Higher capacities to help Essar Ports scale up earnings

Essar Ports Ltd, the new entity that will replace Essar Shipping Ports and Logistics Ltd (ESPLL) on the bourses after the completion of the de-merger process towards the end of the month, is expected to get better earnings visibility.

This is primarily due to the fact that it has scaled up volumes, with the company planning to further double its cargo handling capacity and divert one-fourth of its capacity to handle third-party (or merchant cargo) contracts in the next two years.

Long-term deals

Currently, ESPLL's ports division handles about 88 million tonnes of cargo at its Hazira (30 mt) and Vadinar (58 mt) facilities. Almost the entire capacity is for Essar Group companies on a take-or-pay contract, which are usually long-term contracts valid for 15 years.

“As merchant volume ramps up, the margins should further improve as merchant pricing at its Hazira port is 10 per cent higher than contract pricing and 20 per cent higher at its (upcoming) Salaya facility,” says a recent analysis by Credit Suisse.

Doubling capacity

ESPLL, on Monday, announced May 19 as the record date for the completion of the demerger process — while the current company will become Essar Ports, the shipping, logistics and oilfield service business will be spun off into a new entity, Essar Shipping Ltd, which is expected to get listed by next month.

“We are putting in a fresh investment of about Rs 3,000 crore to almost double the existing port capacity to 158 mt, including a new dry bulk terminal at Salaya and a coal and iron ore berth at Paradip by 2012-13. After the expansion, we intend to handle third-party (or merchant) cargoes to the extent of 25 per cent of our capacity,” says Mr A.R. Ramakrishnan, ESPLL Director, who will be the Managing Director of Essar Shipping Ltd, once it is listed.

Investment plans

Essar Shipping will invest $600 million to acquire 12 vessels, with deliveries starting from August this year and lasting for the next 18 months. In addition, it is putting in Rs 2,400 crore to procure two jack-up rigs by next fiscal for its oil field services business, which has higher margins than shipping.

“We have tied up funds for the expansion of both the post-demerger entities,” he told Business Line .

The new entity's strategy will continue to focus on long-term contracts to hedge itself against volatility in the spot market freight rates.

“Today, while tanker rates in the spot market are anywhere between $12,000 and $15,000 a day, the Time Charter Yield (TCY) is almost double for the same vessel,” Mr Ramakrishnan pointed out.

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