We revised the outlook to reflect the significant increase in investments over the past 12 months and lower-than-expected operating performance. We affirmed the rating on APSEZ because we believe the company's financial performance will improve over the next 18 months to be in line with our expectations for the rating.
"We expect APSEZ's weaker performance to keep its financial ratios below our expectations for the current rating, with funds from operations (FFO) to debt of less 13% for the next 12 months," said S&P Global Ratings analyst Mehul Sukkawala. "A fall in coal imports, which stemmed from higher domestic coal production, and a subdued economic environment hurt the company's revenue growth and profitability."
APSEZ's debt also increased by Indian rupees (INR) 40 billion because of adverse working capital movement and high investments through capital expenditure, advances, and deposits. APSEZ's financial ratios were also adversely affected by a slower-than-expected decline in Mundra Port Pty. Ltd.'s debt, which the company guarantees. We believe the debt-to-FFO ratio for the fiscal year ended March 31, 2016, has further slipped to 10%-11%, from 12% in fiscal 2015.
In our view, APSEZ's financial ratios will improve over the next 12-24 months with better operating performance and positive free operating cash flows. The company has undertaken significant measures to increase cargo volumes, especially in containers. It would benefit from the commissioning of various projects, especially the additional terminal at Dhamra Port and the fourth container terminal at Mundra port. At the same time, we expect the company to continue its focus on investments.
APSEZ continues to maintain its market position. The company remains India's largest port operator and continues to further improve its market share by growing cargo volumes faster than the rest of the industry.
"We expect APSEZ to improve its diversity as it continues to develop, expand, and acquire new ports although Mundra port will continue to account for a large share of its operations. The company has also maintained its operating efficiency despite registering a marginal decline in its strong margins," Sukkawala said.
The negative outlook reflects the risk of APSEZ's operating performance not improving in line with our expectation or the company undertaking aggressive investments, resulting in its ratio of FFO to debt remaining below 13% for a prolonged period. It also reflects the risk of the company increasing its dependence on short-term debt, adversely affecting its liquidity position.
We may lower the rating if we expect APSEZ's financial position to remain weak for a prolonged period. A ratio of FFO to debt below 13% would indicate this. APSEZ's financial position could stay weak if: its organic and inorganic growth strategy is more aggressive than what we have factored into the rating; the operating performance does not improve in line with our expectations; or related party dues increase further.
We may also lower the rating if the company's liquidity position deteriorates. This could happen due to APSEZ having a high amount of short-term debt without commensurate availability of long-term funding.
We may revise the outlook to stable if we believe APSEZ will sustain stronger financial ratios, with a ratio of FFO to debt approaching 13% in fiscal 2017 and rising comfortably and sustainably above 13% in fiscal 2018 and beyond. It is also based on the expectation that the company maintains adequate liquidity.
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