Essar Ports to open up business to third parties

Essar Ports to open up business to third parties

Mumbai: Essar Ports Ltd, a unit of the $20 billion Essar Group, will open up its ports to third parties instead of using them as captive facilities as it plans to expand into new areas such as container terminals and fuel storage tanks, according to managing director Rajiv Agarwal.

Essar Ports was created by separating the ports business from the erstwhile publicly traded Essar Shipping Ports and Logistics Ltd. The demerger also led to the formation of Essar Shipping Ltd, which will be listed in June.

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“At present, 95% of our port facilities is captive, and only 5% is offered to some big clients. After the demerger of the port business into a separate entity, we have plans to offer at least 30% of our capacity to third-party business by 2013-14," Agarwal said.

“We are planning to start container business in our Hazira port in Gujarat as a part of diversification. Besides, we are developing tankages, or fuel storage farms, for petroleum and petrochemical companies," he said.

Analysts say the earnings prospects of the ports business will improve following the separation. Essar Ports is the third port company to get listed following Mundra Port and Special Economic Zone Ltd and Gujarat Pipavav Port Ltd.

“The cyclicality is reduced due to the presence of long-term take-or-pay contracts with the Essar group companies. Essar Ports is now planning to grow beyond the group expansion by tapping merchant traffic. Merchant volumes are expected to increase to one-fourth in the next three years from nil currently," wrote research analysts Anubhav Aggarwal and Abhishek Bansal at domestic brokerage Credit Suisse in a 31 May note.

Currently, Essar Ports has a capacity of 88 million tonnes per annum (mtpa) and aims to reach 158 mtpa by 2013.

Agarwal said the company has committed Rs9,300 crore towards capacity expansion, of which Rs6,150 crore has already been invested.

The utilization of the port capacity in fiscal 2011 was 40 million tonnes (mt), with ports contributing revenue of Rs732 crore and operating profit of Rs534 crore.

Some analysts are sceptical about the plan to open up the business to third parties.

“The company has experience of handling only captive cargo till now. The complexity of operations increases in the case of merchant cargo as the number of customers and the variety of cargo handled increase. Moreover, merchant cargo volumes are not as predictable as captive volumes," the Credit Suisse report said.

The company may also have to deal with delays in projects.

“Forest clearance is pending for Salaya (Gujarat) and Paradip (Orissa) coal terminals, and financial closure for Hazira II (Gujarat) has not yet been achieved. Berth construction requires at least 18 months to two years; and therefore, if the approvals are not achieved in the next six months to one year, the capacity expansion at Salaya, Hazira and Paradip may get delayed," the report said.