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High dependence on group firms key concern for Essar Ports stock

High dependence on group firms key concern for Essar Ports stock
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First Published: Wed, Jun 29 2011. 11 21 PM IST
Updated: Wed, Jun 29 2011. 11 21 PM IST
Shares of Essar Ports Ltd have fallen by about 20% in the last one month, since its listing after a demerger. Essar Ports was listed on bourses on 31 May after the demerger of the erstwhile Essar Shipping Ports and Logistics Ltd.
Essar Ports is the second largest private port company in India and is looking to expand its capacity to 158 million tonnes per annum (mtpa) by 2012-13 (FY13) from 88 mtpa currently. The company is a part of the Essar Group and will offer services to the group companies—Essar Oil, Essar Steel and Essar Power.
Essar Ports has tied up a considerable portion of its port capacity in long-term take-or-pay contracts with its group companies. Investors view this as a key risk to the stock, as dependence on the group companies’ performance for cargo traffic is substantial.
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“High revenue visibility afforded by take-or-pay contracts is the mainstay of the investment argument in Essar Ports. Any move by the management seen as significantly modifying or diluting contract terms to benefit Essar Group customers is the key downside risk in our view,” pointed out analysts from JPMorgan Chase and Co. in a report earlier this month.
Since the dependence on group companies is high for Essar Ports, any delay in the capacity ramp-up of group companies is expected to adversely affect Essar Ports’ performance. Eventually, the company hopes to increase the contribution of non-group companies.
“Once the port capacity ramp-up is complete, Essar Ports aims to increase the share of third-party cargo (non-group companies) to about 27% by FY15, from nil currently,” Citigroup Global Markets Inc. analysts wrote in a note to clients last week.
While that would reduce the cargo concentration risk for the company, it’s not going to happen anytime soon. While profit-booking could be one reason for the fall in the share price, these concerns, too, are likely to weigh on investor interest in the stock.
Graphic by Naveen Kumar Saini/Mint
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First Published: Wed, Jun 29 2011. 11 21 PM IST