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Adani Ports & SEZ Plans to Raise ₹500cr via NCDs

Adani Ports’ Bond Market Move to Raise 500 Cr INR for Growth

Source: Originally reported by Economic Times on Jan 5, 2024

Analysis for Layman

Adani Ports and Special Economic Zone (APSEZ) is set to raise 500 crore INR by issuing Non-Convertible Debentures (NCDs) on January 8th. NCDs, representing long-term corporate bonds, cannot be converted to company equity shares. APSEZ will release two sets of secured, rated NCDs. The first, maturing in 2029 with an 8.7% annual coupon, and the second, maturing in 2034 with an 8.8% coupon. These NCDs are secured against company assets and rated AA+ by agencies, indicating high safety.

The funds raised will be utilized to meet APSEZ’s growth requirements, as it continues to expand its capacity to retain its position as India’s largest commercial ports operator. The NCD route provides a quicker means of fundraising compared to bank loans or equity options. Additionally, the favorable coupon rates contribute to its attractiveness against prevailing bond yields.

Adani Ports & SEZ Plans to Raise ₹500cr via NCDs

Impact on Retail Investors

This NCD issue has a limited direct impact on retail investors, primarily attracting institutional investors and high net worth individuals. Retail investors can only purchase the NCDs after they are listed. However, the fundraise supports APSEZ’s growth plans, reinforcing its balance sheet. As a leader in the infrastructure sector crucial for India’s external trade, APSEZ’s performance influences broader economic sentiment, making it a retail favorite with a 20% free float in public shareholding.

While the NCD fundraising offers limited new information, positive signals on growth contribute to investor sentiment. APSEZ’s stock price directly impacts retail portfolios, with support to trade growth having positive indirect effects. Key watchpoints include execution risks such as funding costs, and any rise in bond yields, interest rates, or major Capex overruns could negatively impact short-term stock performance. Hence, retail investors should focus on project timelines, debt levels, and funding access trends beyond headline fundraising news.

Impact on Industries

The ports and shipping industry directly benefits as the raised capital is deployed to expand capacity in APSEZ’s ports network. Increased container handling capacities facilitate export-import trade growth, benefiting port operators and shipping liners. Higher throughput also benefits related logistics sectors, including sea freight firms, inland container depot operators, trucking groups, and warehousing and distribution hubs in port-proximate locations. The increased trade has spin-off effects on export manufacturing sectors, such as pharma, engineering goods, and agro products.

Construction, machinery, and technology partners involved in port modernization initiatives also see an influx of orders. Diversified conglomerates, EPC companies, and technology providers to the ports ecosystem observe positive outcomes, enhancing APSEZ’s dominance versus competitors.

Long Term Benefits and Negatives

Over a 5-10 year horizon, matching NCD tenors, ramping up ports infrastructure has sustainable positives. Adding capacities ahead of demand supports trade competitiveness, serving rising consumption, and improving economies of scale. Technology upgrades aid efficiency and align with green initiatives, saving energy and reducing waste.

From APSEZ’s perspective, the capex helps secure a leadership position with first-mover advantages and reduces geographic concentration risks by expanding the portfolio beyond the home base Mundra port. Stable long-term funding for capital projects provides continuity benefits. However, potential negatives such as cost overruns, execution delays, inadequate capacity utilization, and shipping industry cyclicality need monitoring.

Short Term Benefits and Negatives

The next 6-12 months are crucial for deploying the capital raised by the NCD issue toward identified capacity expansion projects. Commencing construction activities, awarding vendor contracts, and preparing ancillary infrastructure will support job creation and benefit technology partners, construction materials providers, and allied logistics firms.

APSEZ should leverage funded projects to pursue strategic public-private partnerships, and the fundraise provides a backup liquidity cushion. However, risks include delays in deploying capital, securing regulatory approvals, and changes in lending rates or capital access conditions due to the evolving macro environment. Prudent capital allocation and project governance are essential for long-term success, and any faltering on this count can lead to short-term stock price volatility and negative investor sentiments around near-term uncertainty.

Impacts of Adani Ports’ NCD Issuance on Companies:

Indian Companies Potentially Gaining:

  • Adani Group Companies: (e.g., Adani Green Energy, Adani Power, Adani Enterprises): Additional funds raised by APSEZ could benefit other Adani group companies through potential inter-group loans or collaborations on infrastructure projects.
  • Ports & Logistics Companies: (e.g., DP World India, JSW Infrastructure, Krishnapatnam Port): Increased investment in port infrastructure by APSEZ could stimulate activity in the sector, potentially benefiting competitors through higher cargo volumes or infrastructure utilization.
  • Financial Institutions: (e.g., Axis Bank, ICICI Bank, HDFC Bank): Acting as investors or distributors for the NCDs could generate fees and commissions for banks.

Indian Companies Potentially Losing:

  • Bond Issuers in Similar Risk Category: (e.g., Power Grid Corporation, National Highways Authority of India): APSEZ’s strong AA+ rating and attractive coupon rates could draw investor attention away from other debt issuances, potentially increasing their borrowing costs.
  • Alternative Investment Funds: (e.g., Edelweiss Infrastructure Yield Plus Fund, JM Core Investments – InvInv Fd): APSEZ’s NCDs could compete with existing infrastructure debt investment options, potentially impacting fund inflows and returns.

Global Companies:

  • No significant impact anticipated. This is a domestic debt issuance primarily targeted towards Indian investors.

Market Sentiment:

  • Short-term: Positive for Adani Group companies and the ports & logistics sector. Neutral for most other companies.
  • Long-term: Depends on the success of the NCD issue and Adani Ports’ future projects. Positive sentiment if the funds are used effectively, potentially boosting investor confidence in the port infrastructure sector.

Limitations:

This analysis is based on limited information and could be subject to changes based on market developments and unforeseen events.

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