Bengaluru: Adani Ports and Special Economic Zone Ltd (APSEZ), India’s biggest port operating firm, is set to sign an agreement with Larsen and Toubro Ltd (L&T) in the next few days to take over operation and management (O&M) of the Kattupalli port at Ennore near Chennai, as both the firms work on different strategies to drive growth, at least two people familiar with discussions said.

“We are about to start operation and management of Kattupalli port," an Adani Group executive said, on condition of anonymity.

The commercial terms of the deal could not be ascertained.

The deal will help APSEZ, owned by billionaire Gautam Adani, to operate and manage Kattupalli port that has facilities including a container terminal with a capacity to load 1.2 million twenty-foot equivalent units (TEUs) a year. The port is part of a shipyard-cum-port complex that Larsen and Toubro Shipbuilding Ltd has constructed at Kattupalli with an investment of 3,989 crore.

L&T Shipbuilding is 97% owned by L&T with Tamil Nadu Industrial Development Corp. holding the balance.

The port also has permission from the environment ministry to handle other clean cargo, such as automobiles (cars, earth movers, trucks and buses), liquid non-hazardous cargo (edible oil, lube oil, etc) and break bulk cargo (granite, gypsum, barytes, limestone, steel, timber logs).

L&T will continue to run the shipyard, which will not be part of the O&M deal to be signed with APSEZ, said one of the people, executive from L&T briefed on the negotiations, asking not to be named because he is not authorized to talk to reporters.

The Kattupalli deal will help APSEZ strengthen its presence on India’s eastern seaboard by adding to its existing facilities at Dhamra in Odisha, Visakhapatnam in Andhra Pradesh and a container terminal being constructed at Kamarajar Port, also in Ennore.

Across Gujarat, Goa, Andhra Pradesh and Odisha, APSEZ currently runs eight ports or terminals with capacity to handle a combined 338.5 million tonnes of cargo.

The capacity expansion planned at the existing ports or terminals located at Mundra, Tuna, Dahej, Hazira, Mormugao, Dhamra, Visakhapatnam and Ennore will add a further 240 mt, taking the total to 578.5 mt.

In 2014-15, APSEZ loaded a combined 144.25 mt, accounting for about 14% of the 1,052.20 mt of cargo handled at India’s ports.

L&T is looking to sell some assets,including roads and infrastructure projects, and dilute its stake in non-core subsidiaries to revive performance, the group’s executive chairman A.M. Naik told Reuters on Wednesday.

Under the O&M deal, APSEZ will take over the cranes and other cargo-handling equipment erected by L&T (excluding assets on land) at Kattupalli port and pay some upfront money, and assure adequate cash flow to meet the debt service obligations, mainly interest on bonds sold by L&T to fund the facility.

L&T has been struggling to service the interest obligations.

APSEZ will also have the responsibility to market the terminal, which it has started with shipping lines.

As a matter of policy, L&T does not confirm or deny market speculation, a spokesman for the company said.

APSEZ declined to comment.

APSEZ’s strategy for Kattupalli also involves turning it into a bigger multi-cargo port by adding a 20-mt capacity coal terminal. This has triggered a concern for the shipyard located close by.

Coal arriving at the port will have to be stacked up about 8-10 metres high. Coal dust carried by wind blowing towards the yard could have a corroding effect on the steel used for building ships.

“They are looking for ways to mitigate this concern," said a third person, port industry executive involved in the deliberations.

The coal terminal plan at Kattupalli is also an indication that APSEZ has lost interest in talks for buying the Gangavaram port in Andhra Pradesh due to high valuations coupled with a concern that getting a controlling stake there could be a problem, said the third person, asking not to be identified.

There are regulatory reasons why APSEZ had to opt for an O&M contract ahead of buying Kattupalli port.

“Kattupalli port is part of a shipyard complex. L&T cannot divest it as per the agreement it had signed with the Tamil Nadu government in 2008 because it is under one company. If L&T wants to divest it, it will have to split the company and assets and then divest it. This requires approval from the state government," the Adani Group executive mentioned earlier said.

Until that happens, L&T can only bring in a specialist to operate and manage the port.

Port experts are also intrigued by the Kattupalli port deal, when APSEZ is building a 1,270 crore container-loading facility at the adjacent Union government-owned Kamarajar port.

The two ports are separated by a boundary wall.

The first phase of the Kamarajar facility with a capacity to load 800,000 standard containers a year will be ready by March, but the operations will begin only a few months later. In the second phase, another 600,000 standard container capacity will be added.

The Kamarajar terminal has to handle certain minimum level of containers written into the 30-year contract (there are penalties for handling lesser than the minimum guaranteed containers), which is not the case with Kattupalli.

“The Kattupalli deal will allow APSEZ to play around with the container volumes particularly when there is an overcapacity for handling containers in and around Chennai," said the port industry executive mentioned earlier.

“There is no point in handling only containers at Kattupalli port because in another nine months, APSEZ will start operating the Kamarajar facility, which is exclusively for containers. The planned coal terminal should be seen from that perspective. There is a growing demand for more coal-loading facilities in and around Chennai after the Madras high court barred Chennai port from handling dusty cargo, such as coal and iron ore, from October 2011 citing health hazards," he added.

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