Bangalore: Essar Ports Ltd, a unit of the $17 billion Essar group, plans to pare its interest costs by refinancing the debt of all its existing projects.
The company will initially refinance up to Rs.1,000 crore through long-term financing, and may later raise money through the external commercial borrowing (ECB) route and long-term bonds to fund future projects, chief executive officer and managing director Rajiv Agarwal said.
Essar Ports’ net debt stood at Rs.5,500 crore on 30 June.
“Our main focus is to reduce debt and contain capital expenditure. The idea is to save 2-3% on interest costs since interest rates of 12.5-13% are not very sustainable for infrastructure projects,” said Agarwal, adding the company will make no acquisitions and will focus on meeting its production target of 158 million tonnes (mt) in the next two years.
The company has two ports at Vadinar and Hazira in Gujarat, with a cumulative capacity of 88 mt per annum (mtpa). It is undertaking expansion (new berths at Hazira, Salaya, Paradip ports) and is expected to add another 70 mtpa, boosting capacity to 158 mtpa by fiscal 2014.
In September, Essar Ports had refinanced its debt in a subsidiary, Essar Bulk Terminal Ltd, through a long-term finance scheme of India Infrastructure Finance Co. Ltd (IIFCL) to reduce its interest rate by over 2.5% on Rs.405 crore, which is part of the debt taken for building its 30 mt capacity bulk terminal at Hazira in Gujarat. The port company completed the transaction.
“We will be looking at availing takeout financing of around Rs.220 crore for our Vadinar port terminal that is a 12 mt all-weather deep draft facility in Gujarat and other projects,” Agarwal said.
Earlier this year, Essar Ports entered into a strategic alliance with the Port of Antwerp, receiving an equity infusion of Rs.175 crore at approximately Rs.100 per share. The proceeds were used to reduce the company’s debt.
Agarwal said his company is not looking at any international projects. Earlier, Essar Ports was exploring a port project in Africa.
Essar Ports has assured cargo visibility due to its take-or-pay contracts with group firms (Essar Steel Ltd, Essar Oil Ltd and Essar Power Ltd), which will account for 80% of cargo handled in fiscal 2015, analysts Shankar.K and Santosh Hiredesai at domestic brokerage Edelweiss Securities Ltd wrote on 7 September.
“From the current capacity of 88 mt, the scale up to 158 mt by FY15 is rightly timed to meet expansions at each of its sister companies, leading to a volume growth of 35% between FY12 and FY15,” they said.
Agarwal said the port has plans to handle third-party cargo in a big way and his company is aiming at 25% third-party business in next three years from the current 5%.
Rival and listed port company Adani Ports and Special Economic Zone Ltd, on the contrary, is developing ports across India and has acquired a coal terminal in Australia. Adani Ports has presence in Visakhapatnam, Mundra and Dahej.
The Edelweiss Securities analysts have cautioned that Essar Ports’ 54 mtpa capacity expansion is awaiting environmental clearance or approvals for the construction of new terminals. “Any delay in the same will impact the company’s revenue and profit growth,” the analysts wrote.
Essar Ports’ Agarwal confirmed his port terminal project in Paradip and Salaya is facing delay due to some clearance and litigation issues. A section of the people at Paradip have moved the Supreme Court against Essar Ports protesting against its proposed coal berth, that would have got the port company at least 25% of revenue from third parties in the next two years.
“We expect we will get necessary approvals soon. But in two years’ time, we should be in line with the projection (158 mtpa). By 2020, the company plans to achieve a capacity target of 250 mtpa as the capacity at project locations of Hazira, Vadinar, Salaya can be doubled. Only Paradip has restrictions. But as these are modular projects, it will take some time,” said Agarwal.
Seaborne trade accounts for 90% of the global trade in terms of volume (70% in value) due to its cheap economics. Typically, port traffic grows at 1.5-2 times of the gross domestic product (GDP) growth rate which India has not realized so far on a sustained basis.
Even in its best growth decade between 2002 and 2012, cargo grew only 9.2% compared with the average GDP growth of 7.7%. With a mere 1.1 billion tonne port capacity, India is expected to see sustained growth in port demand and, therefore, capacity addition triggered by soaring consumption of imported fuel/minerals as well as general cargo (led by container cargo growth).
Meanwhile, Essar Ports is also aiming at reducing the promoters’ stake to 75% from the current 80% by the end of the fiscal. The move is in line with the Securities and Exchange Board of India (Sebi) diktat that all listed private companies must reduce their promoters’ stakes to no more than 75% by June 2013.
Essar Ports lost 0.63% to close at Rs.94.5 per share on Friday on BSE when the benchmark index, Sensex, dropped 0.63% to close at 18,938.46 points. From the beginning of the year, Essar Ports gained 86.74% and Sensex rose 22.54%.