Kotak Institutional raises target price for Adani Ports and SEZ to ₹1,650, says outperformance can continue for long

Kotak Institutional Equities has raised its target price for Adani Ports and Special Economic Zone (ADSEZ) to ₹1,650 per share, up from the previous target of ₹1,550. The upgrade is based on the company’s continued outperformance in FYTD24. The revised target price indicates an upside potential of nearly 18% from the stock's latest trading price of ₹1,400. Also, this target price indicates a new all-time high level for the stock.

The brokerage highlighted that despite a weak start to the year for the market, ADSEZ has continued to outperform. This outperformance is expected to be sustainable, with potential boosts to margins.

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The brokerage said that recent interactions with the management of Mundra Ports and assessments of master plans for other key ADSEZ ports showed significant growth potential, with the capacity to expand by 5–6 times over time. This gives ADSEZ a competitive advantage, as its cost of capacity expansion would be lower than that of its peers.

In contrast, most competitors face challenges in scaling up their existing capacity beyond two times due to fixed capacities at their terminals and select non-major ports. This necessitates asset additions for growth, which would increase their capital costs per ton, either through winning government port terminals via bidding or constructing new greenfield terminals.

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Over the past decade, ADSEZ has acquired several non-major ports from private players, enabling large capacity additions at reasonable valuations. Notable acquisitions include assets in Dhamra, Kattupalli, Krishnapatnam, Gangavaram, and Sarguja Rail, which now have a combined EBITDA of approximately ₹50 billion, equivalent to their combined net debt after adjusting for loans to the parent company.

Most of these port assets operate at 67-86% capacity utilization, except for Gangavaram at 56%. These utilization rates demonstrate ADSEZ's success in value creation through reinvesting cash flows.

The brokerage also noted ADSEZ’s strategic focus on building a land bank in logistics. Currently, ₹150 billion, or 5% of the market cap, is the outstanding exposure of the standalone entity toward Adani Logistics, up approximately 1.8 times year-over-year.

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Kotak Institutional Equities continues to value Adani Logistics at ₹100 billion in enterprise value, which is about 65% of ADSEZ standalone's existing exposure to logistics. This valuation, as per the brokerage, provides meaningful upside potential to the firm's fair value as these investments start contributing to Adani Logistics' EBITDA.

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Meanwhile, the company shares have rallied 37% in the current year so far and they have also touched a new all-time high of ₹1607 apiece on June 03.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.

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