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Adani Enterprises (ADE IN, INR 339, upgrade to Buy)
The recent 30% plunge in Adani Enterprises (AEL) stock seems unwarranted as we continue to believe that the company’s business/revenue model remains unscathed. Notwithstanding the decline in global trade due to the economic slowdown during FY09, Mundra Port did not face any significant decline in cargo. A stress test on the possible scenarios across AEL’s three businesses (power, port and coal trading/mining) reveals that at CMP of INR 339/share the stock is trading close to the lower end. Hence, we upgrade our recommendation on the stock to ‘BUY’ with SOTP based target price of INR442/share.
Stock correction: Misplaced over reaction
A few probable reasons behind the recent 30% plunge in AEL’s stock are:
(a) introduction of mining tax in Australia: Post adjustment of future mining expenses, the charge is expected to be ~AUD1/ton; (b) promoter selling shares: The ~3.7 mn sales of shares between September 21, 2011 and October 17, 2011 have been intra-promoter transactions (inter se transfer), hence there is no change in promoter holding; and (c) Mundra Port bid for Dudgeon port: In July 2010, Mundra Port was selected as the preferred bidder to develop the port, post which it acquired Abbot Point port terminal. The company has an option to continue/withdraw its bid.
(a) introduction of mining tax in Australia: Post adjustment of future mining expenses, the charge is expected to be ~AUD1/ton; (b) promoter selling shares: The ~3.7 mn sales of shares between September 21, 2011 and October 17, 2011 have been intra-promoter transactions (inter se transfer), hence there is no change in promoter holding; and (c) Mundra Port bid for Dudgeon port: In July 2010, Mundra Port was selected as the preferred bidder to develop the port, post which it acquired Abbot Point port terminal. The company has an option to continue/withdraw its bid.
Stress test indicates stock trading close to lower end
We have done a stress test across key AEL businesses. Values under various scenarios are: (i) stress case value of INR303/share (higher coal cost and lower merchant price, decline in port cargo and value erosion due to Australian coal mines); and (ii) base case of INR442/share based on realistic growth in power and port subsidiaries and not assigning any value to the coal mining businesses (neither Australian nor domestic).
Outlook and valuations: Business intact; upgrade to ‘BUY’
With the stock trading close to the stress case value providing 30% upside based on our SOTP value of INR 442/share, we are upgrading our recommendation to ‘BUY’ from HOLD. On relative return basis we upgrade it to ‘Sector Performer’
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