2 min read.Updated: 10 Jun 2019, 01:12 AM ISTR. Sree Ram
The reduction in related-party loans is visible in the sizeable drop in working capital during FY19
With the regulators paving the way for tariff renegotiation at a loss-making plant of group firm Adani Power Ltd, concerns about incremental loans to this entity have further abated
Shares of Adani Ports and Special Economic Zone Ltd have gained momentum in the past year, with the company reducing its financial exposure to group firms through related- party loans. Besides, the company has suggested that capital expenditure (capex) has peaked, which will result in balance-sheet deleveraging and improvement in profitability.
The reduction in related-party loans is visible in the sizeable drop in working capital during FY19. Besides, with the regulators paving the way for tariff renegotiation at a loss-making plant of group firm Adani Power Ltd, concerns about incremental loans to this entity have further abated.
All this helped the Adani Ports stock gain 12% in the past year.
That’s not all. The company delivered on its guidance of better payouts to shareholders. Last week, it surprised the Street by announcing a ₹1,960 crore share buy-back, and said that it would return 20-25% of profits every year to shareholders.
This is a notable change in Adani Ports’ dividend policy. Payouts in the five years between FY14 and FY18 were less than 15% of profits, as the accompanying chart shows. The payout ratio in FY19 was abnormally high due to a special dividend.
“We had assumed a 15% pay-out for FY20/21 in our estimates but the new announcement is clearly a positive development. With the higher pay-out, we now estimate that return on equity for FY20/21 can be 18.8%-19.8%, which would be a 50 basis point improvement from current estimates," analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd said in a note.
With several of Adani Ports’ assets generating free cash flow, it is only logical that the company returns the cash. If, indeed, it consistently returns the cash within the guided payout range and stays clear of related-party transactions, the stock may be better valued, say analysts.
Much depends on how the management balances its growth ambitions. After the peak capex in FY17, Adani Ports steadily moderated its investments to around ₹2,500 crore. In FY20, the company plans to invest ₹4,000 crore (including ₹1,000 crore in Myanmar).
“In the past few months, we have seen a renewed capex aggression towards expanding footprints in port and logistics," analysts at Antique Stock Broking Ltd said in a note.
Against its “desired" net debt- to-Ebitda (earnings before interest, taxes, depreciation and amortization) of less than three times (2.9 in FY19), Adani Ports now expects to maintain the leverage at 3-3.5 times. While this may not be a deal-breaker, a large acquisition can add to the leverage. This would be a risk to watch out for.
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