Press Release Adani Ports and Special Economic Zone Limited April 05, 2019 Ratings Amount Rating Facilities Ratings1 (Rs. crore) Action Non-Convertible CARE AA+; Stable Debentures (Proposed) 750.00 Reaffirmed [Double A Plus; Outlook: Stable] – I CARE AA+ (SO); Stable Non-Convertible 40.00 [Double A Plus (Structured Reaffirmed Debentures Issue – II * (reduced from Rs.60.00 crore) Obligation); Outlook: Stable] * 790.00 Total (Rupees Seven Hundred and Ninety Crore Only) Details of instruments/facilities in Annexure-1 *backed by the escrow of entire receivables of Indian Oil Corporation Ltd for the single point mooring (SPM) facility of APSEZ Detailed Rationale & Key Rating Drivers The rating assigned to the proposed non-convertible debenture (NCD) - I 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 and increasing share of container volumes due to growth in container volume at its Mundra port after completion of its capex, growth in cargo volumes at Kattupali and Ennore, long-term contracts with customers and flexibility in determining tariff at seven ports including its landlord Mundra port. The rating also factors its healthy profitability, demonstrated project execution capabilities of APSEZ in the port sector and strong financial flexibility as well as liquidity. The long-term rating of APSEZ, however, continues to remain constrained by its relatively high debt levels inherent in infrastructure development projects resulting in moderate leverage though improved gradually; as it is awaiting realization of full benefits of completed capex at some of the locations. The rating further takes cognizance of moderation in performance at its Dhamra port. APSEZ’s ability to rationalize its debt levels along with generating envisaged returns from the added capacities are the key rating sensitivities. Furthermore, extent of exposure to related parties and any large size debt funded capex and/or any large sized acquisition impacting its financial risk profile would also be a key rating monitorable. The rating assigned to the NCD – II of APSEZ continues to derive strength from its port service agreement (PSA) with Indian Oil Corporation Limited (IOC) rendering strong future revenue visibility concomitant with sound credit quality of the underlying receivables and established track record of operating the single point mooring (SPM) facility. The rating also draws comfort from maintenance of debt service reserve account (DSRA) in the form of fixed deposit receipts (FDR) and significant buyback of the rated NCD. The rating is, however, constrained by the nature of the structure which is not bankruptcy remote. Large deviation from the structure impacting debt coverage indicators is the 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 APSEZ is India’s largest port operator while Mundra is India’s largest commercial port. 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/under development port at six locations (Mundra, Dahej, Kandla, Hazira, Mormugao and Vizhinjam) located on Western coast and four (Vizag, Dhamra, Kattupalli and Ennore) locations on Eastern coast. APSEZ through its subsidiary, Abbott Point Bulkcoal Pty Limited (ABPO), also handles operations of Abbot Point Coal Terminal 1 in Australia. The contribution of Mundra to the overall cargo handled by the company has gradually reduced from 91% in FY13 to 66% in 9MFY19. Diversified cargo mix, long-term contracts with customers and flexibility in determining tariff at seven out of ten ports APSEZ has established mechanized cargo handling facilities with capability to handle bulk, liquid, crude and container cargo. Consolidated cargo handled by the group grew from 169 million metric tonne (MMT) in FY17 to 180 MMT in FY18, a growth of 6.51% driven by healthy growth in container cargo of 20% on a y-o-y basis. Furthermore, during 9MFY19, the cargo handled by the company on consolidated basis increased by 14% on a y-o-y basis driven by healthy growth in 1 Complete definitions of the ratings assigned are available at www.careratings.com and in other CARE publications. 1 CARE Ratings Limited Press Release container cargo of 13% on a y-o-y basis. Over the past few years, the company has reduced its dependence on coal cargo with increasing growth in container cargo. The contribution of coal in the overall cargo handled by the company has declined from 47% during FY15 to 33% during 9MFY19 while that for container cargo had increased from 29% during FY15 to 41% during 9MFY19. APSEZ has entered into long-term contracts with reputed companies for key cargo segments at Mundra, Dhamra, Dahej, Hazira, and Mormugao ports/termianls. Apart from Mundra, six other ports including Dahej, Hazira, Dhamra, Kattuppalli, Vizhinjam and 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 TOI and healthy profitability On a consolidated basis, APSEZ’s TOI increased by 27% during FY18 on a y-o-y basis due to growth in cargo handled by the company and increase in realisation. TOI of APSEZ further grew by 8% during 9MFY19 on a y-o-y basis driven by growth in cargo volume which led to a 20% increase in port revenue but the impact on the TOI was moderated on account of lower port development during 9MFY19 which was present in 9MFY18 on account of transfer of Container Terminals 3 and 4 (CT – 3 and CT-4) at Mundra port to its JV companies. APSEZ has healthy profitability as reflected from its consolidated PBILDT margins in the range of 65-69% over FY15-FY18. PBILDT margins continued to remain healthy during 9MFY19. Healthy operating and financial performance of Hazira and Dahej ports; partly offset by moderate performance of Dhamra Port The operational and financial performance of Hazira port 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. The improvement in performance of Dahej port can be attributed to increase in coal volumes. Further, the Dahej port, which had seen decline in cargo during FY16 and FY17, has also shown improvement during 9MFY19 primarily on account of pick up in coal imports during the period. Furthermore, the operations of Kattupalli port have also remained healthy with 18% growth in cargo handled by it during 9MFY19 on a y-o-y basis in addition to the notable growth in cargo volumes at the terminal at Mormugao on account of new long term contract signed. However, the performance of Dhamra Port was moderated mainly on account of impact of ongoing capex during FY18 and evacuation issues due to unavailability of rakes during 9MFY19. The same is also reflected from decline in PBILDT margins of Dhamra port from 67% during FY17 to 58% during FY18 and 49% during 9MFY19. As articulated by its management, the evacuation issues are being addressed through acquisition of railway rakes so as to reduce its dependence on Indian Railways. 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. During FY18, the company had transferred container terminal – 4 (CT – 4) to its joint venture, Adani CMA Mundra Terminal Private Limited (ACMTPL). Further, APSEZ completed the construction and transferred the container terminal-3 extension (CT-3 extension) to its JV, Adani International Container Terminal Private Limited (AICTPL; rated CARE AA; Stable). APSEZ is also undertaking construction of liquefied natural gas (LNG) terminal at Dhamra port which 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. APSEZ has also liquidated entire loans & advances which it had extended to related parties. Liquidity Analysis The liquidity position of APSEZ is underpinned from the fact that the company had large free cash and cash equivalents balance of Rs.5221 crore as on September 30, 2018. The company generated healthy cash flow from operating activities amounting to Rs.5608 crore during FY18 which suffices the near term debt repayments as well as capex requirements and results in surplus liquidity. Free cash flow is expected to increase considerably in the medium term unless it decides to undertake some major capex/acquisition. Key rating strengths for NCD - II Strong revenue visibility due to favourable PSA with IOC and strong credit quality of underlying receivables IOC has signed a PSA with APSEZ to handle its crude oil requirement of Panipat Refinery from March 1, 2005 to February 16, 2031. As per the PSA with IOC, APSEZ is entitled to receive annual fixed charges of Rs.35 crore up to the throughput of 8.25 million metric tonne per annum (MMTPA), for throughput of more than 8.25 MMTPA and less than 11 MMTPA, fixed charges would increase in proportion to the increase in the throughput and for throughput of 11 MMTPA and above, Rs.48.41 crore annually for the use of its SPM facility by IOC.