Adani Ports and SEZ Investment Research Report

A Ship being loaded at an Adani Port

Adani Ports and Special Economic Zone Ltd.

A Brief Value Investing Research Report
25^th January, 2017
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Company history and business:

Adani Ports and Special Economic Zone Limited is an India-based port infrastructure company. The Company is engaged in the business of developing, operating and maintaining the Port and Port-based infrastructure facilities, including Multi product Special Economic Zone (SEZ). Its segments include Port and SEZ Activities, and Others.

Its Others Segment mainly includes Aircraft Operating Income and Services. The Company also provides logistics and infrastructure that moves goods from the port to customers.

Its port services include marine, handling intra-port transport, storage, other value-added and evacuation services for a range of customers, primarily terminal operators, shipping lines and agents, exporters, importers and other port users. The categories of cargo handled at the Company's ports are bulk, containers and crude oil.

It operates approximately 10 ports/terminals spread across over five states of India, including Gujarat, Goa, Andhra Pradesh, Tamil Nadu and Odisha.

Panoramic Views of a port of Adani

Basic Filtering Criteria:

Adani Ports Share's Market Snapshot

	(Rs. Crores/ Rs. 10 million)	Minimum Required	Actual
1	Turnover	1000	7,255	Pass
2	Market Capitalization	1000	60,730	Pass
3	Price to Earnings Ratio	Less than 15	22.7	Fail
4	Price to Book Value	Less than 1.5	4.64	Fail
5	Dividend Yield	4-5%	0.37%	Fail

As per basic value investing filtering criteria, Adani Ports’s share has to be dropped as it passes only two out of the five filtering criteria. However as it is a constituent of the S&P BSE Sensex, we cautiously accept it for further evaluation.

A. Company Performance

Profitability Analysis

Adani Ports and SEZ Ltd. Consolidated Profit & Loss Account                                                   (Rs. Crore/ Rs. 10 million)
Operating Income (net)	7255.73	6151.98
Expenses :
Operating Expenses	1791.81	1656.21
Employee Benefits Expenses	282.17	237.16
Other Expenses	531.23	356.3
Total Operating Expenses	2605.21	2249.67
EBDITA	4650.52	3902.31
Depreciation and Amortization Expense	1079.44	911.68
EBITA	3571.08	2990.63
Finance Costs	1099.04	1175.06
Finance Costs as % of sales	15.15%	19.10%
EBT	2472.04	1815.57
Other Income	684.82	685.64
PBT	3156.86	2501.21
Tax	326.92	176.72
Profit After Tax (PAT)	2829.94	2324.49
Add: Share of profit from associates	-4.68
Fian al PAT	2825.26	2324.49
EBDITA as % to Sales	64.09%	63.43%
EBITA Margin	49.22%	48.61%
EBT Margin	34.07%	29.51%
PBT Margin	43.51%	40.66%
PAT Margin	39.00%	37.78%

Highlights:

1. For the market capitalisation enjoyed and inclusion in the BSE Sensex the turnover is very small.
2. All the profitability ratios are extremely strong and healthy.
3. Interest cost to sales is too high for our comfort at 15-20% of sales. Adani being an infrastructure based company and too aggressive after growth this is inescapable. Such high finance costs become the Achilles’s heel during economic downtrends.

Overall on profitability parameter the company’s performance is very good. 

Balance Sheet Analysis

Adani Ports Ltd. Consolidated Balance Sheet                                    (Rs. Crore/ Rs. 10 million)		Mar ' 16	Mar ' 15
Liabilities
Share capital		417.00	416.82
Reserves & Surplus		12,806.63	10,351.05
Total net worth	A	13,223.63	10,767.87
Minority Interest	B	142.88	158.98
Long-term borrowings		16,305.56	13,849.78
Deferred Tax		1,066.53	859.02
Other Long-term liabilities		606.35	684.56
Long-term provisions		73.07	292.78
Total long-term liabilities	C	18,051.51	15,686.14
Short-term borrowings		3,194.16	1,305.55
Trades Payable		404.84	362.34
other current liabilities		4,247.52	3,321.37
short-term provisions		99.93	479.94
Total current liabilities	D	7,946.45	5,469.20
Total Liabilities		39,364.47	32,082.19
Assets
Fixed Assets
Tangible Assets		18,339.24	17,807.66
Capital Work-In-Progress		2,386.63	1,275.55
Total Fixed Assets	E	20,725.87	19,083.21
Goodwill on Consolidation		2,599.72	2,599.72
Non-Current Investments		207.89	57.35
Deferred Tax Assets		0.07	-
Loans and Advances		7,696.77	2,490.13
Trade Receivables		22.00	438.86
Other Non-Current Assets		1,338.06	502.55
Total Non-Current Assets	F	11,864.51	6,088.61
Current Investments		136.57	202.87
Inventories		213.74	259.19
Trade Receivables		1,943.69	1,287.77
Cash and Bank Balances		1,290.95	633.78
Loans and Advances		2,335.97	3,743.80
Other Current Assets		740.60	663.45
Total current assets	G	6,661.52	6,790.86
Intangible Assets	H	112.57	119.51
Total Assets		39,364.47	32,082.19
Total Outside Liabilities	I = (B+C+D)	26,140.84	21,314.32
Tangible Net Worth	J = (A-H)	13,111.06	10,648.36
Current Ratio		0.84	1.24
Long-term Debt-Equity Ratio		1.37	1.46
Total Outside Liabilities/ Tangible Net Worth (TOL/ TNW)		1.99	2.00

Highlights:

1. Unlike the profit and loss statement, the balance sheet of Adani ports does not demonstrate strength.
2. Current ratio is not only far below the prescribed minimum number of 2 but has declined compared to the previous year.
3. Long-term debt-equity ratio is double the prescribed maximum 1.
4. Total Outside Liabilities/ Tangible Net Worth (TOL/ TNW) is well below the maximum 3 but still is very high.

Overall, the Balance Sheet of Adani Ports does not demonstrate strength.

Adani's Vizhinjam port in Kerala 

Cash Flow Analysis:

Adani Ports Ltd. Consolidated Cash Flow Statement                               (Rs. Crore/ Rs. 10 million)	Mar ' 16	Mar ' 15
Sales	7,255.73	6,151.98
Net cashflow-operating activity	2,578.63	3,057.07
Less: Finance Costs	-1,213.63	-1,200.22
Adjusted Cash flows from operations or free cash flows	1,365.00	1,856.85
Free cash flows as % to sales	18.81%	30.18%
Purchase of fixed assets (net)	-2512.25	-1228.93
Investments and advances towards acquisitions and subsidiaries	-1270.69	-2439.49
Deposits (net)	-1421.06	423.45
Dividend and Interest received	548.39	759.74
Net cash used in investing activity	-4655.61	-2485.23
Long-term borrowings (net)	2595.49	397.09
Short-term borrowings	1889.75	880.78
Dividends	-455.05	-206.91
Dividend Tax	-92.74	-35.18
Others	-276.62	-72.09
Net cash from financing activity	3660.83	963.69
Net increase/ decrease in cash for the year	370.22	335.31
Cash and equivalent begin of year	485.49	150.17
Cash and equivalents on acqusition of subsidiary		0.01
Cash and equivalent end of year	855.71	485.49
Dividend Distribution as % free cash flows	33.34%	11.14%
Dividend coverage from non-operating income	100.11%	313.83%

Highlights:

1. Adjusted operating or free cash flows have nearly halved from a health 30% in the previous year to 19% in the current year. This is not on account of cash profits but on account of a steep increase in all the classes of current assets or working capital constituents.
2. Fresh investments are being regularly made in fixed assets and acquisitions not entirely out of free cash flows from operations but predominantly out of borrowings (about 82% in the financial year 2015-16), which is disturbing.
3. Percentage of free cash flows distributed, as dividend is at a healthy 33.34% in financial year 2015-16 but poor in the previous year.
4. Dividend coverage from non-operating income is very health indicating that the company is in a position to sustain dividends even when operations result in a loss.

Overall Adani Ports/ cash flows indicate a mix of strengths and weaknesses, borrowings being the weakness

Dividend Coverage from non-operating income

(Rs. Crore/ Rs. 10 million)	Mar ' 16	Mar ' 15
Dividend	455.05	206.91
Net Non-Operating Income	548.39	759.74
Dividend Coverage from Non-Operating Income	100.11%	313.83%

The table shows that Adani Ports has enough non-operating income to support a minimum level of dividends.

On this parameter the company’s performance is good.

Percentage of Net Profits distributed as dividend:

(Rs. Crore/ Rs. 10 million)	Mar ' 16	Mar ' 15
Net Profit	2829.94	2324.49
Percentage of net profits distributed as dividends	16.08%	8.90%

The reason for poor performance is need for expansion and inadequate free cash flows,

On this parameter the company’s performance is extremely poor.

B. Market Conditions:

Adani Ports Share's Market Snapshot

Price to Earnings Ratio:

A PE Ratio of 22.7 is not favorable.

Market condition on this parameter is not favorable.

Price to Book Value per Share: With a price to book value ratio at 4.64 the market condition is far above he maximum permitted 1.5, especially for an assets heavy company, and therefore is unfavorable.

Market condition on this parameter is unfavorable.

Dividend Yield:

Dividend yield of 0.37% is very poor. The low dividend is caused both by stinginess in distributing net profits as dividends as well as high share price.

Market condition on this parameter is unfavorable, but the company also cannot be forgiven.

Distance from 52 week high: 

The share price is far away from the 52 week low and very near the 52 week high.

Market condition on this parameter is unfavorable.

Five-year price graph:

Adani Ports Share Five Year Price Graph

The price graph clearly shows that from the beginning of the calendar year 2014 the share price has galloped. After a brief correction in mid 2016 again the price is on the rise.

Overall the market condition on this count is not favorable.

Five-year share price return: 

Adani Ports Share Five Year Price Graph

Table shows that even though the share price of Adani Ports had corrected 5% in the last quarter, in the last three and five years the price had appreciated over 100%.

On this parameter the market condition does not bestow any benefit.

C. Final Conclusions:

1. Adani Ports and SEZ Ltd. is a good company that has been operating about 10 ports all along the Indian coast. Company is expanding aggressively and there is no doubt will continue to grow in the next few years.
2. Being a BSE Sensex constituent enjoys high degree of liquidity.
3. Enjoying very high market capitalization perhaps unjustified for the size of sales and balance sheet – indicating that the market is chasing the scrip fervently.
4. The company’s profitability ratios are all excellent and impeccable.
5. Company is resorting to heavy borrowings to sustain its growth plans which is a serious source of concern. The interest costs to sales ratio is at a very high level of 15-20% which could prove to be grave drain during troubled economic times.
6. Balance Sheet shows weakness with low ratios.
7. Cash flows show mixed results. Low free cash flows after dividends are only able to fund only 18% of expansion cost, rest coming from borrowings, which is not a good sign.
8. Uninterrupted dividend paying track record is not deep. Dividend yield is poor. Percentage of net profits distributed as dividend is poor.
9. Market conditions are not favourable – price is high. PE Ratio is slightly higher than 15 at 22.7 but price to book value ratio is too high at 4.64. Scrip is trading at 52 week high. Five year price graph and returns too are not encouraging.

D. Final Investment Advice:

The scrip cannot be simply rejected – there are many positives, especially the attractive profit margins. However, Funding growth through borrowings and distributing a miniscule percentage of net profits as dividend is not forgivable.

Final investment advice is do not Buy but Watch.

Post Disclaimer: Opinions expressed here are the author’s personal opinions. Market conditions have a great bearing on many end results discussed in this report. No disrespect is intended towards the company, it’s management. Investors are advised not rely blindly on the opinions expressed herein but to exercise their own judgment. Neither the author nor the blog shall be responsible for any loss suffered by either acting or not acting based on the opinions expressed herein.

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