Mumbai: A significant rise in investments over the last one year by Adani Ports and Special Economic Zone (APSEZ) along with subdued earnings will weigh on the company’s credit rating, said global rating agency Standard and Poor’s (S&P). Citing these pressures, on Monday, S&P Global Ratings revised its outlook on APSEZ to “negative" from “stable".

A significant increase in APSEZ’s investments over the past 12 months, resulting in 20% higher debt, and weaker-than expected operating performance have been the main triggers for the rating agency to review its outlook for APSEZ, S&P said.

“The adjusted debt for APSEZ was 21,000 crore as on March 31, 2015, that has gone up to 25000 crore in March 31, 2016. Fall in coal volumes and subdued economic environment has also adversely impacted the company’s FY16 performance," said Mehul Sukkawala, senior director for corporate ratings at S&P Global Rating.

He added that the financial ratios of APSEZ are expected to improve over the next 18 months led by stronger operating performance, cash flow from the special economic zone and reversal of related party dues.

APSEZ’s financial leverage as measured by funds from operations (FFO) to debt is expected to be 13% for 2017 fiscal and will rise sustainably in 2018 and beyond, according to S&P.

The revenue growth will be led by commissioning of additional capacity at ports like Dhamra and Mundra, addition of new shipping lines and new long-term contracts for coal. The annual income from special economic zone will be about 1000 crore in fiscal 2017 and 2018 before falling to about 600 crore in fiscal 2019, according to S&P.

APSEZ, controlled by billionaire Gautam Adani, will incur a capital expenditure of about 7,000 crore over the next three years for infrastructure development of existing ports and terminals.

“This capex would mainly be for development and construction of Vizhinjam port in Kerala and for adding capacities at Mundra, Dahej and Hazira port projects in Gujarat and Dhamra port in Odhisha," Sukkawala said on a webcast on Monday.

The capex is over and above the Centre’s viability gap funding for Vizhinjam port and does not include the investment required for acquisition of Kattupalli port in Tamil Nadu from L&T Shipbuilding Ltd. According to S&P, APSEZ will complete acquisition of Kattupalli by the end of fiscal 2017.

Tamil Nadu’s port policy, under which the project was awarded to Larsen and Toubro Ltd (L&T), does not permit the sale of the port because it was structured as a shipbuilding cum port facility under a single entity. For L&T to divest its investment in the project, it will have to split the company’s assets and then divest it. Currently, L&T operates both the port and a shipyard under L&T Shipbuilding. L&T holds a 97% equity stake in L&T Shipbuilding, with Tamil Nadu Industrial Development Corp., a state government undertaking, holding the rest.

The project was delayed due to elections in Tamil Nadu but with the same government that had cleared the project being re-elected, the acquisition process is well on track, according to Sukkawala of S&P Global.

S&P is the second rating agency to review its outlook on APSEZ. Last week, Moody’s Investors Service also revised its outlook on Adani Ports and Special Economic Zone (APSEZ), to “negative" from the earlier “stable" citing an increase in capital expenditure and financial leverage as reasons for the revision in ratings.

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