Fitch Ratings on Tuesday affirmed its long-term foreign-currency issuer default rating (IDR) on port operator Adani Ports and Special Economic Zone Ltd (APSEZ) at 'BBB-' with a negative outlook.
In a report, the rating agency says, "We continue to assess APSEZ's underlying credit profile at 'bbb'. APSEZ's underlying credit profile reflects its status as India's largest commercial port operator, with best-in-class operational efficiency. The issuer has shown throughput resilience throughout economic cycles, including the current COVID-19 pandemic-related downturn.”
APSEZ's cargo throughput for FY22 rose by nearly 14% or by 6.5%, excluding the additional contribution from Krishnapatnam Port Company Ltd (KPCL), compared with an increase of nearly 6% for cargo throughput at all Indian ports.
However, Fitch says about half of APSEZ's cargo is sticky and includes contractual take-or-pay cargo that is unlikely to be diverted to other ports due to infrastructure restrictions, such as the lack of facilities to handle crude oil, and cargo from joint-venture partners.
"APSEZ has timing flexibility in its expansion projects. Management has budgeted capex of about Rs86 billion for FY23, but this could be restricted to maintenance capex of Rs9 billion only," the rating agency says.
According to Fitch, APSEZ has adequate liquidity to weather near-term challenges. It says, "The company had a readily available cash balance of about Rs91 billion at FY22 (estimate), against operating expenses of Rs46 billion and interest costs of about Rs26 billion. APSEZ has Rs7 billion to repay or refinance in FY22. The company, as a member of one of India's largest conglomerates spanning various sectors, has strong banking relationships and established access to capital markets."
APSEZ handled a quarter of India's seaborne cargo in FY22 through the 12 ports it operates. APSEZ's advanced transport infrastructure, operational efficiency and integrated logistics solutions, which transport cargo from its ports to its inland depots via railways, have resulted in market share gains and faster organic throughput growth than its peers and compared with India's economic growth, the rating agency points out.
It says, "The company's expanded logistics business covers all of India and it has built multimodal logistics for warehousing, rail transportation and distribution. Its logistics business now operates 75 railways and includes container, auto, grain and bulk rakes under the general-purpose wagon investment scheme."
APSEZ's consolidated debt comprises mainly US dollar and Indian rupee bullet bonds. Fitch expects the company's business strengths, established capital market access and relationships with banks to mitigate refinancing risk.
APSEZ also has limited exposure to floating interest rates due to its use of fixed-rate bonds and bank loans. The bonds do not benefit from restrictive financial covenants or reserve accounts and the company relies on natural hedging to manage foreign-exchange risk. Nearly a third of its revenue is in US dollars, which should be sufficient to cover its US-dollar debt servicing, the rating agency added.
The company's rating is capped by India's country ceiling of 'BBB-'. However, Fitch says, it does not expect positive rating action in the near term. "A revision in the outlook on the Indian sovereign to stable would indicate that the country ceiling is likely to remain at 'BBB-' and therefore our outlook on APSEZ would also be revised to stable."
During FY22, total earnings before interest, taxes, depreciation, and amortization (EBITDA) of APSEZ increased by 22% while the EBITDA margin narrowed as the EBITDA contribution from lower-margin segments, including logistics and its port development business, increased. Meanwhile, the EBITDA contribution from the higher-margin port segment fell.
"Outstanding debt increased, as the company issued two US-dollar bonds in FY22 with total proceeds of US$750 million, part of which was used for refinancing. Management intends to distribute 22% of profit after tax in FY22, similar to the 20% distributed in FY21 and FY20. Management intends to stick with its policy of distributing 20%-25% of profit after tax, depending on the company's medium-term financial performance," Fitch says.