Kotak raises target price on Adani Ports; sees outperformance to continue

Kotak Institutional Equities has increased its fair value (target price) for Adani Ports and Special Economic Zone Ltd (Adani Ports) as the domestic brokerage firm believes that the Adani Group stock can continue to outperform for long, despite the weak start to the year for the market.

Adani Ports grew its volumes by 14 per cent on a year-on-year (YoY) basis in April-May 2024 versus the Indian market’s low-to-mid single-digit growth in this period, said Kotak. Addition of new assets would make YoY comps higher from Gopalpur, Dar es Salaam, Vizhinjam and Colombo, it said.

"These developments suggest prospects of high teens exit growth rates for FY25 and thus, upgrades to the low double-digit growth guidance," Kotak said. The brokerage cited management of Mundra Ports and assessment of master plans of other key ports of the company suggesting potential of growing existing capacity by about 5-6 times over time.

Shares of Adani Ports rose about 2 per cent during the trading session on Friday to Rs 1,431.20, commanding a total market capitalization of more than Rs 3.10 lakh crore. The scrip had settled at Rs 1,404.25 in the previous trading session on Thursday.

"We envisage prospects of sustained outperformance and margin uptick, as peers would require to add assets to grow—the same would increase the capital cost per ton for peers, as they win existing port terminals of the government through bidding or construct greenfield terminals," said the brokerage.

In its latest report, InCred Equities expected port volume CAGR in FY24-26F to be like that in FY20-24F. The main difference of growth over FY24-26F is in its coal estimate. The historic resilience of crude oil cargo to price volatility gives comfort. Neither the dip in thermal coal imports (FY20-22) nor the rise (FY22-24F) are structural, InCred said, giving a 'hold' rating on Adani Ports on the back of fair valuations.

Over the past decade, Adani Ports has won most non-major ports from private players, where large capacity additions can happen. It has done so at reasonable valuations on existing capacity, Adani Ports has added five assets in India over the past decade in Dhamra, Kattupalli, Krishnapatnam, Gangavaram and Sarguja Rail, adds Kotak

To recall, Index provider S&P announced on May 24 that it will include Adani Ports and Special Economic Zones in the Sensex index from June 24, 2024. In the upcoming BSE rejig, Adani Group-owned Adani Ports will be added in the Sensex index, replacing the IT firm Wipro on the same day.

The brokerage noted the trend of Adani Ports is incrementally focusing on creating land bank in logistics— Rs 15,000 crore or 5% of the market cap is the current outstanding exposure of standalone entities toward Adani Logistics. "We continue to value Adani Logistics at Rs 10,000 crore EV or 65 per cent of existing exposure to logistics of Adani Ports standalone," it said.

Kotak increased its volume estimates by 5-6 per cent for FY26 and FY27. The lower 2 per cent increase in FY25 volumes reflects the impact loss of two months of volumes of Gangavaram Port—the asset is expected to return to YoY levels of volumes in June. "We increase our fair value to Rs 1,650 from Rs 1,550 on higher estimates and higher reinvestment value," it said with a 'buy' tag.

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