Adani Ports’ Unit To Acquire Agri-Logistics Arm Of Adani Enterprise

Adani Logistics Ltd., a unit of Adani Ports & SEZ Ltd., will acquire Adani Agri Logistics Ltd. from Adani Enterprises Ltd. for a cash consideration of Rs 946 crore in a deal expected to be completed by the end of the ongoing financial year, subject to regulatory approval.

Though the acquisition is under the purview of related-party transaction, it will not require approval of minority shareholders as it's being done through a wholly-owned subsidiary of Adani Ports And Special Economic Zone Ltd.

Other than Rs 946-crore cash consideration, Adani Logistics will also take in net debt of close to Rs 700 crore on its books. The enterprise value of this deal is close to Rs 1,662 crore, implying a valuation of 16.8 times based on Ebitda estimates for the financial year 2019-20.

As of Sept. 30, 2018, Adani Ports had a gross debt of more than Rs 24,000 crore and cash of more than Rs 5,200 crore on its books.

Adani Agri, which controls a 45 percent market share, has agreements with Food Corporation of India and other state-owned agencies to operate facilities for warehousing and transportation of food grains.

The company, under these agreements, is eligible for revenue based on annual guaranteed tonnage. It has long term (20-30 year) guaranteed offtake contracts on use-or-pay basis with 70 percent operating margin.

Adani Agri, which posted an annual revenue and Ebitda of Rs 128 crore and Rs 92 crore in FY18, is expected to touch Rs 193 crore and Rs 143 crore by March 2021, according to company filings.

The business has employed Rs 800 crore and its management expects incremental capital expenditure of nearly Rs 500 crore through the year ending March 2021. The company is expected to increase its operating capacity by 63 percent to 14,25,000 metric tonnes by then.

With this acquisition Adani Logistics will get access to railway siding which it would use to develop private freight terminals for handling other commodities resulting in savings of Rs 75-100 crore. Additionally, the surplus land, i.e., 96 acres of 355 acres, is expected to be utilised by the company for logistics parks/warehousing that could result in savings of an additional Rs 125-150 crore.

Brokerage View

Citi

• Downgrade to ‘Neutral’ from ‘Buy’; cut target price to Rs 385 from Rs 500.
• Downgrade as acquisition appears expensive and raises questions on capital allocation.
• Acquisition might lead to resurgence of investor concern around related party transaction.
• Underlying operations are of high quality and stock valuations are reasonable.

CLSA

• Maintain ‘Buy’ with target price of Rs 475.
• Acquires Adani’s agriculture logistics from group at premium valuation.
• Funding is not a problem as its post-acquisition leverage will be 0.72x.
• Will group merge more assets into Adani Ports—a key client concern.

JPMorgan

• Maintain ‘Overweight’ with target price of Rs 430.
• Expensively priced inter-group deal on FY20 basis, synergies kick-off starting FY21.
• Management doesn't see any other Adani group asset that overlaps with port/logistics business aside.
• Expect a negative stock reaction to this instance of inter-group M&A.