Global Ratings said on Thursday that Adani Ports and Special Economic Zone Ltd's (BBB-minus with stable outlook) rating headroom will reduce as it actively pursues multiple organic and inorganic growth opportunities.
The India-based commercial port operator has sufficient financial buffer to absorb the recent acquisition of Gangavaram Port Ltd but its rating trajectory will depend on management's financial discipline to maintain an investment-grade credit profile, it said.
"We believe APSEZ's acquisition of Gangavaram Port will not have a material impact on the company's financial ratios because the management plans to acquire the additional equity stake via fresh equity infusion rather than debt," said S&P.
APSEZ confirmed that it will acquire 89.6 per cent of Gangavaram Port for Rs 5,558 crore. The financial close of this acquisition is to occur in the first half of fiscal year ending March 31, 2022.
Gangavaram Port, which is strategically located in the north of Andhra Pradesh, will provide greater diversity to the company's operations. The port has a concession deed with the state government that extends till 2059.
APSEZ's capital expenditure (capex) will likely be around Rs 3,000 crore in fiscal 2022 compared with Rs 2,000 crore in fiscal 2021, given the company's plans for growth capex for existing ports and new ports.
The forecast takes into consideration APSEZ's announced acquisition of a 100 per cent stake in Dighi Port for Rs 705 crore.
S&P anticipates APSEZ's ratio of funds from operations (FFO) to debt will improve to 15.1 per cent in fiscal 2022 and 17.9 per cent in fiscal 2023 from 10.6 per cent in fiscal 2021.
It expects management to protect the company's investment-grade credit profile by adjusting its capex, inorganic growth appetite or dividend distributions to maintain an FFO-to-debt ratio of more than 15 per cent on a sustainable basis.
APSEZ's leverage in fiscal 2021 was significantly higher than S&P's earlier expectations because of lower trade volumes amid Covid-19 pandemic and completion of Krishnapatnam Port Co Ltd (KPCL) acquisition in fiscal 2021.
Cargo volumes at APSEZ declined 27 per cent year-on-year to 41.5 tonnes for the first quarter of fiscal 2021 due to lockdown measures amid pandemic. But as the Indian economy reopened, the port registered quarter-on-quarter growth of 35 per cent to 56 tonnes for the second quarter and growth of 20 per cent to 67 tonnes for the third quarter (excluding KPCL).
Average growth for all other India ports was 18 per cent. S&P expects APSEZ's cargo volumes (excluding KPCL) to be 225 to 230 tonnes in fiscal 2021.
S&P said APSEZ's capital structure can accommodate headwinds, given the management's ability to adjust growth aspirations, shareholder distribution and investments. APSEZ's ratio of adjusted net debt to EBITDA will be below 4.0x over fiscals 2022 and 2023.