Retain ‘overweight’ on Adani Ports & SEZ (ADSEZ) and rate the stock as our top pick in Indian industrials sector. We arrive at our target price of R363 per share given the combination of strong cash flows, strong upside potential (inorganic), and low downside risk.
The market’s tendency to focus on absolute valuations or valuations relative to the market makes the stock seem expensive (25.8x FY16e EPS and a 112% premium to the Sensex on 12-month forward P/E). However, we believe that the right benchmark for ADSEZ’s valuation is relative to its peers, industrials in India or ports globally. The stock trades closer to the lower end of the band, and looks inexpensive.
With Mundra forming over 10% of India’s cargo in FY14), we do not expect ADSEZ to buck the growth trend by as much as it has in the past.
However, with the new port assets created by the company coming off zero or low bases, we expect them to provide a kicker to growth over the next three years – we forecast a 26% CAGR for the consolidated entity versus 19% for the Mundra asset (including the SEZ) due to the four subsidiaries (out of the seven subsidiaries that the company has) that we have included in our financial models. The share of profits provided by the subsidiaries moves up to 15% by FY18e versus a negative contribution in FY14.
By Morgan Stanley