Fitch Ratings has affirmed India-based port operator Adani Ports and Special Economic Zone Limited’s (APSEZ) Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB-‘ and removed it from Rating Watch Negative (RWN). The Outlook is Negative. A full list of rating actions is at the end of this commentary.

RATING RATIONALE

The rating affirmation follows the demonstration of adequate funding access by the Adani group following the US indictment of certain board members of another group entity, Adani Green Energy Limited (AGEL), on 20 November 2024.

We believe the risk associated with the group’s liquidity and funding requirements has moderated. However, the Negative Outlook reflects our view that the proceedings and outcome of the US investigations could reveal further weaknesses in the group’s corporate governance practices, which may lead to negative rating action in the near to medium term. Fitch will monitor the investigations for any evidence of weakness in the entities’ governance practices and internal controls, and the impact on APSEZ’s financial flexibility.

The rating continues to reflect APSEZ’s strong business and financial profile, underpinned by a robust portfolio of seaports and adequate liquidity position. Its cash balance of INR77 billion as of December 2024 and strong operating cash flow should cover debt maturities of INR66 billion during the financial year ending March 2026 (FY26) and fund its capex. The company also benefits from flexibility in the pace of execution of its expansion projects.

Fitch assesses the financial profile to be stronger than is commensurate with its ‘BBB-‘ rating. Fitch’s governance assessment, as well as India’s (BBB-/Stable) Country Ceiling of ‘BBB-‘, constrains APSEZ’s rating at ‘BBB-‘. APSEZ benefits from geographically diversified port locations, advanced intermodal connectivity transportation infrastructure and best-in-class operational efficiency. It has high customer retention for about half of its cargo, owing to comprehensive and advanced infrastructure to handle a variety of cargoes.

KEY RATING DRIVERS

Best-in-Class Port Operator – Revenue Risk (Volume): Stronger

APSEZ is India’s largest commercial port operator, handling a quarter of the country’s seaborne cargo through its 14 operational ports and terminals in India. Most are primary ports of call in their regions. Its flagship Mundra Port is the gateway to north-western India. Traffic is mainly origin and destination, with limited transshipment cargo. APSEZ’s advanced transport infrastructure, operational efficiency and integrated logistics solutions that transport cargo from its ports to inland depots via railways have led to market share gains and faster organic throughput growth than its peers and India’s economic growth.

Cargo that is difficult to switch to other ports makes up about half of total throughput. APSEZ continues to diversify its throughput from the west coast, with its east-coast terminals accounting for more than 40% of total throughput. The company’s expanded logistics business covers all of India, with multimodal logistics for warehousing, rail transportation and distribution.

Flexibility in Modifying Tariffs – Revenue Risk (Price): Midrange

APSEZ’s portfolio comprises mainly non-major ports. The private ports have the freedom to fix their own tariffs, which are generally higher than at other Indian ports, but this is justified by APSEZ’s better operational efficiency and connection with the hinterland, as it lowers shippers’ overall logistics costs, according to management.

The company’s take-or-pay contracts accounted for about 12% of port revenue in the financial year ended March 2024 (FY24), with a capacity-weighted remaining contract term of 16 years. Take-or-pay contracts insulate revenue from throughput volatility. The assessment is constrained to ‘Midrange’ due to regulated tariffs at certain ports, although their contribution to APSEZ’s EBITDA is minimal.

Internally Funded Capex – Infrastructure Development and Renewal: Stronger

APSEZ’s medium-term capex plan is well developed, focusing primarily on expanding capacity at key ports to accommodate demand growth, as most major greenfield projects are nearing completion. Its capex plans also involves upgrading ports and enhancing logistics capabilities, including warehousing, bulk rakes and trucking. It has budgeted annual capex of about INR110 billion-115 billion over the medium term. APSEZ has a strong record of managing its port investments, which are mostly discretionary and can be postponed without affecting operations significantly.

Fixed-Rate Bullet Bonds Dominate – Debt Structure: Midrange

APSEZ’s consolidated debt comprises mainly US dollar and Indian rupee bullet bonds. We expect its business strengths, established capital market access and relationships with banks to mitigate refinancing risk. APSEZ also has limited exposure to floating interest rates since the majority of its debt is made up of fixed-rate bonds and notes. The bonds do not benefit from restrictive financial covenants or reserve accounts and it relies on natural hedging to manage foreign-exchange risk. Nearly one-third of its revenue is in US dollars and should be sufficient to service its US dollar debt.

Financial Profile

Fitch’s base case assumes annual cargo volume growth of about 10%-15% and 2%-3% annual tariff growth over the next few years. We forecast an EBITDA margin of about 60% over the period, annual capex of INR115 billion-120 billion and annual cash outflow from acquisitions at the same level as FY24. We have also assumed a dividend payout ratio of 20%-25% per annum. Our base-case total debt/operating EBITDA remains below 2.5x from FY26 to FY28.

Our rating case assumes a haircut from the base case at about 2%-5% in volume and about 1%-2% in tariffs, an additional 2pp-3pp stress on the EBITDA margin, a 20% stress on capex and 10% additional stress on acquisition assumptions. We have assumed a higher dividend payout ratio of 25% per annum. The rating-case total debt/operating EBITDA remains below 3.0x from FY26 to FY28.

PEER GROUP

We view APSEZ as most comparable to JSW Infrastructure Limited (JSWIL, BB+/Positive). Both JSWIL and APSEZ have diverse portfolios and debt profiles with limited protective features. However, APSEZ benefits from a more diverse cargo and counterparty mix, larger scale of operations, and larger portion of cargo throughput due to its longer-term cargo contracts compared with JSWIL. APSEZ’s rating is, however, constrained by its ESG assessment and India’s Country Ceiling. We therefore assess APSEZ only one notch higher than JSWIL despite its much stronger business profile.

Port of Melbourne (issuing entity Lonsdale Finance Pty Ltd: BBB/Stable) is the primary port of call in the State of Victoria and serves Australia’s broader market with limited competition. Its rating benefits from a diversified landlord port business model, long concession life, and low infrastructure development and renewal risk, although its operational scale is much smaller than that of APSEZ. Despite an average net debt/EBITDA of 7.9x against APSEZ’s 3.0x under Fitch’s rating case, Port of Melbourne is rated a notch higher than APSEZ as its overall stronger qualitative attributes support higher leverage, while APSEZ is constrained by its ESG assessment and India’s Country Ceiling.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

– Impairment of financial flexibility, which would be evident from increased funding costs or restricted funding access;

– Evidence of further weaknesses in group entities’ governance practices and internal controls, such as material adverse development from the US investigation;

– Prolonged deterioration in rating-case debt/EBITDA to above 6.0x;

– Lowering of India’s Country Ceiling to ‘BB+’.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

The rating could be affirmed with a Stable Outlook if risks of any material negative implications from the US investigations do not materialise, while funding access remains intact.

CREDIT UPDATE

APSEZ continued to handle about a quarter of India’s total cargo volume in 9MFY25. Cargo throughput increased by 7% yoy, while revenue rose by 14%, contributed largely by organic throughput growth in Mundra as well as consolidation of results from Astro Offshore, a leading offshore support vessel owner, and Tanzania’s concession starting from 2HFY25.

APSEZ completed the acquisition of its majority stake in Gopalpur Port in FY25 and an 80% interest in Astro Offshore. It has also signed a 30-year concession agreement to operate and manage Container Terminal 2 at the Dar es Salaam port in Tanzania. In addition, India’s first dedicated transshipment hub, Vizhinjam Port, also commenced operation in December 2024.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

APSEZ’s rating is capped by India’s country ceiling

ESG Considerations

APSEZ has an ESG Relevance Score of ‘4’ for Governance Structure due to the complexity of its group structure at the shareholder level, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

APSEZ has an ESG Relevance Score of ‘4’ for Group Structure due to the concentration of ownership with a large majority stake held by Adani Group, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

The highest level of ESG credit relevance is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision.

Source: Fitch Ratings