There is no credit impact on Adani Ports and Special Economic Zone Limited (APSEZ, BBB-/Negative, underlying credit profile: bbb) from its proposed acquisition of a minority 31.5% stake in Gangavaram Port Ltd. (GPL) from Warburg Pincus LLC, says Fitch Ratings.
The purchase price of INR195 billion will be fully funded through APSEZ’s internal accruals and cash balance, according to management. We believe the acquisition supports APSEZ’s port portfolio by diversifying concentration away from the west coast of India; the company says the proportion of cargo from the western and eastern coasts will shift to 60% and 40%, respectively, from 67% and 33% currently. APSEZ’s share of pan-India cargo volume will also increase to 30%, from 27%, consolidating its market leadership.
GPL’s EBITDA margin of 59% is lower than the 70% that APSEZ records for its port operations. However, APSEZ intends to improve GPL’s profit margin by increasing operational efficiency. We believe APSEZ has a strong record in turning around acquired port assets, such as Dhamra Port in 2014, Kattupalli Shipyard in 2015 and more recently, Krishnapatnam Port Company Ltd., which APSEZ acquired in October 2020. GPL is a debt-free asset and has growth potential through expansion, new cargo types and enhanced logistics solutions.
Our rating case estimates that the acquisition of GPL will result in APSEZ’s consolidated EBITDA in the financial years ending March 2022 (FY22) and FY23 to increase by about 6% for both years, and that net debt/EBITDAR in FY21-FY25 will remain unchanged to stay below 5.0x, the level above which we would consider negative rating action. APSEZ’s underlying credit profile is capped by India’s Country Ceiling of ‘BBB-‘.
GPL has paid-up equity share capital of 517 million shares, of which 58.1% are owned by D.V.S. Raju and family – the promoter – 10.4% by the government of Andhra Pradesh and 31.5% by Warburg Pincus. APSEZ is also in discussions with D.V.S. Raju and family for their 58.1% stake.
GPL is the second-largest non-major port in Andhra Pradesh on the east coast of India. It has nine water berths with 64 million metric tonnes (MMT) of capacity under a concession from Andhra Pradesh that extends till 2059. The port handled 35 MMT of cargo in FY20). GPL is an all-weather, deep water, multi-purpose port capable of handling fully laden super cape size vessels of up to 200,000 DWT. It has free hold land of around 1,800 acres and a master plan capacity for 250 MMT per annum with 31 berths for future growth.