InCred Equities downgrades Adani Ports stock to a ’reduce’ on rich valuation

Financial firm InCred Equities has downgraded Adani Ports and Special Economic Zone stock to a 'reduce' from a 'hold' earlier with an unchanged target price of ₹1,329 apiece, primarily due to the steep valuation of the stock.

In a report on June 17, InCred Equities pointed out that Adani Ports stock trades at 18.2 times FY25F EV/EBITDA versus six-year average one-year forward EV/EBITDA of 14.1 times.

The brokerage firm cut its EBITDA estimates for FY25/26F by 3 per cent each but maintained its target price of ₹1,329. It said its target price implies 15 times FY26F EV/EBITDA.

EV/EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortisation) is a financial metric used to evaluate the value of a company. This ratio is often used to compare the value of similar companies in the same industry, indicating whether a company is overvalued or undervalued relative to its peers.

InCred expects Adani Ports' EBITDA to rise 14 per cent annually over FY24-26F.

InCred expects Adani Ports' cargo to post an 8.5 per cent CAGR over FY24-26F.

"Our growth estimate may seem at odds with that over FY20-24 (17.1 per cent CAGR). However, excluding acquisitions over FY21-24, volume CAGR was 7.7 per cent. For Coal, we estimate 12 per cent CAGR (39mt) over FY24-26F from 158mt in FY24, above our 6.2 per cent per annum estimated growth for the sector, partly driven by a further ramp-up of Adani Power and Tata Power plants. For container, we estimate a 10 per cent CAGR versus a 7 per cent CAGR for the sector," said InCred.

InCred pointed out that despite the heavy capital expenditure (capex), Adani Ports' balance sheet remains healthy.

"Over FY22-24, the capex of ₹46,500 crore (including ₹27,600 crore of acquisitions) and ₹4,200 crore of dividends were funded by ₹28,100 crore cash profit, a ₹10,000 crore rise in net debt, ₹4,100 crore reduction in net working capital or NWC and ₹8,300 crore of share issuance for acquisitions," said InCred.

"While the steady improvement (fall) in NWC (net working capital)/sales from 51 per cent (FY21) to 9 per cent (FY24) is encouraging, we feel there is room for improvement as Gujarat Pipavav’s NWC/sales were (-) 34 per cent in FY24. 60 per cent of the capex over FY22-24 was funded via internal accruals. Despite a 55 per cent rise in assets, NED/EBITDA (net external debt-to-EBITDA) is benign. Related party dues were just ₹1,300 crore in FY24," InCred said.

Adani Ports share price trend

Adani Ports share price rose nearly 2 per cent in morning trade on BSE on Tuesday, June 18. The stock opened at ₹1,457.65 against its previous close of ₹1,430.30 and rose 1.9 per cent to the intraday high level of ₹1,458. Around 110:40 am, the stock traded 0.53 per cent up at ₹1,437.90 apiece. Equity benchmark Sensex was 0.32 per cent up at that time.

Until June 14 close, Adani Ports share price has surged over 93 in the last one year, significantly outperforming the benchmark Sensex, which has gained nearly 22 per cent in the same period.

Adani Ports share price hit its 52-week high of ₹1,607.95 on the BSE June 3 this year. The stock's 52-week low level is ₹702.85, which it hit on June 23 last year.

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