Adani Port rally: A good time for investors to cash in

With a year-to-date gain of nearly 33 per cent, Adani Ports’ stock has convincingly entered the list of large-cap winners in 2017. Many factors have led to this rally, the most significant one being the closure of inter-corporate loans and advances.

While announcing the September 2016 quarter's results, the management promised its investors that loans extended to group companies, worth Rs 3,500 crore, would be fully repaid by the end of the financial year (end-March). The announcement on April 4 showed this had been done. Analysts view this development very positively, as a demonstration of the management’s commitment. Group stocks such as Adani Enterprise, Adani Power and Adani Transmission also recently touched their 52-week highs, as a ripple effect of closure on inter-corporate borrowings.

Also interesting is that Adani Ports’ stock price movement mirrors the 30 per cent year-to-date increase in the Baltic Dry Index, the global measure of change in the cost to ship various raw materials. This indicates the waterway trade is gathering momentum. An exploratory process is also on to set up a port in Malaysia, in partnership with MMC Port Holdings, a Malay infrastructure conglomerate.

While the earnings outlook is positive, with cargo volumes expected to rise even in the March quarter, the likelihood of new triggers are minimal. After a buoyant earnings season, the Street expects Adani Ports to show 11-14 per cent revenue growth and 23-24 per cent net profit growth in the March quarter. The momentum is expected to continue in FY18, though analysts at Macquarie feel net profit growth could be flat — Mundra Port, 80 per cent of the net profit, will have a marginal tax rate increase on exhausting a 10-year tax holiday.

While this is a technical factor, growth will largely be propelled by relatively newer additions, such as the container terminal in Mundra, the Kattupalli port and Dhamra port. As these take the focus off from coal import, given their concentration on container cargo, dry bulk (iron ore) and liquid cargo (crude oil), the dependence on coal (already reduced from 41 per cent in FY15 to 31 per cent at the end of the December ’16 quarter) might slip further to 26-30 per cent by FY20.

On the whole, the recent diversification plan to reduce its dependence on Mundra and coal shipment is shaping well. This will keep earnings and stock price stable. However, as gains from the new strategy are already priced-in, the Street will await fresh earnings triggers.

What could propel this is any meaningful ramp-up in coastal shipping operations, noteworthy reduction in debt (Rs 18,985 crore in FY17) or guidance on capital expansion plans. For now, looking at the recent developments and earnings expectation for FY18, the upsides seem capped. Trading at near a 52-week high, investors might be better off booking some profit in the counter. Analysts polled on Bloomberg indicate Adani Ports’ stock entails a downside risk of about seven per cent, as the average target price (the level the stock is expected to reach) in analyst polls since January is capped at Rs 333.