OREANDA-NEWS. Fitch Ratings has assigned India-based Adani Ports and Special Economic Zone Limited (APSEZ) an expected Long-Term Foreign Currency Issuer Default Rating (IDR) of 'BBB-(EXP)'. The Outlook is Stable. The agency has also assigned APSEZ an expected senior unsecured rating of 'BBB-(EXP)' and the company's proposed senior unsecured US dollar denominated notes an expected rating of 'BBB-(EXP)'.

The ratings benefit from the company's strong operational profile. APSEZ's credit profile is expected to improve over the next two years as debt gets paid down and the company generates positive free cash flows; we expect financial leverage as measured by net adjusted debt (including off balance-sheet liabilities arising from guarantees) to EBITDA to improve to around 4x by FY17.

The company also has a significant proportion of group transactions in the course of ordinary business as well as loans and advances provided to group entities. The bond covenants restrict non-business transactions with affiliates, and also ensure that there is sufficient liquidity at APSEZ.

Final ratings are contingent upon the receipt of final documents for the bond issue that conform to information already received. The senior unsecured rating is also contingent on the company successfully raising senior unsecured debt, which will be used to repay secured debt so that the secured debt/EBITDA falls comfortably below 3x over the near term. The proposed notes are rated at the same level as APSEZ's senior unsecured debt rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company.

KEY RATING DRIVERS
Strong Operating Profile: APSEZ operates eight ports across the Indian coast line. It posted revenue of INR61.5bn and EBITDA of INR39bn in the financial year ended March 2015 (FY15) Its largest port, Mundra, accounted for around two third of revenue and profit in FY15, and is the largest port in India by cargo volumes handled. APSEZ handles a range of cargoes, from coal to containers. The top 10 customers accounted for 35% of revenue in FY15, and no single customer accounted for more than 10% of revenue. A large portion of the cargo (more than 95%) originates or is destined for India, and hence APSEZ is likely to benefit as the Indian economy grows. Cargo volumes are also likely to be resilient because APSEZ's ports have long-term arrangements with customers and industries close by.

Faster than Industry Growth: APSEZ's growth has outpaced that of the industry. The CAGR of cargo volumes at the company's ports was 35.5% over the ten years from FY04 to FY14, compared to 5.3% for major ports owned by the central government and 10.6% for non-major ports.

Efficient Operations at Mundra: The port has a capacity of 210 million metric tonnes per annum (mmtpa), and had volumes of 110.9 million tonnes in FY15 (FY14: 101.1 million tonnes). With capacity utilisation of around 50%, there was almost no pre-berthing time for ships calling at Mundra, while it provides fairly fast turnaround times through the use of mechanisation. The port caters to bulk, container as well as petroleum products. It is able to accommodate large vessels such as capesize ships as well as very large crude carriers. Mundra is on India's western cost and has good access to the northwest hinterland through roads and a 64km private railway line that connects it to the Indian railway network. APSEZ's 30-year concession to operate the Mundra port ends in February 2031.

Acquisition of Dhamra Port: The company plans to expand organically and through acquisitions. In June 2014, it completed the acquisition of Dhamra port on India's eastern coast at an enterprise value of INR55bn. Dhamra is APSEZ's second-largest port, accounting for 12% of consolidated revenue and EBITDA in FY15. Dhamra has capacity of 20mmtpa, and handled 11.7 million tonnes from June 2015 to March 2015. It has long-term agreements with Tata Steel Limited (BB+/Stable), and the company plans on increase the focus on coal as it is close to the coal-rich areas. APSEZ's 34-year concession to operate Dhamra expires in 2041.

Improving Credit Profile: Fitch expects the company to deleverage over the next few years as volume growth drives increased profitability and as the company pays down debt from positive free cash flow. The EBITDA-based net leverage is likely to fall to under 5x by FYE16 and 4x by FYE17 from 5.6x at FYE15.

Group Linkages: APSEZ has transactions with group entities, including business activities such as transporting coal for Adani Power Ltd and Adani Enterprises Ltd (AEL), and providing loans and advances to group entities. AEL had a 75% stake each in APSEZ and Adani Power Ltd. However, AEL has completed the process of demerging its holdings such that its shareholders will directly hold APSEZ as well as Adani Power Ltd.

The bond covenants restrict its transactions with its affiliates. If the transactions are not part of normal business operations, they are capped at USD150m (INR9.2bn) a year and APSEZ cannot have any outstanding liability related to them above that threshold. Further maintenance covenants and dividend distribution covenants ensure that adequate liquidity will be maintained at APSEZ. The bond covenants ensure that the cash flow leakage from APSEZ will be limited and enables us to take a credit view for the company separate from its group.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
-Volume growth to be strong in line with past trends. Volumes at some of the newer ports, such as Hazira and Dahej, are also likely to be strong
- The company's EBITDA margin to remain at around 60%
-Capex needs are likely to be lower than the past so that there is positive free cash flow generation

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- APSEZ's net adjusted leverage (net adjusted debt/EBITDA) is likely to fall to less than 4x and EBITDA interest cover will increase above 3.5x by FY17. Inability to improve financial leverage to below 5x by FY16 and below 4x by FY17 will lead to a negative rating action.

No positive rating action is expected over the medium term, as the ratings factor in the expected improvement in the company's financial profile. The ratings are also constrained by the concession nature of the company's ports, with the key Mundra port's concession expiring by 2031.