The outlook for Adani Ports and Special Economic Zone Limited (APSEZL) has been revised to Negative on account of the deterioration in the Group's financial flexibility, following a sharp decline in share prices and an increase in the yield of international bonds raised by group entities. This followed a report published by a USA-based short seller.

ICRA notes that the Group's strong financial flexibility and APSEZL's track record of refinancing a large part of its debt with borrowings (mostly from overseas debt capital markets) of longer tenures at lower interest rates were the key credit strengths, which have been adversely impacted.

ICRA will be monitoring the Group's ability to raise funds from domestic/global market as equity/debt at competitive rates. Further, ICRA sees an increased risk of regulatory/legal scrutiny on the group entities and its impact on the credit quality of APSEZL will be monitored. However, ICRA notes that the APSEZL's liquidity profile remains robust and a large repayment of international bond of $650 million is due only in FY2025.

The rating reaffirmation continues to factor in the strong business profile of APSEZL, marked by its favourable operating characteristics, geographically spread-out footprint, diversified cargo mix and long-term customer tie-ups. ICRA also notes that the company has been acquiring key port assets as well as strategic assets across the logistics volume chain in the last few years. This has strengthened its business profile by improving the asset and cargo diversification, expanding presence across key hinterlands in the domestic market and integrating the port assets with other logistics segment.

The company accounted for ~24% of the overall cargo handled at the Indian ports in FY2022, with around 43% share in the container segment and ~35% share in coal. ICRA also notes that the share of coal has moderated in the overall cargo mix in the last few years and is expected to moderate further, going forward. The increased asset and cargo diversification mitigates the risks associated with demand cyclicality in specific cargo segments, structural risks arising from the expected moderation in coal imports in the medium to long term and any asset specific/event risk at specific locations. 

The consolidated revenue grew at a CAGR of 12% during FY2017 to FY2021, aided by organic growth and acquisitions. The revenue grew ~27% in FY2022 and ~16% in 9MFY2023. The revenue from the logistics/other non-port segments has also been growing in the last few years. The ratings also consider the healthy profitability metrics and large cash accruals which enable it to maintain a comfortable liquidity position.

ICRA also notes that the company is undertaking several projects, including a greenfield project at Vizhinjam in Kerala, which has witnessed delays due to various issues, including protests. While the company is exposed to project execution risks, ICRA notes that the impact on the overall credit profile of company is mitigated by the relatively small size of such projects compared to the overall asset base and net worth. Further, ICRA takes note of the in-principle approval received for viability gap funding (VGF) for the project.

Due to the large capex and periodic acquisitions, the net debt/OPBDITA levels have remained high for the company. However, the net leverage moderated to 3.4x as on March 31, 2022 (considering the consolidation of Gangavaram Port, the net debt/OPBDITA was ~3.1x), supported by higher profits in line with the scale of operations. The net debt/OPBDITA further improved to 2.8x as on September 30, 2022 (considering full consolidation of Gangavaram Port). ICRA expects the leveraging and credit metrics to improve, going forward, with higher cash flow generation as cargo volumes ramp up at its various ports/terminals.

Further, APSEZL has maintained an aggressive acquisition policy and capex plans in recent years, including capex to be incurred for the JV projects. However, ICRA notes that part of the planned capex is discretionary in nature and will be undertaken based on market conditions and financial performance. In the wake of recent developments, the company has revised down its capex plans for FY2024 to Rs. 4,000-4,500 crore from Rs. 6,000-8,000 crore and the management has also guided that the company will be partly prepaying its debt in FY2024 to achieve net debt/OPBDITA of 2.5x and any potential acquisition will keep the leverage guidance into consideration. Any significant debt-funded acquisition that will impact the deleveraging plans will be a rating sensitivity.