Essar Ports to cut dependence on group cos to mitigate risk

Written by Nikita Upadhyay | Nikita Upadhyay | Mumbai | Updated: Sep 2 2011, 05:06am hrs
Essar Ports, which is planning to double its capacity from 88 mtpa (million tonnes per annum) to 158 mtpa by 2014, has said it will reduce its dependence on group companies for cargo traffic by almost 30% by then, thereby mitigating a huge risk that analysts had termed as a high concentration of Essar group cargo.

At present, group companies, including Essar Oil and Essar Steel, contribute as much 98% to the traffic at Essars two operational ports at Hazira and Vadinar. Essar Ports has already accounted for additional capacities arising from expansion at group companies like Essar Oil (which is expanding its Vadinar refinery to 20 mtpa, and is now looking outside the group to generate further merchant cargo).

While today, our group companies contribute largely to cargo traffic, it will come down to about 70% once all our facilities are up and running, said Rajiv Agarwal, MD & CEO, Essar Ports. When new facilities come up, some of them will be completely dedicated to third party cargo. With the 14 mtpa coal handling facility at Paradip and 20 mtpa expansion at Hazira, we will have spare capacity to handle third party cargo, he added.

Samir Kanabar, partner-tax & regulatory services, Ernst & Young, believes that for a ports company to attract investment, it should handle commercial cargo rather than captive. Ports like Kandla, Mundra and Pipavav have mushroomed on merchant or commercial cargo. A port cannot survive for long on a captive-bound cargo. Investors look at commercially viable ports and not captive ports as growth and returns are higher in commercial ports, Kanabar added.

Essar Ports is currently executing two terminals at Paradip with a capacity of 30 mtpa comprising an iron ore berth of 16 mtpa and a coal berth of 14 mtpa. The company is also setting up a dry bulk terminal at Salaya with a capacity of 20 mtpa. Additionally, the company plans to expand its Hazira port capacity by 20 mtpa taking its capacity to 50 mtpa.

In a recent report, Gaurav Pathak and Shashikiran Rao from Standard Chartered Bank had highlighted that internal cargo concentration is a risk to Essar Ports. Lack of external customers increases the dependence on the performance of group companies for cargo growth. Because of the high concentration of Essar group cargo, Essar Ports performance depends heavily on the expansion plans of group companies Essar Oil, Essar Steel and Essar Power, the report said.

For the entire 158 mtpa capacity, the company has committed an investment of R9,300 crore, of which R6,300 crore has already been invested. The rest would be done over the next two years through internal accruals and loans. Also, by that time, the company plans to reduce the promoters stake from 83.71% to 75% by diluting equity, Agarwal added.

Shares of Essar Ports closed at R70.25, down 1.33% on on BSE on Tuesday.

Cargo handling capacity at Indian ports crossed 1 billion tonnes this January. Industry veterans expect an average of 33% growth in cargo across all private ports. In the June 2011 quarter, private ports had achieved 15% yoy higher realisations per tonne. The higher realisations were achieved due to tariff increases, improving cargo mix (higher composition of container traffic) and take-or-pay agreements kicking off.