Adani Ports and Special Economic Zone Ltd is the bright spot in the Adani Group. Its earnings are growing consistently and the company is outperforming the sector on cargo volumes and expects to do well in the rest of the fiscal year.

Compared to 4% growth in the industry, Adani Ports clocked 7% rise in volumes in the June quarter. Helped by market share gains and addition of new ports and facilities, the company expects volumes to rise 10-15% in the current fiscal year. Last fiscal year, it grew 5%. Comparatively, volumes at its peer Gujarat Pipavav Port Ltd fell in the June quarter and analysts at best expect the firm to report flat or low-single-digit volume growth for the full fiscal year.

Still, Adani Ports’ valuations are at a discount to Gujarat Pipavav, whose performance and outlook is nothing much to talk about. Adani Ports’ price-to-earnings multiple is at around 15 times the current fiscal year earnings per share estimate, while Gujarat Pipavav is trading at about 28 times. Even on enterprise value to Ebitda (earnings before interest, tax, depreciation and amortization), Gujarat Pipavav is valued better, shows data compiled by Emkay Global Financial Services Ltd.

Gujarat Pipavav is seen to be a relatively developed asset. Adani Ports is still in expansion mode—both through organic and inorganic routes. But that does not fully explain the valuations discount. The reason for this is related-party transactions and the perception that promoters are leveraging Adani Ports to fuel the growth of the group.

Despite generating Rs2,867 crore of profit in fiscal year 2016, the company’s borrowings (long term+short term) went up by a fourth during FY16. And a significant part of this borrowed money was loaned to third parties. From a meagre Rs68 crore in March 2015, loans rose to Rs2,922 crore in March 2016.

Not surprisingly, the development earned the ire of investors, who sent the stock lower after the March quarter results. Recognizing the damage, Adani Ports began taking corrective measures. In a June quarter results call with analysts, the management said that it plans to reduce loans by Rs1,000 crore by the September quarter (Q2)-end and wipe them out completely by the end of the current fiscal year.

While the comments helped the stock recover after the June quarter results, the quantum of loan reduction and commentary on future plans at the September quarter results announcement will determine the rerating potential of the stock. It should be noted that the stock, even after the recent recovery, is still lower than where it was a year ago.

If Adani Ports delivers on the loan reduction promise, then the stock can rerate, say analysts. That will not only help it save on finance costs and conserve earnings but will also give investors the confidence that the company’s financial strength is being put to the right use—i.e., to grow its business and earnings.