Mumbai: Essar Group unit Essar Ports Ltd is attempting to strengthen its business by focusing on long-term and third-party contracts while also investing in a liquefied natural gas (LNG) terminal as part of its diversification plan.
In an interview on Wednesday, Rajiv Agarwal, managing director, Essar Ports said the company is restructuring its business to beat the slowdown in cargo traffic, which has fallen due to lower import of cargo and restrictions on movement of iron ore.
Essar Ports is one of the largest private port companies in India with a current capacity of 140 million tonnes (MT). This capacity will be expanded to 194 MT over the next few years.
It has five operational port terminals at Hazira, Vadinar, Paradip, Salaya and Vizag and handled approximately 90 MT of cargo during FY17.
“At least 50% of the cargo contracts are going to be long-term with multiple cargoes including iron ore, coal, LNG and other liquid and bulk cargoes. We now have 10-11% cargo contribution coming from third-party contracts against mere 3% three years ago," Agarwal said. He added that the company will focus on getting more business from Essar Group companies and increasing capacity utilization, which is currently at 60%.
Agarwal said the company is also planning to invest ₹ 3,000 crore to enter the LNG terminal business. The company will do this by setting up a floating storage and regasification unit (FSRU) near Hazira in Gujarat instead of a conventional LNG terminal on land. The funds needed for the project would be raised through a mix of equity and debt.
Agarwal said the company will not allow debt levels to go beyond ₹ 6,500 crore at any given time. At present, the consolidated debt of Essar Ports is at ₹ 6,000 crore.
The restructuring of the Essar Ports business comes at a time when lower imports of coal have impacted business. The government has also imposed certain restrictions on iron ore mining. Coal and iron ore are two major cargo sources for Essar Ports.
“We are leveraging the group companies to offset the lull in cargo demand. At the same time, we have plans to increase third-party contracts to 35% in coming years from 11%," Agarwal said.
Essar Ports has the support of group companies, though they operate at arm’s length. For instance, Essar Oil Ltd has guaranteed volumes at the Vadinar terminal for 43 MMT in financial year 2017 going up to 49.3 MMT in financial year 2021. At the Hazira terminal, Essar Steel Ltd has guaranteed volumes of 23.75 MMT a year. At the Paradip Port, Essar Steel has guaranteed 8 MMT in financial year 2017 going up to 10.8 MMT by financial year 2019.
At Salaya, another group company Essar Power has guaranteed 6.12 MMT.
Mathew Antony, managing partner at Aditya Consulting, a boutique legal and business advisory firm, said the port business has been impacted by global and domestic factors, some of which are now turning around.
“As the global slowdown prolonged, the port business too got affected. With the government’s emphasis on overall infrastructure development, there will be more bulk coastal movements of these industrial products, which is an unexplored market till now," Antony said.
Essar Ports was delisted recently from the bourses.
Antony said the delisting could allow Essar Ports to make structural changes to the business model by bringing in strategic players as equity partners, who can finance the growth.