Adani Ports share price: Jefferies maintains buy rating with price target of Rs 670

Adani Ports and SEZ Related Party Transaction Appears Expensive and Gangavaram Value-Accretive. The group transaction will be completed only if the majority of the minority shareholders approve. The implied 10.2x FY21E PB multiple for the rail company compares with Adani Ports’ 5.0x PB and Container Corp’s 3.4x PB. Jefferies maintains buy rating on Adani Ports with a price target of Rs 670. Adani Ports share price today 752, up Rs 22 or 3%.

Adani Ports made 2 announcements:

1) Acquiring a rail logistics company of the promoter group through a Rs 48 bn share swap transaction at Rs 675/sh (70.6 mn shares – 3.5% dilution)
2) 31.5% stake acquisition in Gangavaram Port for Rs 19.54 bn.

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Rs 59-60 bn EV value based on third party Deutsche Bank and BDO consultant reports at 10-14% WACOC:

Sarguja Rail Corridor (Sarguja), owned by Adani promoters, has a 70 km track length with a 50-year lease till 2065. It charges track access charge for transporting cargo and currently caters only to Rajasthan Rajya Vidyut Utpadan Nigam (RRUVNL) for its coal cargo. The contract covers RRUVNL’s 15 mntpa PEKB mine and is extendable to 40 mntpa. Sarguja’s FY20 EBITDA was Rs 3.6 bn, which management believes will be Rs5.2 bn in FY22E. Promoter holding will move up to 64.95% from 63.74% post the transaction.

Gangavaram Port acquisition implied EV/EBITDA is 9.3x FY21E vs. Adani Ports' 21x:

GPL is a 50- year port concession model, expiring in 2059. Adani Ports has acquired Warburg Pincus’ stake and is looking to buy out the promoter's 58.1% stake in the future. Gangavaram Ports operational capacity is 64 mntpa with a master plan capacity of 250 mnt. FY16-21E volume CAGR was 11% and FY18-21E CAGR at 8%. Coal is 61% of cargo with the balance being across other bulk categories. Ports’ FY20 59% margin compares reasonably well with Adani Ports’ 63% consolidated port margin. 31.5% share of FY20 Rs 5.16 bn profit is Rs1.6 bn, implying 8% of the Rs 19.54 bn consideration for the stake.