Fitch Ratings has affirmed India-based port operator Adani Ports and Special Economic Zone Limited’s (APSEZ) Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB-‘. The Outlook is Negative. A full list of rating actions is at the end of this commentary.
RATING RATIONALE
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. Cargo throughput rose by nearly 14% in the financial year ended March 2022 (FY22), or by 6.5% excluding additional contribution from Krishnapatnam Port Company Limited (KPCL) in FY22. This compares with an increase of nearly 6% for cargo throughput at all Indian ports.
About half of APSEZ’s cargo is sticky; this includes contractual take-or-pay cargo, 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 INR86 billion for FY23, but this could be restricted to maintenance capex of INR9 billion only.
We believe APSEZ has adequate liquidity to weather near-term challenges. The company had a readily available cash balance of about INR91 billion at FYE22, against operating expenses of INR46 billion and interest costs of about INR26 billion. APSEZ has INR7 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.
KEY RATING DRIVERS
Best-in-Class Port Operator – Revenue Risk (Volume): Stronger
APSEZ handled a quarter of India’s seaborne cargo in FY22 through the 12 ports it operates. Most are primary ports of call in their regions. Its flagship Mundra Port is the gateway to north-western India. Traffic is mainly origin and destination, with limited transhipment cargo. 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.
Cargo that is difficult to switch to other ports makes up about half of total throughput. APSEZ continues to diversify its throughput from the west coast, with its east-coast terminals of KPCL, Dhamra, Kattupali and Ennore accounting for 38% of total throughput, up from 26% a year earlier. 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.
Flexibility in Modifying Tariffs – Revenue Risk (Price): Midrange
APSEZ’s portfolio is mainly private ports, which have the freedom to fix their own tariffs. These are generally higher than at other Indian ports, but this is justified by APSEZ’s better operational efficiency and connection with the hinterland, which lowers shippers’ overall logistics costs, according to management. The company’s take-or-pay contracts accounted for about 12% of port revenue in FY21, with a revenue-weighted remaining contract term of 10 years. Take-or-pay contracts insulate revenue from throughput volatility. Overall assessment is constrained to Midrange due to certain ports for which tariff is regulated; however, their contribution to the group’s EBITDA is minimal.
Internally Funded Capex – Infrastructure Development and Renewal: Stronger
APSEZ’s capacity is sufficient to support medium-term throughput growth. However, the company plans to further upgrade its infrastructure, diversify its cargo mix and expand its logistics business. The plan includes the upgrade of its ports, the addition of warehousing and bulk rakes for its logistics business. However, most of this is discretionary capex, which the company can postpone without a major impact on its operations.
Fixed-Rate Bullet Bonds Dominate – Debt Structure: Midrange
APSEZ’s consolidated debt comprises mainly US dollar and Indian rupee bullet bonds. We expect its 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.
PEER GROUP
APSEZ can be compared with JSW Infrastructure Limited (JSWIL, BB+/Stable), which also comprises of a portfolio of ports. Both entities have ports across India, but we assess JSWIL’s volume at ‘Midrange’, against ‘Stronger’ for APSEZ on account of JSWIL’s concentrated exposure to cyclical commodities. We assess APSEZ two notches above JSWIL due to its diverse throughput and counterparty mix, the large scale of its operation and better financial profile.
Port of Melbourne (issuing entity, Lonsdale Finance Pty Ltd: BBB/Stable) is the primary port of call in the State of Victoria and serves Australia’s broader market with limited competition. Its rating benefits from a diversified landlord port business model, long concession life and low infrastructure development and renewal risk. However, it is much smaller in operational scale than APSEZ. Its overall stronger qualitative attributes support higher leverage; it had average net debt/EBITDA of 8.8x under Fitch’s rating case, compared with APSEZ’s 3.1x for the same underlying credit profile.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– Prolonged deterioration of Fitch’s rating case debt/EBITDA to above 6.0x due to underperformance or a material reduction of average concession life
– Lowering of India’s (BBB-/Negative) Country Ceiling to ‘BB+’
Factors that could, individually or collectively, lead to positive rating action/upgrade:
– We do 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
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
TRANSACTION SUMMARY
APSEZ’s is India’s leading private operator, having multiple ports across India. Its most important port, Mundra Port, contributed nearly half of the group’s throughput and serves as the gateway to landlocked north-western India.
CREDIT UPDATE
APSEZ’s throughput growth has consistently outperformed that of the wider industry in India, reflecting its expertise in turning around troubled assets and operational efficiency. Throughput growth has been driven by an increase in dry bulk, liquid and container cargo, which rose by 42%, 19% and 14%, respectively, in FY22. APSEZ also continued to diversify its throughput from the west coast and will complete the acquisition of the remaining 58.1% stake in Gangavaram Port Ltd. (GPL) after the approval of National Company Law Tribunal, India.
Total EBITDA increased by 22% in FY22, 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 USD750 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.
FINANCIAL ANALYSIS
The Fitch base case assumes a 18% YoY increase in throughput in FY23 due to first time inclusion of GPL cargo versus management case of increase of 25% YoY. Thereafter, Fitch base case assumes 6.5% increase in throughput in FY24-FY27, against management projections of a CAGR of around 14%. We estimate a 3% growth for tariffs, the same as management guidance and maintain EBITDA margins that are lower by 3% than management case for every year in FY23-FY27. We also assume the same capex as management and a dividend payout of 25% of profit after tax from FY23. Our base case generates a three-year average gross debt/EBITDA of 3.0x, with a maximum of 3.5x in FY23.
Fitch rating case assumes the same throughput for FY23 as the Fitch base case and a 10% haircut to base-case throughput growth in FY24-FY27, implying a throughput CAGR of about 5.9% between FY23 and FY27. We also apply a 10% haircut to the base-case tariff and maintain EBITDA margins that are lower by 5% than management case for every year in FY23-FY27. We assume the same dividend payouts as in the base case, in line with management’s guidance. We do not stress capex, as it is discretionary in nature. Our rating case generates a three-year average gross debt/EBITDA of 3.1x, with a maximum of 3.6x in FY23.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
APSEZ’s rating is capped by India’s Country Ceiling of ‘BBB-‘.
Source: Fitch Ratings