Limited has been turning out a noteworthy performance over the years, the current tsunami of negative investor sentiment against the Adani Group is likely to affect the bottom-line 

APSEZ, which stands for Adani Ports and Special Economic Zone Limited, is the foremost operator of commercial ports in India, responsible for handling nearly 25 per cent of the country’s cargo movement. With a presence across 13 domestic ports located in seven maritime states, namely, Gujarat, Maharashtra, Goa, Kerala, Andhra Pradesh, Tamil Nadu and Odisha, APSEZ boasts the most extensive national footprint and hinterland connectivity. APSEZ’s port facilities are outfitted with cutting-edge cargo-handling infrastructure, capable of handling even the largest vessels that call at Indian shores. The ports are equipped to manage diverse cargoes, including dry cargo, liquid cargo, crude and containers, making them truly versatile.

Adani Logistics Ltd., a subsidiary of APSEZ, oversees the operation of three logistics parks situated in Patli, Haryana, Kila-Raipur, Punjab and Kishangarh, Rajasthan. With the capacity to manage 500,000 twenty-foot equivalent units (TEUs) each year, Adani Logistics’ business has been expanding rapidly. Over time, APSEZ has transformed into a provider of comprehensive port infrastructure services with the Mundra SEZ in Gujarat serving as a noteworthy demonstration of this evolution. Encompassing more than 8,000 hectares, the Mundra Economic Hub presents opportunities for investment as the most extensive multi-product SEZ, free trade and warehousing zone (FTWZ) and domestic industrial zone.

Thanks to its integrated services across three verticals – ports, logistics and SEZ – APSEZ has succeeded in forging partnerships with top Indian businesses, establishing itself as an undisputed leader in the Indian port sector. Alongside its proficiency in offering end-to-end logistics solutions, operational efficiency, cost-effective operations and synergies through acquisitions, APSEZ has received certification as a ‘Great Place to Work’ in the fiscal year 2021-22. The company’s young and dynamic workforce serves as a driving force, propelling it to greater heights.
 

Sectoral Analysis

The growth of the Indian ports industry has been significant in recent years, fuelled by the government’s push for improved infrastructure and increasing international trade. India’s long coastline of approximately 7,517 km has 12 major ports andnearly 200 non-major ports. Of these, the major ports, owned by the central government, handle 58 per cent of the country’s total cargo traffic, with the non-major ports handling the remaining 42 per cent. According to the Ministry of Shipping, around 95 per cent of India’s trade by volume and 70 per cent by value is conducted via maritime transport. 

In November 2020, Prime Minister Narendra Modi renamed the Ministry of Shipping as the Ministry of Ports, Shipping and Waterways, reflecting the importance of this sector. The Indian government has undertaken various initiatives to increase the ports’ capacity and improve their efficiency, including the Sagarmala Programme which aims to modernise ports, develop new ones improve connectivity and logistics, and promote coastal shipping and inland waterways. The National Perspective Plan for Sagarmala Programme includes developing six new mega ports in the country

The Indian ports and shipping industry plays a crucial role in the country’s trade and commerce and the government has allowed foreign direct investment (FDI) of up to 100 per cent under the automatic route for port and harbour construction and maintenance projects. It has also facilitated a 10-year tax holiday for enterprises that develop, maintain and operate ports, inland waterways and inland ports. The Indian ports sector is poised for continued growth, driven by increasing international trade, rising demand for containerised cargo and the government’s focus on improving infrastructure. Private sector participation and government initiatives are expected to further boost the sector’s growth in the coming years. However, addressing the challenges faced by the sector will be crucial for its sustainable growth and development.
 

Government Initiatives

The government has taken several measures to improve operational efficiency through mechanisation, deepening the draft and speedy evacuations. Some of the major initiatives taken by the government to promote the ports sector in India are as follows:

◆ In October 2022, the Cabinet Committee on Economic Affairs approved the development of a container terminal at Tuna-Tekra, Deendayal Port. The terminal will be built on a ‘build, operate and transfer’ (BOT) basis under public-private-partnership (PPP) mode.

◆ In August 2022, Minister of Road Transport and Highways Nitin Gadkari, Minister of Ports, Shipping and Waterways and Ayush Sarbananda Sonowal and Minister of State for Road Transport and Highways General (Retd.) V K Singh signed a tripartite agreement for swift development of modern multi-modal logistics parks (MMLPs) under the aegis of Bharatmala Pariyojna across the country.

◆ India has plans to invest USD 82 billion in port projects by 2035.

◆ Indian ports received cumulative FDI inflow worth USD 1.63 billion from April 2000-June 2021.

◆ In October 2021, the Syama Prasad Mookerjee Port, Kolkata, gave importers the opportunity to bring in vessels at the deep drafted anchorages located at Sagar, Sandheads and X Point.

◆ In October 2021, Adani Group announced that it wants to make Adani Ports and Special Economic Zone a net-zero carbon emitter by 2025 and power all its data centres with renewable energy by 2030.

◆ Jawaharlal Nehru Port Trust’s SEZ became the first-of-itskind operational port-based multi-product SEZ in India.

◆ The Competition Commission of India (CCI) approved Adani Ports and Special Economic Zone’s proposed acquisition of 10.40 per cent equity investment in Gangavaram Port in September 2021. The 10.4 per cent equity shareholding will be bought from the Government of Andhra Pradesh.

◆ APSEZ plans to become the world’s largest private port company by 2030 and carbon-neutral by 2025.

◆ In December 2021, India and Russia talked about collaborating on shipbuilding and inland waterways.
 

Financials

For the quarter ended December 31, 2022, Adani Ports and Special Economic Zone Limited reported a consolidated total revenue income of ₹5,051.17 crore, up 7.16 per cent from last year’s same quarter’s total revenue of ₹4,713.37 crore and down 10.58 per cent from the last quarter’s revenue of ₹5,648.91crore. The EBITDA for the quarter stood at ₹3,011 crore and witnessed a growth of 15 per cent from Q3FY22. The company reported a net profit of ₹1,336.51 crore in the latest quarter and fell by 12.95 per cent from the corresponding quarter last year. Out of the total revenue of operations of ₹4,786.17 crore, the port business contributed ₹3,936 crore.

The logistics business contributed ₹490 crore and the balance ₹360 crore was derived from its SEZ and operations and maintenance business. Out of the total EBITDA of ₹3,011 crore, the port business contributed ₹2,737 crore, the logistics business contributed ₹142 crore and the remaining ₹132 crore was from its SEZ and operations and maintenance business. The port revenue per tonne has increased by ₹58 year-on-year, which is a growth of 13 per cent. Of this, ₹15 per tonne is due to the depreciation of the rupee against the dollar and the remaining ₹43 per tonne is due to an increase in the share of high-paying customers and a higher volume growth outside the JV terminals. 

As of March 2023, the company is expecting a net debt of ₹44,000 crore, which takes into account the payment for Haifa Port, Tumb ICD Indian Oil tanking and the ongoing capex in line with the guidance at the beginning of the year. Regarding the company’s FY 2024 guidance, its CEO Karan Adani mentioned that they are expecting FY 2024 EBITDA to be in the range of ₹14,000 to ₹15,000 crore while the capex is likely to be in the range of ₹4,000 to ₹4,500 crore. The cash surplus generated during the year would be used to repay and prepay loans of ₹5,000 crore. This will result in a net debt to EBITDA ratio of around 2.5 times.
 

Outlook

In recent months, APSEZ’s stock price has been volatile, falling from its peak in June 2021. This decline can be attributed to a combination of factors, including concerns about the impact of the pandemic on global trade, rising fuel prices and the overall economic slowdown. Additionally, the controversy surrounding Gautam Adani and his companies has also affected investor sentiment. It should be noted that up to 75 lakh more Adani Ports shares have been pledged, bringing the total to 1 per cent of all shares with SBICAP. According to SBICAP Trustee officials, the additional pledge is a top-up to the existing collateral and no new loan was issued. 

SBICAP Trustee is a division of SBI Capital Markets, which is a division of State Bank of India (SBI). It is clarified that such a share pledge serves only as additional collateral security over and above the project assets and that SBI does not extend additional finance in exchange for such pledged shares. Allegations of corporate mismanagement, stock price manipulation and rising risks of highly leveraged books of some of the group companies, among other things, made a stir on Dalal Street. There is a risk that investor concerns about the group’s governance and disclosures are significant, and that new investigations and negative market sentiment will raise the cost of capital.

This has the possibility of limiting APSEZ’s and other group companies’ access to funding. Despite falling nearly 40 per cent from its recent high, it is still trading at a PE of 24 times, which is its 15-year median PE. As a result, bottom fishing is not cheap. The ROE appears to be declining and is currently below 15 per cent. The most recent quarterly numbers do not look promising, particularly the bottom-line figures. The corporate governance issue will linger for some time, and so expectations are low for a meaningful and long-term rally in the stock. Given the fact that investor sentiments for the group have turned negative as of now, we recommend SELL.