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Rs 3,500 cr related parties loan recovery puts Adani Ports on stable pedestal: Fitch

Rating agency Fitch Ratings has affirmed India-based Adani Ports and Special Economic Zone Limited's (APSEZ) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB-' on the back of Rs 3,500 crore related parties loan recovery. The Outlook is Stable. The agency has also affirmed APSEZ's senior unsecured rating and the ratings on its US dollar notes at 'BBB-', says a release on 3rd Oct.

The ratings continue to benefit from APSEZ's robust business model and strong market position. We expect the group's financial profile to improve over the next two years as the company generates positive free cash flows. We expect financial leverage, as measured by net adjusted debt (including off-balance sheet liabilities arising from guarantees) to EBITDA, to improve to around 3.5x by the financial year ending 31 March 2019 (FY19).

Financial Discipline Key to Ratings:

APSEZ recovered all its outstanding related-party loans, advances and deposits of Rs 3,500 crore in FY17. The terms of the group's US dollar notes limit any related-party transactions to the company's normal course of business. The company also has significantly better flexibility in infrastructure renewal and expansion capex than some other rated peers in the region, which gives it the ability to generate strong free cash flows. Fitch continues to see APSEZ as being well-positioned to benefit from India's economic growth and related cargo opportunities. The Stable Outlook on the rating reflects management's commitment to contain outflows in terms of capex, M&A and advances. The main risk to the rating is deviation from this commitment. 

Major Port Operator in India:

APSEZ owns 10 ports and terminals (nine in operation and one under construction) in India with capacity of more than 300 million metric tonnes per annum (mmtpa). The group handled about 17% of the country's total cargo in FY17. APSEZ's Mundra port is the largest in India by cargo volume, and accounted for around 58% of the company's revenue and 62% of cash operating profits in FY17. 

Long-Term Contracts; Diversified Customers

 Cargo volumes are likely to be resilient because APSEZ's ports have long-term arrangements with customers and industries in its hinterland. Around 63% of the group's total cargo, including a large share of coal, is contracted or sticky in nature. The top 10 customers accounted for about 50% of cargo volumes in FY17, most of which is sticky in nature, and no single customer accounted for more than 10% of revenue. About 97% of cargo originates from or is destined for India, hence, APSEZ is likely to benefit as the Indian economy grows. 

Volume Growth Forecast Revised Down

Fitch has reduced its forecast for growth in consolidated cargo volumes to CAGR of 7% over FY17-FY20 from more than 10% previously. This followed growth of 11% in FY17 that fell short of expectation of 15%, but was up from 5% in FY16, when growth was hampered by a 8% decline in coal volumes. 

However, the group's volume growth has outpaced the industry's over last decade, helped by its diversified cargo, which ranges from coal to containers. The group's investment plan is focused on increasing cargo volumes and diversifying cargo, especially in containers. In FY18, APSEZ will benefit from a full year of operations of its fourth container terminal at Mundra Port, improved operations at Kattupalli Port, additional contracts for cargo at Dahej, Hazira and Dhamra Ports, and increased coastal shipping in India. 

Positive Cash Flows

 Fitch expects APSEZ's free cash flows to continue to be positive from FY18 despite its large investment plans. The management plans capex of about Rs 3000 crore  a year over the next few years. Most of the capex is driven by the company's aim to increase cargo volume to diversify away from coal. The group plans to develop the first phase of Vizinjham Port by FY19. Given APSEZ's track record of planning, implementation and growth, Fitch does not expect any significant execution risk in the investments. Fitch expects the company to deleverage further as cargo volume growth and income from its Special Economic Zone (SEZ) drive cash generation. 

APSEZ akin to PT Pelabuhan Indonesia…

APSEZ's rating of 'BBB-' is well-positioned relative to its peers given the scale of its operations, profitability and credit metrics. APSEZ's credit profile is similar to that of PT Pelabuhan Indonesia II (Persero) (Pelindo II, IDR: BBB-/Positive, standalone: BBB-). APSEZ's larger scale, higher margins and better credit metrics are balanced by Pelindo II's stable significant cash flow generation from its joint ventures in the form of rental income. Pelindo II's standalone profile is constrained by its significant investment plan for which the company does not have much flexibility given high utilisation of its existing facilities. 

 Compared with APSEZ, PT Pelabuhan Indonesia III (Persero) (Pelindo III, BBB-/Stable, Standalone: BB) has smaller scale, lower margins and higher capex intensity with lower flexibility given high utilisation of its existing facilities. Unlike Pelindo II, Pelindo III does not benefit from any stable rental income either. These factors constrain Pelindo III's standalone profile at the 'BB' rating level. 

Key Assumptions

Fitch's key assumptions within our rating case for the issuer include:

- Cargo volume CAGR of about 7% over next four years

- Receipt of SEZ income from LNG and container terminals 

- EBITDA margins at about 60% 

- Capex of around INR3000 crore a year through FY21

Rating Sensitivities

Developments That May, Individually or Collectively, Lead to Positive Rating Action
- Fitch does not anticipate positive rating action on APSEZ in the medium term, given its significant investment plan and resultant financial metrics. The ratings are also constrained by the concession nature of the company's ports, with the key Mundra Port's concession expiring in 2031. Developments That May, Individually or Collectively, Lead to Negative Rating Action 

- Material debt-funded investments
- Operating performance that is significantly weaker than Fitch expects
- Inability to improve financial leverage (net adjusted debt/EBITDA) to under 4.0x (FY17: 4.3x) or EBITDA interest cover above 4.5x (FY17: 5.0x) on a sustained basis


As at end-March 2017, APSEZ's cash balance stood at around INR2400 crore against short-term debt maturities of about INR4200 crore. We expect the group to generate FCF of INR1000 crore in FY18. APSEZ also has solid access to banks and capital markets, in our view.The group has implemented progressive debt realignment over the last two years. The average maturity is enhanced to 4.2 years at end-March 2017 from 3 years at end-March 2016. The same has been further enhanced to 5.3 years by the USD500 million 10-year US dollar bond issued in June 2017.


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