ADANI PORTS AND SEZ Positives being ignored

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1 COMPANY UPDATE ADANI PORTS AND SEZ Positives being ignored India Equity Research Power Adani Ports and SEZ (ADSEZ) has refinanced the ~USD2bn bridge loan taken for the Abbot Point X50 port terminal at lower than expected terms. In addition, it has been issued LoI for a 20 MT bulk terminal at Kandla port. We believe these positives are being overshadowed by negative news flow/perception at the group level. Maintain BUY/OP with TP of INR172/share. EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to Market BUY Outperformer Medium Equalweight Abbot Point bridge loan refinancing complete The Abbot Point Terminal AUD1.8 bn acquisition, which was funded by a USD2bn bridge loan, has been refinanced by a combination of asset backed loan and a holding company term borrowing at competitive rates of BBSW+250bps and 3mUS LIBOR + 330bps respectively. The repayment is back ended, in line with volume scale up which would be 50mtpa terminal by FY15 thereby ensuring repayments aligned with project cash flows. Project pipeline in line with 200 mt target by 2020 ADSEZ was recently issued LoI by the Kandla Port Trust to develop a 20 mtpa dry bulk terminal at investment of INR10bn on BOOT basis for 30 years. Further, the company is also in race for the INR37bn Chennai Port's 4mn TEU mega container terminal project. It is also scaling up capacity at its flagship port, Mundra, by incurring capex of INR33bn buoyed by higher demand for coal imports and containersation volumes. Outlook and valuations: Concerns overdone; Reiterate BUY Despite strong capex plans and project wins, the negative news flow on security clearances and Enforcement Directorate probing ADSEZ on possible money laundering has weighed heavily on the stock leading to its underperformance by ~7% vis a vis broader market over the last month. However, with completion of Abbot Point refinancing, the company denying money laundering probe and LoI being awarded for the Kandla project, we believe these positives are being ignored and concerns are overdone. The stock at CMP of INR124 offers an attractive entry point with potential upside of 39% at our fair value of INR 172/share. Reiterate BUY/Sector Outperformer on the stock. Financials (Consolidated) Year to March FY10 FY11 FY12E FY13E Revenue (INR mn) 14,955 20,001 34,815 48,653 EBITDA (INR mn) 9,663 12,994 22,187 31,841 Net profit (INR mn) 6,760 9,181 10,201 16,070 EPS (INR) EPS growth (%) P/E (x) EV/EBITDA (x) ROAE (%) ROACE (%) Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. MARKET DATA (R: APSE.BO, B: ADSEZ IN) CMP : INR 124 Target Price : INR week range (INR) : 170 / 111 Share in issue (mn) : 2,003.4 M cap (INR bn/usd mn) : 237 / 4,660 Avg. Daily Vol.BSE/NSE( 000) : 1,777.0 SHARE HOLDING PATTERN (%) MFs, FIs & Banks 4.9% * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) Stock Nifty Edelweiss Securities Limited : NIL EW Power Index 1 month (10.4) (3.7) (8.9) 3 months (1.7) months (6.6) (3.7) (10.9) Shankar.K shankar.k@edelcap.com Santosh Hiredesai santosh.hiredesai@edelcap.com March 29, 2012 Others 7.0% FIIs 10.6% Promoters* 77.5%

2 Power Abbot Point bridge loan refinancing complete The Abbot Point Terminal acquired in May 2011 at AUD1.8bn was funded by a USD2bn bridge loan. The existing bridge loan has been refinanced by a combination of asset backed AUD loan and a holding company USD term borrowing at competitive rates of BBSW+250 bps and 3mUS LIBOR + 330bps respectively. The asset backed loan of AUD1.1bn would come up for renewal/refinancing five years hence. The repayment for holding company term loan of USD 800mn is back ended with repayments starting from the 4 th year and 13 quarterly payments. This is in line with the volume scale up expected at the port, which would generate adequate cash flows to meet repayment commitments. Table 1: Reconciliation of refinancing AUD mn USD mn Original acquisition cost 1,800 2,000 Funded by 2,000 Exchange rate at May Current exchange rate Worth of the asset now 1,878 2,000 Funded by 1, Value of asset loan in USD 1,172 Total loan based on current forex 1,972 Savings in loans 29 Funded by : Forex gain in USD 39 Interest capitalised 12 Project pipeline in line with 200 mt target by 2020 Source: Company, Edelweiss research ADSEZ was recently issued LoI by the Kandla Port Trust to develop a 20 mtpa dry bulk terminal after the company emerged as the H1 bidder by agreeing to share 25.09% of revenue with the port trust as royalty. The project is expected to have a capital outlay of INR10bn to be incurred over the next 24 months and will be ready for operations by 2014 on BOOT basis for a period of 30 years (including 2 years of construction). The dry bulk terminal designed to have four berths will come up at Tekra near Tuna off 20 Km from the existing Kandla port with a draft of 16.5 meter which will enable larger vessels calling the port. Construction of the new bulk terminal will begin after signing of the concession agreement with the Kandla Port Trust which is expected shortly. The company is working on brownfield and greenfield projects for capacity addition at various locations and has recently bid for the Chennai Port's INR37bn mega container terminal project designed to handle 4 mn TEUs. The Chennai Port Trust in the past had rejected the revised bid of 5% revenue share of Adani ports for the same project on account of low revenue share being offered by the lone bidder while the other six shortlisted bidders did not offer price bids. However, this time around the private operator will invest on berth and breakwater construction, reclamation of backup area, handling equipment and other landside infrastructure at a cost of INR31.25bn and the cost of dredging, floating crafts and navigational aids estimated at INR5.6bn would be borne by the port trust. The flagship Mundra port is also scaling up by adding several berths/terminals to augment capacity to meet the requirements of growing demand of coal imports and containerisation. Projects being executed currently: 2 Edelweiss Securities Limited

3 Adani Ports and Special Economic Zone Multipurpose berths 9 12 at a capex of INR7.3bn which would add a capacity of 15mtpa to the existing 25/30mtpa. While berths 9 and 10 are ready, the next two would be ready in the coming quarters. Adani International Container Terminal (AICT), a 100% subsidiary of ASDEZ, is implementing a container terminal at a capex of INR18bn which will add 1.5mTEU. This will take total capacity to 4mTEU from the existing 2.5mTEU over the next two years. The existing 60mtpa coal terminal at the west basin is also adding new berths at a capex of INR7bn to have a final capacity of 100mtpa in the coming years. Chart 1: Terminal capacities post expansion at flagship Mundra port (MT) Multi Purpose Container Coal Terminal Existing capacity Post expansion Note: Container terminal capacity approximated as 1mn TEU = 12mtpa Source: Company, Edelweiss research Outlook and valuations: Concerns overdone; Reiterate BUY Despite strong capex plans and project wins, negative news flow on security clearances and Enforcement Directorate probing ADSEZ on possible money laundering has weighed heavily on the stock leading to its underperformance by ~9% vis a vis broader market over the last month. However, with completion of Abbot Point refinancing, the company denying money laundering probe and LoI being awarded for the Kandla project, we believe some of the concerns are overdone and the positives being ignored. The stock at CMP of INR 124 offers a very attractive entry point with a potential upside of 39% at our fair value of INR 172/share. Reiterate BUY/Sector Outperformer on the stock. 3 Edelweiss Securities Limited

4 Power Table 2: SOTP Valuations Part Method CoE Value Stake Value of Stake Price per share % age of SOTP (%) (INR mn) (%) (INR mn) (INR) (%) Mundra Port DCFE 12.8% 247, % 247, % SEZ DCFE 18.8% 22, % 22, % Dahej Port DCFE 13.4% 25,110 74% 18, % Mormugao Terminal DCFE 13.4% 6, % 6, % Hazira Port DCFE 13.4% 16, % 16, % Abbot Point DCFE 14.7% 18, % 18, % ALL P/BV 2x FY11 6, % 6, % Cash FY13E Book 8, % 8, % Total 350, , % Source: Edelweiss research 4 Edelweiss Securities Limited

5 Company Description Adani Ports and Special Economic Zone Adani Ports and SEZ (Mundra Port SEZ earlier), incorporated as Gujarat Adani Port on May26, 1998, began commercial operations in October 2001, post entering into concession agreement with GMB to build, operate and maintain the port for a period of 30 years till 2031 extendable by another 20 years. The port is into providing cargo handling services for bulk, crude and container cargo. The company has also received approval to develop the adjacent port land as a multi product SEZ. Notification has been issued to ~16,000 acres of land while the company is in talks to acquire more land to add to its SEZ portfolio. While the company is also bidding for other domestic and international port projects it has also invested in value added services like logistics support, providing container rail services and inland container depots to diversify from its core port business. Investment Theme APSEZ, under the aegis of the parent company Adani Enterprises, has been instrumental in developing a deep draft gateway port and SEZ strategically on the West coast of India with state of the art infrastructure and capability to handle diversified cargo. Since inception, APSEZ has posted 35% CAGR and handled ~51 MT cargo in FY11, higher than most other major Indian ports. Also, it has hedged cargo uncertainty risk by getting into long term service contracts (45% of total cargo to be handled in FY14E). Such a third generation port acting as one stop shop for export/import logistics is in unique league of ports and one of its kinds in India. The company has a strong portfolio of projects on the Indian West coast other than the flagship Mundra port. These projects will help the company gain a pan India presence. It has also been scouting for opportunities to go global and has recently evinced interest in port development projects in Australia and Indonesia, in line with its long term strategy. Key Risks Uncertainty in traffic at ports Since cargo at ports is contingent on international trade, any slowdown in it could affect Mundra Port as well. APSEZ is hedged to some extent from the traffic risk because of the take or pay agreements which constitute about 45% of the cargo going ahead. Regulatory changes regarding SEZs The existing SEZ policies and benefits outlined by the government to promote exports are relatively new and are being continuously reviewed. Any changes in the form of reversal of current tax benefits to units under the SEZ umbrella will significantly undermine incentives for industries to setup units in the SEZ, hampering current plans of land sale. Land parcel sale at the SEZ is yet to pick up. Execution risk in international projects Although the company has been successful in port projects implemented in India (largely Gujarat), we need to watch out for the execution and the profitability in its international ventures as well the East coast of India. APSEZ is planning to leverage its captive group business Adani Enterprises mining operations and Adani Power s coal imports to provide assured cargo visibility and thereby minimize the risks associated with a greenfield venture. 5 Edelweiss Securities Limited

6 Power Financial Statements Income statement (INR mn) Net revenue 14,955 20,001 34,815 48,653 61,656 Cost of Operations 3,789 5,321 9,595 13,022 15,963 Other operating expenses ,856 2,349 2,772 Employee costs ,176 1,441 1,682 Total operating expenses 5,293 7,007 12,627 16,812 20,417 EBITDA 9,663 12,994 22,187 31,841 41,239 Depreciation and amortisation 1,868 2,388 4,990 6,437 6,469 EBIT 7,795 10,606 17,198 25,404 34,770 Other income Interest expenses ,811 9,203 9,654 Profit before tax 7,556 10,036 10,413 16,234 25,149 Provision for tax Core profit 6,955 9,162 10,064 16,120 24,194 Extraordinary income/ (loss) (220) Minority interest + pre acquisition profit 6,736 9,162 10,064 16,120 24,194 Minority interest (16) (20) (137) Share in profit of associates 8 Profit after minority interest 6,760 9,181 10,201 16,070 23,888 Basic shares outstanding (mn) 2,003 2,003 2,003 2,003 2,003 Basic EPS (INR) Diluted equity shares (mn) 2,003 2,003 2,003 2,003 2,003 Diluted EPS (INR) Dividend per share (INR) Dividend payout (%) Common size metrics as % of net revenues Operating expenses Depreciation Interest expenditure EBITDA margins Net profit margins Growth ratios (%) Revenues EBITDA PBT Net profit EPS Edelweiss Securities Limited

7 Adani Ports and Special Economic Zone Balance sheet (INR mn) As on 31st March FY10 FY11 FY12E FY13E FY14E Equity capital 4,035 4,035 4,035 4,035 4,035 Reserves & surplus 30,504 37,864 46,261 60,528 82,613 Shareholders funds 34,539 41,899 50,296 64,563 86,648 Minority interest (BS) ,207 Secured loans 31,814 35, , , ,851 Unsecured loans 5, Borrowings 37,062 35, , , ,107 Deferred tax liability 2,817 3,468 3,468 3,468 3,468 Deferred revenue 6,291 6,121 6,121 6,121 6,121 Sources of funds 81,629 88, , , ,550 Gross block 56,342 73, , , ,283 Depreciation 7,842 10,229 15,219 21,656 28,126 Net block 48,500 63, , , ,157 Capital work in progress 19,183 21,174 13,111 18, Total fixed assets 67,682 84, , , ,759 Goodwill Investments 2, Inventories ,036 1,270 Sundry debtors 1,764 2,849 5,120 7,156 9,068 Cash and equivalents 9,997 2,515 10,234 25,344 49,501 Loans and advances 4,471 2,444 2,444 2,444 2,444 Other current assets 643 1,201 1,201 1,201 1,201 Total current assets 17,191 9,433 19,763 37,181 63,484 Sundry creditors and others 4,754 5,736 10,336 13,762 16,713 Provisions 740 1,050 1,050 1,050 1,050 Total current liabilities & provisions 5,494 6,786 11,386 14,812 17,763 Net current assets 11,698 2,647 8,377 22,369 45,721 Others 30 Uses of funds 81,629 88, , , ,550 Book value per share (INR) Free cash flow (INR mn) Net profit 6,760 9,181 10,201 16,070 23,888 Depreciation 1,868 2,388 4,990 6,437 6,469 Deferred tax Others 37 (2,262) 6,648 9,220 9,927 Gross cash flow 9,185 9,958 21,838 31,727 40,284 Less: Changes in WC (1,309) (2,127) (1,989) (1,118) (804) Operating cash flow 10,495 12,085 23,827 32,845 41,088 Less: Capex 18,287 19, ,468 8, Free cash flow (7,792) (7,303) (78,641) 24,163 40,265 Cash flow metrics Operating cash flow 10,495 12,085 23,827 32,845 41,088 Investing cash flow (18,057) (9,704) (102,442) (8,648) (789) Financing cash flow 6,949 (5,279) 86,334 (9,086) (16,142) Net cash flow (613) (2,899) 7,719 15,110 24,157 Capex (18,287) (19,388) (102,468) (8,682) (823) Dividends paid (1,404) (1,803) (1,803) (1,803) (1,803) 7 Edelweiss Securities Limited

8 Power Profitability & efficiency ratios ROAE (%) ROACE (%) Debtors days Current ratio Debt/EBITDA Fixed asset turnover (x) Average working capital turnover (40.3) (20.1) (18.3) Average capital employed turnover (x) Debt/Equity Adjusted debt/equity Operating ratios Total asset turnover Fixed asset turnover Equity turnover Du pont analysis NP margin (%) Total assets turnover Leverage multiplier ROAE (%) Valuation parameters Diluted EPS (INR) Y o Y growth (%) CEPS (INR) Diluted PE (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) Dividend yield (%) Edelweiss Securities Limited

9 RATING & INTERPRETATION Company Absolute reco Relative reco Relative risk Company Absolute reco Relative reco Relative Risk Adani Enterprises BUY SP M Adani Ports and Special Economic BUY SO M Zone Adani Power REDUCE SU M CESC BUY SU H GMR Infrastructure BUY SP H GVK Power and Infra HOLD SU H JSW Energy HOLD SO H Lanco Infratech BUY SU H Marg BUY None None Navabharat Ventures BUY None None NTPC HOLD SU L Power Grid Corp of India BUY SO L PTC India BUY None None Reliance Infrastructure BUY SU M Tata Power Co BUY SO L ABSOLUTE RATING Ratings Expected absolute returns over 12 months Buy More than 15% Hold Between 15% and - 5% Reduce Less than -5% RELATIVE RETURNS RATING Ratings Sector Outperformer (SO) Sector Performer (SP) Criteria Stock return > 1.25 x Sector return Stock return > 0.75 x Sector return Stock return < 1.25 x Sector return Sector Underperformer (SU) Stock return < 0.75 x Sector return Sector return is market cap weighted average return for the coverage universe within the sector RELATIVE RISK RATING Ratings Low (L) Medium (M) High (H) Criteria Bottom 1/3rd percentile in the sector Middle 1/3rd percentile in the sector Top 1/3rd percentile in the sector Risk ratings are based on Edelweiss risk model SECTOR RATING Ratings Overweight (OW) Equalweight (EW) Criteria Sector return > 1.25 x Nifty return Sector return > 0.75 x Nifty return Sector return < 1.25 x Nifty return Underweight (UW) Sector return < 0.75 x Nifty return 9 Edelweiss Securities Limited

10 Power Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai Board: (91 22) , Vikas Khemani Head Institutional Equities Nischal Maheshwari Co Head Institutional Equities & Head, Research Coverage group(s) of stocks by primary analyst(s): Power Adani Power, Adani Enterprises, Adani Ports and Special Economic Zone, CESC, GMR Infrastructure, GVK Power and Infra, JSW Energy, Lanco Infratech, Marg, Navabharat Ventures, NTPC, PTC India, Power Grid Corp of India, Reliance Infrastructure, Tata Power Co Recent Research Date Company Title Price (INR) Recos 07 Mar 12 CESC Tariff hike: Better late than never; Event Update 15 Feb 12 Reliance EPC kicking in; Infrastructure Result Update 15 Feb 12 Adani Ports Kandla satellite port bid green lighted; EdelFlash 268 Buy 627 Buy 143 Buy Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Hold Reduce Total Rating Interpretation Rating Expected to Rating Distribution* * 1 stocks under review > 50bn Between 10bn and 50 bn < 10bn Market Cap (INR) Buy Hold Reduce appreciate more than 15% over a 12 month period appreciate up to 15% over a 12 month period depreciate more than 5% over a 12 month period Access the entire repository of Edelweiss Research on This document has been prepared by Edelweiss Securities Limited (Edelweiss). 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