S&P warns Adani Ports of a downgrade two days after a deal investors fear may be shady

• Adani Ports acquired Adani Agri Logistics Ltd. (AALL) from Adani Enterprises for ₹9.5 billion.
• The move has caused serious anxiety among investors and analysts.
• Significant increase in related-party transactions remains a key credit risk, says S&P.

Global ratings agency S&P Global has issued a warning to Adani Ports and Special Economic Zones, two days after the company announced ₹9.5 billion deal to acquire a group company Adani Agri Logistics from the parent company Adani Enterprises.

Adani Ports is paying top dollar for a loss making company that may turn profits only three years from now, leading investors and analysts to suspect shady intent. "Acquisition of logistics assets from a related party is negative for its credit profile even though the transaction is not material financially. Any significant increase in related-party transactions remains a key credit risk for APSEZ, even if financial ratios stay above our downgrade trigger," the S&P said in a note today.

Essentially, the ratings agency is saying that it does not matter how good or bad the financial health of Adani Ports is, it may still downgrade the company if it fears that funds are being moved between group companies unfairly or in a less transparent manner. While the deal may be legally valid, the onus is on the Adani Group to follow a higher standard of governance.

The warning from S&P is not the first one. The move had left a bad aftertaste among investors and analysts who fear the deal may hurt the returns from Adani Ports — and that the only one who may benefit from the deal is the promoter group.

"This acquisition value appears excessive, especially in light of negative return on equity in FY18,” said Atul Tiwari, analyst, Citigroup, in a client note, as reported by the Economic Times on Tuesday. “The surprise acquisition might lead to a resurgence of investor concern around related party transactions and capital allocation again.”

The shares of Adani Ports have declined over 7% in the three trading sessions since the deal was announced.

The company's promoters had pledged a big chunk of their stock to lenders, with no clear means in sight to retrieve them. Promoters held 62.30% stake in Adani Ports as on December 31, 2018 of which 45.51% was pledged, the Economic Times reported.

As in any investigation, the question to ask is who benefits the most from a questionable move.

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