Adani Ports and Special Economic Zone shares fell more than 8 percent intraday on February 25 after its subsidiary Adani Logistics said it will acquire Adani Agri Logistics (AALL) from Adani Enterprises.
The acquisition will be an all-cash deal and is expected to be completed by March 2019, the company said in its filing.
Adani Logistics will also acquire Adani Agri Logistics (Dahod), Adani Agri Logistics (Darbhanga) and Adani Agri Logistics (Samastipur) Adani Enterprises.
“AALL is a subsidiary of Adani Enterprises and the transaction is proposed at an enterprise value of Rs 1,662 crore. After the acquisition, the combined business EBITDA (earnings before interest, tax, depreciation and amortisation) will immediately double to around Rs 200 crore,” it added.
Adani Agri Logistics will add 28 locations and 7 trains to Adani Logistics network.
“Adani Agri Logistics has long term (20-30 year) guaranteed offtake contracts on use or pay basis with over 70 percent EBITDA margins,” Adani Ports said, adding AALL targets to double infrastructure capacity in the next three years and tap the new 12.5 MMT infrastructure market as well as opportunities such as conventional storage conversion, among others.
Moreover, Citi has downgraded Adani Ports to neutral from buy, saying that the acquisition appears expensive and raised questions on the capital allocation of the company.
The brokerage believed that the acquisition might lead to a resurgence of investor concern around related-party transactions. Citi cut its target price to Rs 385 from Rs 500 per share.
Karan Adani, CEO of Adani Ports, in an interview to CNBC-TV18 said, “With the government’s focus on agriculture sector increasing, the acquisition will be a positive step. It was intended to create a presence in the logistic sector.”
The company expects doubling of EBITDA in the next 3-4 years. Current EBITDA is at Rs 100 crore. Going ahead, they also expect the net debt to EBITDA to come down. The net debt to EBITDA is currently at 2.75x.
“Most of the debt borrowing is on long term basis of 5-10 years. Independent valuation of the deal was done by E&Y,” Adani added.
The total consolidated revenue of Adani Agri Logistics for FY18 was Rs 128.67 crore and EBITDA of Rs 92 crore with margin at 72 percent.
“This is a very expensive acquisition and not a good choice to use the cashflow of the company when the net debt has increased from Rs 17,662 crore to Rs 18,400 crore. The benefits of the acquisition are not visible even in the projects till 2025E, which are released by the company. Minority shareholders are at a loss due to this transaction,” said Sameer Kalra – Equity Research Analyst & Founder Target Investing who has a sell rating on the stock.
He further said Adani Agri is a loss-making company that is expected to turn profitable in 2022.
“It is estimated to pay Rs 81 crore interest cost which is 82 percent of EBITDA which is a high leveraged company in 2020. Due to this acquisition, it will reduce the interest cost by Rs 18 crore which will result in interest cost of Rs 63 crore,” he added.
At 1418 hours IST, the stock was quoting at Rs 325.65, down Rs 28.45, or 8.03 percent amid high volumes on the BSE.