Story:Over the last 5 years growth has been rapid, with Sales by 40%, Profits 51% and EPS 51% CAGR. However, Punit Jain notices a slowing down of these numbers in the last 4 quarters. Steady Margins, with Operating Margins at 70% and PAT Margins at 50%, for APSEZ standalone. Debt-equity is 3.41 (sharply up due to Abbot Point purchase). This is high for an infra company. For infra sector, cash is critical. APSEZ has a poor free Cash flow due to high investments in operations and the Abbot Point purchase. EPS (adjusted) is up 48% CAGR in recent years. The PE has been in a range of 20-50 over 4 years. But current PE of 19.8 is at low end of this range. EPS shows a steady quarterly increase indicating stable business performance, but flattening after Dec 2011.Return Ratios are deteriorating - ROCE is 7.8% (14% in FY11) while RONW has stayed at 22%. With EPS growth slowing, the PEG (3Yr) is now at 0.55, indicates undervalued status. The Abbot Point financial projections indicate that by 2014, the project will start contributing to the bottomline. Repayment of loans will certainly take longer.
Risks:APSEZ may have overextended itself by the purchase of Abbot Point Australia. Export Import slowdown. Gujarat High court in a May 2012 court order has stayed development work at APSEZ due to unauthorized construction over a 1,840-hectare enclave. India's home ministry has barred APSEZ from participating in two major port project bids because of security concerns.
Opinion, Outlook and Recommendation:Seaports are critical to India’s growth, as over 95% of imports and exports have to be transported by this route. The 6-9% GDP growth in India is now testing the capacities of Indian Ports. Also Govt. ports so far have been constrained in terms of capacity, speed of execution and pricing. APSEZ’s Mundra Port and Indian operations are excellent. APSEZ will capture market share due to spare capacity, good connectivity, excellent facilities and proximity to demand centers.The Abbott Point acquisition is a large investment, which will soak cash for the next 2 years in terms of additional investments and interest. There are also associated business risks. But the plan appears to be well thought out, and investors with a Medium Risk appetite should BUY this stock with a minimum 2-year perspective. EPS growth may slow to ~ 40% in the next 3 years. PE has fallen to new lows. The premium valuations commanded by APSEZ due to its pioneer status may only be regained over this Medium term.Jain valuation prices the share at 136. Thus today it is available at a discount to CMP.
Key Reasons to Invest: APSEZ’s Mundra Port and Indian operations are excellent infra assets with high growth in Sales, Profits and EPS over the last 5 years.Govt dominated Indian Port sector is constrained on capacity, speed and pricing.The large Australian Abbot Point acquisition comes from a conviction that the next phase of Port services growth will come from Australian Coal and Mining exports.