Press Release Adani Ports and Special Economic Zone Ltd May 4, 2017 Ratings Amount Facilities Rating1 Rating Action (Rs. crore) ‘CARE AA+; Stable’ Non Convertible Debentures 750 (Double A Plus; Reaffirmed (Proposed) Outlook: Stable ) 750 Total (Rupees Seven Hundred and Fifty Crore Only) Details of instruments in Annexure-1 Detailed Rationale& Key Rating Drivers The rating assigned to the proposed non convertible debenture issue of Adani Ports and Special Economic Zone Limited (APSEZ) continues to factor in its strong operating efficiency and competitive position as reflected by operational port assets at diverse locations, diversified cargo mix with reduced dependence on coal cargo, long-term contracts with customers and flexibility in determining tariff at four ports including its landlord Mundra port. The rating also factors in healthy profitability, demonstrated project execution capabilities of APSEZ in the port sector, healthy operating and financial performance of Hazira and Dhamra ports and strong financial flexibility. The long-term rating of APSEZ is, however, constrained by its moderate debt coverage indicators during FY16 (refers to the period April 1 to March 31) and H1FY17 on a consolidated basis on account of high debt levels. The rating is also constrained on account of extension of loans & advances to related and unrelated parties by the company. However, the rating takes cognizance of declining trend in loans and advances as was previously articulated by the management and restrictive covenants in the foreign currency denominated bonds issued by the company on extension of fresh loans and advances to related parties. APSEZ’s ability to rationalize its debt levels along with generating envisaged returns from the added capacities are the key rating sensitivities. Furthermore, any large size debt funded capex and/or any large sized acquisition impacting its financial risk profile would also a key rating monitorable. Detailed description of the key rating drivers Key Rating Strengths Strong operating efficiency and competitive position aided by geographically diversified presence of its ports Over the past few years, APSEZ has diversified from a single port entity having presence on Western coast to one with multi port operations spread across both Western and Eastern coasts of India. The company has diversified geographically through development of new ports or acquisition of existing ports. The company currently has cargo handling capacity at five locations (Mundra, Dahej, Kandla, Hazira and Mormugao) on Western coast and two (Vizag and Dhamra) locations on Eastern coast. Mundra, Kandla, Dhamra, Hazira and Dahej are all-weather ports with a natural deep water draft enabling handling of super capesize vessels and E-class container vessels.The contribution of Mundra to the overall cargo handled by the company has gradually reduced from 91% in FY13 to 67% in 9MFY17. Diversified cargo mix, long-term contracts with customers and flexibility in determining tariff at four out of seven ports APSEZ has established mechanized cargo handling facilities at seven locations with capability to handle bulk, liquid, crude and container cargo.Consolidated cargo handled by the group grew from 144 million metric tonne (MMT) in FY15 to 151 MMT in FY16 driven by healthy growth in container, crude and other cargo despite decline in coal cargo. Furthermore, during 9MFY17, the cargo handled by the company on consolidated basis increased by 11% on a year-on-year (y-o-y) basis driven by healthy growth in container, crude and other cargo handled by the company. APSEZ has entered into long-term contracts with reputed companies for key cargo segments at Mundra, Dahej, Hazira and Dhamra ports. Apart from Mundra, four other ports including Dahej, Hazira, Dhamra and Kamarajarport(erstwhile Ennore port) of APSEZ do not fall in the purview of Tariff Authority for Major Ports (TAMP). Hence, these ports have flexibility for fixing the tariff which places them at a relatively advantageous position over other major ports. Growth in total operating income (TOI) and healthy profitability On a consolidated basis, APSEZ’s TOI grew by 17% during FY16 on a y-o-y basis driven primarily by increase in cargo handling charges. TOI of APSEZ grew by 21% during 9MFY17 on a y-o-y basis backed by growth in cargo volumes and increase in cargo handling charges. APSEZ has healthy profitability as indicated by profit before interest, lease, depreciation and tax (PBILDT) margins in the range of 66-68% over FY14-FY16 on a consolidated basis. 1Complete definition of the ratings assigned are available at www.careratings.com and other CARE publications 1 Credit Analysis & Research Limited Press Release Healthy operating and financial performance of Hazira and Dhamra ports; albeit moderation in performance of Dahej port The operational and financial performance of Dhamra and Hazira ports over the past few years has remained robust on account of notable growth in cargo volume due to addition of contracted customers for longer tenor, addition of new container lines, superior infrastructure facility and deep draft enabling berthing of large sized container vessels. Ramp up of operations at these ports has partially compensated for low growth/de-growth at the Mundra port. However, the performance of Dahej port was impacted on account of decline in volume of coal imports as the port is majorly dependent on coal cargo as well as on account of shift of some cargo to Hazira port. Furthermore, the operations of Kandla, Vizag and Mormugao port is at nascent stages and yet to be significantly ramped up. Demonstrated project execution capabilities of APSEZ in the port sector APSEZ over the years has demonstrated project execution capabilities by building new port facilities on the western and eastern coast of India. Furthermore, the company has developed container terminal – 4 (CT – 4) and expanding container terminal – 3 (CT-3) at Mundra port.APSEZ is also undertaking construction of liquefied natural gas(LNG)terminal for Gujarat State Petroleum Corporation (GSPC) at Mundra port. Transfer of CT – 4 and expanded CT – 3 facilities to their respective joint venture (JV) entities and completion of LNG terminal is expected to generate healthy cash flows to the company in the medium term. Strong financial flexibility APSEZ has strong financial flexibility on account of healthy cash accruals and track record of raising low cost debt from domestic and international banks/investors. During the past two years, the company has replaced its high cost rupee borrowing with low cost foreign currency debt with longer tenure reducing the overall cost of borrowing. Key Rating Weaknesses High debt levels leading to moderate debt coverage indicators Consolidated debt levels of APSEZ increased from Rs.18,181 crore as on March 31, 2015 to Rs.23,332 crore as on March 31, 2016 primarily on account of expansion of existing capacities as well as setup of new green field capacities and mark to market losses on foreign currency borrowings.High debt levels led to moderate overall gearing of 1.68 times as on March 31, 2016 (1.59 times as on March 31, 2015) on a consolidated level. High debt levels had also resulted in moderate debt protection indicators despite healthy profitability. However, debt levels reduced moderately to Rs.20,848 crore as on September 30, 2016 primarily through liquidation of advances extended to related parties. Reduction in debt levels along with healthy growth in revenues and improvement in profitability resulted in marginal improvement in debt coverage indicators during H1FY17. Loans and advances extended by the company APSEZ has extended loans and advances to various related and unrelated parties. Loans and advances extended to related parties were Rs.3,500 crore as on March 31, 2016. However, loans advances to related parties reduced by Rs.1,539 crore as on September 30, 2016 and further reduced entirely as on March 31, 2017 as informed by the company to stock exchanges. Going forward, any considerable improvement in the debt protection indicators on sustained basis subsequent to rationalization of loans and advances as well as debtors pertaining to related party is the key rating sensitivity. Analytical approach: Consolidated CARE has taken a consolidated view of APSEZ and its subsidiaries for the analytical purpose. This is on account of increasing focus of management on these subsidiaries as well as their growing scale of operations and extension of advances by APSEZ to them towards rationalizing borrowing cost and facilitating their uninterrupted operations. Applicable Criteria Criteria on assigning Outlook to Credit Ratings CARE’s Policy on Default Recognition CARE's Rating Methodology - Port Projects CARE's Rating Methodology - Infrastructure Projects Financial ratios – Non-financial sector About the Company APSEZ, incorporated in 1998, belongs to the Adani group with Gautam Adani family holding 60.89% stake in the company as on December 31, 2016. APSEZ operates in two segments – (i) port development and operations and (ii) special economic zone (SEZ) development. In the port segment, APSEZ has developed and operates the Mundra port located on the Western coast of India. Apart from Mundra port, APSEZ owns and has developed ports at various other locations like Dhamra, Dahej, Hazira, Vizag, Kandla (Tuna) and Mormugao port. APSEZ through its special purpose vehicles (SPVs) has ongoing projects for establishing green field capacities at Kamarajar port and Vizhinjam in India. APSEZ has also established its presence in ports logistics though operations of dredgers, tugs and container trains. 2 Credit Analysis & Research Limited Press Release APSEZ, through its subsidiary Adani Kattupalli Port Private Limited (AKPPL), has entered into an in-principle agreement for acquisition of the Kattupalli Port in Tamil Nadu from L&T Shipbuilding Limited (LTSB), a subsidiary of Larsen & Toubro Limited. This is subject to receipt of the necessary approvals from the Honourable High Court of Tamil Nadu and the port being demerged from LTSB. Currently, operations of AKPPL are managed by APSEZ.