Modi effect: Will the Adani bull run last?

While fundamentals have improved, run-up in shares has been sharp and valuations do factor in near-term upsides.

Investors have been warming up to the Adani Group companies on optimism that the new government would be favourable and the business issues plaguing it could get resolved.

The three listed entities -- Adani Enterprises, Adani Power and Adani Ports -- have seen gains of 35-175 per cent since September 2013, when Narendra Modi was anointed the Bharatiya Janata Party’s prime ministerial candidate. 

Given the landslide mandate to the BJP and Modi at the helm, investors are expecting more. Yet, one should be cautious, as the share prices are already factoring in the near-term positives, with valuations ahead of consensus target prices.

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Adani Power

Adani Power suffered setbacks earlier, with the sector’s de-rating and own issues on the Mundra (Kutch) project and the resultant losses. However, led by hopes and now the change at the Centre, the stock has risen to Rs 57, way ahead of analysts’ target price of Rs 36. 

“It is difficult to point to how much of the recent rally is because of political factors but we believe if a strong government is in place, that will have a positive impact on power companies, particularly Adani Power. It will be the biggest beneficiary because of the litigations and issues of coal availability," said Abhishek Patel, who is tracking the company at KR Choksey.

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Girish Nair of BNP Paribas wrote, “The stock price has outperformed the MSCI Index by 33 per cent in three months, on expectations that a stable government post-election would resolve problems at its power projects. However, as the courts will decide on the dispute over tariff (rate) resets, we believe the government will have no say in the issue." 

Fundamentally, though, most analysts believe the recent development on the Mundra project, where the Central Electricity Regulatory Commission and the Maharashtra Electricity Regulatory Commission allowed it to raise rates to compensate for depreciation and higher cost of fuel, would immensely benefit the company.

“If we include these benefits, our target price stands at Rs 51 a share as against Rs 32 currently,” said Patel of K R Choksey. Even then, the stock factors in the gains.

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Adani Ports & SEZ

Unlike the other two listed group companies, the Street is hopeful about the prospects of Adani Ports & SEZ, expected to gain further business momentum, led by higher volumes and ongoing expansion.

“We have revised cargo volumes and tariffs (rates) across ports, as well as land sales revenues, based on recent contracts or sale deeds and the incorporated Kandla and Ennore ports. Utilisation of surplus cash towards the next phase of expansion through inorganic or organic routes remains the key," said Shankar K of Edelweiss Securities. Part of this Street optimism is also visible in the March quarter results.

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Recently, the management said 90 per cent of the Abbot (in Australia) sale proceeds had been received.

As expected, on Friday the company announced it had bought the entire stake in DhamraPort (in Odisha) from L&T Infrastructure Development Projects and Tata Steel, at an enterprise value of Rs 5,500 crore. This is part of the company’s pan-India presence strategy, leveraging on its experience at Mundra. 

Dhamra port handled total cargo of 14.3 million tonnes in FY14 and the aim is to take this to 100 mt by 2020. Meanwhile, the stock has gained 16 per cent in a month and trades at 4.4 times its FY15 estimated book value. Investors could use correction to enter the stock.

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Adani Enterprises

Adani Enterprises, largely a coal trading company and with stake in the other two, has also seen a huge spurt in share price.

On the business side, though, it saw a large dip in coal trading volumes during the recent quarters. Also, issues such as losses in fixed-price coal agreements and growing levels of receivables in the books have been raised by the Street. 

However, if demand in the country for imported coal improves and some of the issues ease on receivables, it will have a positive impact. Also, incremental growth in listed subsidiaries such as expansion of port capacity and better cash flows in the power business could further ease the Street’s concern.

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During the March quarter, the company reported a five-fold increase in profit to Rs 2,848 crore, led by significant improvement in operating margins by 967 basis points to 26.2 per cent.

This was largely driven by the power business’ additional revenues because of compensatory rates for two projects.

During the quarter, contribution of the power business grew 200 per cent compared to the corresponding quarter last year, also a reason overall sales grew a strong 40 per cent to Rs 16,171 crore. 

Some of the optimism in the stock is due to the new government and is reflected in the share price, now Rs 539, much higher than the consensus target price of Rs 395.