“Since there is always some premium for an acquisition, it is the possibility of overpaying for a group company that was being probed via questions,” analysts at Jefferies note in a post-deal analyst call.
Consequently, Citi has downgraded the stock from ‘buy’ to ‘neutral’, as it says the acquisition might lead to a resurgence of investor concern around related party transactions and capital allocation. This is why even if the business fundamentals are strong and AAL holds leadership position in the port logistics industry, the stock (Adani Ports) is losing its appeal.
For instance, after a weak September quarter, the December quarter (third quarter or Q3) was once again a strong show by India’s largest private sector ports operator. With total volumes touching 154 million tonne (mt) in Q3, analysts are confident that Adani Ports will meet its 2018-19 target of 200 mt. Led by 11 per cent volume growth in Q3, revenues grew by 5 per cent, while net profit jumped 31 per cent, driven by gains from derivative instruments.
Operating profit margin, on a sequential basis, remained flat at 65.3 per cent, off the historic 70 per cent average, as new ports are now contributing more meaningfully. Dependence on Mundra, Adani Ports’ flagship port, has gradually reduced and was at 65 per cent of volumes in Q3.
Smaller and newer ports, acquired in the last 3 – 5 years such as Kattupalli, Dhamra, Goa, and Tuna, grew faster by 9-25 per cent as against Mundra’s 6 per cent year-on-year volume growth, positioning Adani Ports favourably ahead of the industry.
However, a domestic fund manager says these fundamentals are priced in. “Unless clarity emerges on capital allocation and inter-group transactions, the stock may remain under pressure,” he adds. Therefore, even if current valuations at 30–35 per cent discount to historic levels seem appealing, these concerns override valuations.