From a modest beginning, it is now a name to reckon with among ports in India. With a massive 48 per cent profit in Q1, a port and five terminals to operationalise in the next year, the company expects to continue doing well for a second consecutive quarter (ended September). Sumantra Das writes on the emergence of Essar Ports.
There is a reason Essar wants to quickly shed its image as an ‘in-house operator’ and move on to attracting business from the outside world at its upcoming ports: With an outstanding performance this year, the Ruia-promoted Essar Group ports company could be poised over the next several years to compete for the largest port company in India.
The Essar story rightly indicates to us where the true potential of Indian ports lies. Essar Ports, which offers a range of port and terminal services for liquid, dry bulk, break bulk and general cargo, is sailing smoothly ahead of government-owned ports. In FY12, the company was hived off from Essar Shipping. In August 2011, Essar Shipping Ports & Logistics (ESPL) announced the successful completion of the demerger process. At the time of demerger, the dreams to become over 100 million (metric) tonne per annum (mtpa) capacity port as the company quoted ‘Essar Ports is now the second largest private sector port company in India with 88 mtpa of current capacity, and a target to reach 158 mtpa by 2013. We have a clear vision for reaching our capacity expansion target through ongoing and under development projects.’
Later, the successful demerger of ESPL into the two entities Essar Ports and Essar Shipping have proved that both the companies leveraged their synergies and emerged as leaders in their respective sectors. At present, the current operational capacity (104 mtpa) is expected to rise to 181 mtpa by FY15.
Income and revenues
Essar Ports has a stable portfolio of installed port capacity as it has tied up under long-term contracts with other group companies. Because of this, there is high revenue and earnings visibility, relatively hedged. The company has signed take-or-pay agreements with its group companies. This ensures minimum revenue irrespective of volumes. These contracts have cost-escalation clauses and pass-through charges. Under such contracts, group companies which are Essar Port’s clients will pay on the basis of actual or assured volumes, whichever is higher. Cargo handled will be reconciled at the end of every quarter and finally annually, against assured volumes. Such contracts secure minimum revenue for ESP every year. Although Essar Ports MD Rajiv Agarwal would like to reduce its dependence levels on group business from about 98 per cent to 70-75 per cent in the next few years, observers don’t necessarily agree the environment is right, yet. A senior infrastructure analyst from a leading broking firm seconds this saying, ‘Currently, Essar Ports has three operational ports, out of which 98-99 per cent cargo is in-house cargo, which provides security on cargo volume in present scenario. I think this is the right strategy as economic conditions are not favourable for port developers. The company secured its cargo from group companies and as once slowdown gets over they will focus on other clients. During this time Essar Ports is also developing its capacity to support future requirements. Although investors may not accord much value to it, I believe they have taken the right strategy to augment its capacity in the present scenario. In addition, collaboration with Antwerp Port shows Essar Port’s intentions to get best expertise, technical even commercial support.’
‘Unlike others, our port’s anchor is customer-ready, so Essar Ports never look or wait for customers. However, revenues from third-party customers are expected to grow strongly once the new facilities become operational. On completion, free-cash-flow generation would strongly improve. Most of the debt is long term, repayable over 10 years, says Shailesh Sawa, CFO, Essar Ports.
Essar’s ports are strategically located, with a high degree of scalability and a huge catchment area in the hinterland, says Rajesh Zawar, Analysts at Anand Rathi Research. While Vadinar and Hazira are operational (88 mtpa) and contribute to majority of the company’s revenue, around 80 per cent of Vadinar port’s capacity and 60 per cent of Hazira port’s capacity are undertake/pay contract with Essar Oil and Essar Steel, respectively. The pricing on captive volumes is arrived at an arm’s length basis, at a price differential of around 12-15 per cent between captive and merchant. During Q2FY13, Essar Ports became one of the first companies to be part of the government’s take-out financing scheme through IIFCL, refinancing Rs 405 crore of its debt at EBTL Hazira, thus bringing down interest cost by 265 bps for the stated amount. This would help the company to limit the interest outgo.
New terminals
In October 2012, the iron ore berth at Paradip Port (16 mtpa) commenced its operations.
Recently, Essar Ports has won the bid for the development of three iron ore berths at Visakhapatnam Port for a 30-year concession. The three berths have a combined capacity of 23 mtpa. Two of the berths are operational and will contribute to our revenues post signing of concession agreement. The port handled 12 mt of iron ore in FY13.
ôWith infrastructure spending in the hinterland of various ports, especially at the eastern coast, merchant cargo demand is likely to drive the company’s revenue growth further. Following the capacity additions, the captive revenue is expected to grow at a 14.8 percent CAGR, while merchant revenue should grow at 136 per cent CAGR from FY13 to FY17, improving revenue mix to 60:40 in favour of merchant against captive from current 97:03,ö says Narendra Solanki, Analyst from Destimoney Securities, in his research report. Solanki highlighted that Essar Port’s development at strategic locations for Indian maritime trade would fetch rich dividends once the GDP growth recovers from the current slowdown.
Shashank Kulkarni, Secretary of IPPTA, believes that Essar Ports’s recent aggression shows its intention to become a leading player.’They first hived off logistics and now they are very serious about the port sector as they are coming up with various new projects pan India. Moreover, the recent tie-up with Port of Antwerp is another step towards its global vision. Although they are still in the capacity building phase, I do believe that over the period they will appear to be as leader in the Indian ports sector.
Whether Essar will build an international-infrastructure multi-cargo port like Mundra and Pipavav in the next few years is doubtful. Yet, third-party contracts may precisely be the holders of the key to long term prospects for the company as it seeks to outgrow the group’s business.
Third-party cargo hopes
Shailesh Sawa, Chief Financial Officer, Essar Ports elaborates on the company’s financial trends and future outlook.
Essar Ports began operations at Paradip early this year and expects to commission the Salaya port by FY15. We will also be able to handle additional capacity from Vizag port. Given the high assured revenue from Essar group companies and strong growth in third-party revenue, we expect Essar Ports’ FY12-15 revenue growth to be buoyant.
Presently, we derived around 2-3 per cent of its revenue from third-party contracts. With its ramped-up capacity, it is expected to reduce the dependence on captive (group-company) volumes and increase volumes from third-parties.
We expect third-party cargo at Hazira to grow stoutly, from 0.6 m tone in FY12 to 3 mt in FY15 on account of coal demand for various power projects in the vicinity. We have commissioned our dry bulk terminal at Paradip port and we expect third-party cargo demand to be high here from industries in the region and from coal and iron ore traders. Third-party volumes at Paradip are expected to reach 2.5 mt by FY15.
Similarly, once commissioned in FY15, the Salaya port would benefit from the demand for coal, currently handled at various shallow berths in the region.
We believe the increasing proportion of third-party revenue would help the company reduce dependence on captive volumes.
Unlike others, our port’s anchor customers are ready (group companies cargo) so our ports never look or wait for customers. However, revenues from third-party customers are expected to grow strongly once the new facilities become operational. On the completion, free-cash-flow generation would strongly improve. Most of the debt is long term, repayable over 10 years.
Risk factors: In the present environment of slowdown in world trade could hit volumes which may result delay in capex and any delay in planned capex would be negative. Besides, rising competition from major ports is also another concern as major ports managing to achieve the planned capex within their scheduled time-frames could result in a slight loss of third-party volumes.
Heading for leadership?
Essar Ports initially came from a different perspective. They started port business in order to handle their own cargo and the port was working as part of the whole logistics chain. However, over the period they started moving towards third-party cargo too. So, as an industrial house, Essar Ports’s initial intension was not port operator but later they changed their strategy. Essar Ports’s recent aggressive movement shows that its intension to become a leading player is very clear. They first hived off from logistics and now they are a serious player in the port sector as they are coming up with new projects pan India. Moreover, recent tie-up with Antwerp Port is another step towards its global vision. Although they are still in the capacity building phase, I do believe over the period they will appear to be a leader in the Indian ports sector.
Shashank S Kulkarni, Secretary General
Indian Private Ports & Terminals Association (IPPTA)
EAST TO WEST
The business at Essar Ports is currently on an expansion mode as it is expanding operations at Vadinar and Hazira in Gujarat and building a port at Salaya, also in Gujarat, as well as two terminals at Paradip port in Orissa, and in three terminals at Visakhapatnam in Andhra. Experts say the locations of the company’s ports greatly add to its strengths.
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