Tuesday, June 21, 2016

THE BIG STORY: Building up steam in Indian ports/waterways

Developing transportation infrastructure has been the key focus area of the Modi government. While the thrust was on railways and roads in the first two years, recently, the Centre rolled out a grand plan to improve inland waterways and coastal shipping. If the execution of these plans is as efficient as it has been in roads, there could be some brisk action in listed companies in the water transport sector; with their order-book set to swell in the coming years.
Given India’s coastline of 7,516 km, coastal shipping ought to have been the main mode of transporting goods across the country. This, along with inland waterways, could have reduced the logistics cost of Indian companies drastically, had they been harnessed effectively. The transport costs through road and rail are ₹1.5 and ₹1 per tonne per km, respectively, while the cost through waterways can be bought down to as low as ₹0.50 per tonne per km.
But the contribution of waterways in domestic transportation is currently less than 1 per cent, compared to 24 per cent in China. Container traffic in India accounts for 44 million twenty foot equivalent unit (TEU) compared to 85 million TEU in China. The Centre is right in trying to reduce this gap.
The proposal to develop 101 inland waterways and coastal shipping is likely to result in large-scale investments in the shipping, port operation, logistics and construction sectors. Here we take stock of the benefits that companies in these areas are likely to derive.
Harnessing the ocean

The Sagarmala project recently announced by the Centre intends to double the share of coastal and inland waterways in transport, thus boosting domestic trade and exports. The government expects to do this by expanding current port capacities, building 6 to 8 new ports and developing ports proximate to industrial and manufacturing clusters.

Sagarmala has identified close to 150 projects with an expected infrastructure investment of ₹4 lakh crore. Further, a potential investment of ₹7 to 8 lakh crore is planned for port-led industrialisation across the 14 coastal economic zones expected to be developed as part of this initiative.
The project has four key goals. First, to move domestic raw materials and finished goods across the production and demand centres through coastal shipping. Optimising cargo movement using railways, seaways and inland waterways is expected to save cost significantly. The current coastal volume of 80 million tonnes per annum (MTPA) for thermal coal, petroleum, oil and lubricants (POL), iron ore, steel and cement is expected to grow to approximately 330 to 420 MTPA in 2025. Of this, nearly 75 per cent of the demand is expected to arise from thermal coal alone.
Second, the objective of putting up new manufacturing capacities near the coastal areas will bring down logistics cost by ₹25,000 crore per annum while simultaneously achieving the full potential of the associated logistics providers.
Third, cutting the cost of EXIM container movement by removing infrastructure bottlenecks at ports, creating multimodal logistics hub and Inland Container Depot (ICD), speeding up custom clearance procedures and extending dedicated freight corridor connectivity — all this is expected to cut container travel time by five days and save cost up to ₹1,000-1,500 per container.
The fourth goal is creating export-competitive, port-proximate manufacturing clusters.
The project expects to further make use of the inland waterways to improve the cargo movement. The Centre recently passed the National Waterways Bill, 2015 – which aims to develop 101 more inland waterways, besides those already declared as national waterways. The Ministry of Shipping is looking into the technical, environmental and economic feasibility to develop the selected waterways.
So how are these investments likely to impact companies related to water transport?
Shipping: in turbulent waters

Slowing imports of dry bulk commodities from China, especially thermal coal and iron ore, have dealt a sharp blow to the global shipping community. The Baltic dry index, a major indicator of global trade, dropped from 2340 at the end of 2013 to 290 in February 2016. The only silver lining was the increase in tanker demand to store crude oil when the crude oil prices dropped sharply.

While the current supply of 779 million dead weight tonne (DWT) dry bulk carriers is expected to increase by 5 per cent annually for the next three years, lower international trade will depress the prices of cargo carriers. A similar low-growth scenario is witnessed for containerised shipment also.
Sagarmala, with the proposal to increase coal, iron ore, steel, POL and container shipment, will help energise shipping players.
Two of the largest shipping companies in India are well placed to benefit if the demand picks up.
Shipping Corporation of India, one of the Navratnas, handles 38 per cent of India’s shipping tonnage. The company services both national and international trade with nearly six million DWT capacity and 70-plus fleet size across various segments. The company, other than capturing a good portion of the coastal trade, is also expected to be on a favourable footing in containerised shipping and international trade.
A weak cargo and container segment was offset by increasing demand in the tanker segment, resulting in flat revenue of ₹4,112 crore for FY-16. Net profit for the fiscal more than tripled to ₹377 crore from nearly ₹113 crore in FY15, aided by lower fuel cost for the ships.
Similarly, India’s biggest private sector shipping company, The Great Eastern Shipping Company, which operates in the bulk and tanker segment with a 2.4 million DWT and a 30-plus fleet size, is expected to take advantage of the increased coastal trade in thermal coal, POL and iron ore.
The revenue growth was higher in GE Shipping at 11 per cent annual growth between FY 14 and FY 16, due to higher tanker demand. Profit growth has been quite strong too, growing at 30 per cent in the same period.
Ports: safe harbour

The Indian coastline, which currently has over 12 major and nearly 200 non-major ports, is expected to go through a sea change. Major ports are expected to increase their capacity, improve maritime infrastructure and streamline rail and road connectivity. The private terminal operators such as Sical Logistics are expected to benefit from this drive.

Market share of cargo handled by non-major ports is constantly increasing since their introduction. With operational efficiency of private ports better than major ports, listed port players are expected to reap the benefits of this project. Adani Ports has already established a chain of ports along the western and eastern coast, and Pipavav Port has improved rail connectivity to the hinterlands through the joint venture, Pipavav Railway Corporation.
Adani Ports & Special economic zone (APSEZ), the largest private sector port company, operates nine ports along the western and eastern coast of India. The company’s total operational capacity stands at 330 million metric tonne (MMT), 23 per cent of India’s total port capacity of 1438 MMT. Adani’s flagship port Mundra, with its special economic zone area spanning nearly 6,456 hectares, is well poised to tap the planned coastal manufacturing development.
At a consolidated level, the company handled a total of 151.5 million tonnes of cargo for fiscal year ending 2015-16, an increase of 5 per cent compared to the year earlier. The company’s ports located in the eastern coast of Dhamra, Vizag and Katupalli grew by 23 per cent in the same period.
But Pipavav Port recorded a drop in its bulk cargo and container volume in FY-16 by 38 per cent and 13 per cent to 2.47 million tonnes and 6,95,000 TEUs, respectively.
The lower coal imports for fiscal year ending 2016 have impacted both the ports’ revenue. A weak trade growth in the export market in both the bulk and container segments lowered the top line and bottom line of Pipavav port across FY-15 and FY-16. Though revenue grew at an annualised rate of 9.6 per cent from ₹550 crore in FY-14 to ₹660 crore in FY16, the revenue and profitability dropped in FY-16.
Adani Port & SEZ revenue and profit for FY16 was ₹7,255 crore and ₹2,867 crore, a 22.6 and 28.4 per cent annualised growth between FY-14 and FY-16. This was due to increased container shipment traffic from the eastern coast. The company’s high debt of ₹19,500 crore continues to be a cause of worry.
Construction: building hopes

The first round of investment planned for Sagarmala Project, coupled with the investment outlay for inland waterways, is expected to fill the order books of the engineering, procurement and construction players.

Infrastructure developers and operators, manufacturers of heavy engineering equipment, manufacturers of construction and mining machineries and other companies offering specialised dredging operations are expected to benefit.
Infrastructure behemoth Larsen & Toubro (L&T), which operates in the entire supply chain of the infrastructure industry, is expected to take a big pie of this demand creation. Besides, L&T’s presence in shipbuilding and port should also help.
The total order book stands at ₹2.5 lakh crore, more than two times its revenue of ₹1,02,632 crore in FY16.
Similarly, Bharat Earth Movers, which offers a wide array of mining and construction machinery, can expect a higher demand from the increased construction activities. The revenue of the company remained flat across FY-14 and FY-16.
The 11th Five Year Plan saw around 50 per cent shortfall in dredging activities both across the major and non-major ports. The proposed dredging requirement was 1091 million cubic metres in public and private ports. This deficit was caused by financial, environmental and engineering constraints. The Centre’s progress along these lines should boost interest from project bidders.
Sagarmala proposes to increase the draft (depth) in selected ports to handle bigger vessels. The project to develop inland waterways will also require the services of dredging companies. We can expect dredging major Dredging Corporation of India to garner a good share of this increased demand.
The lower energy cost in the last two years helped the company post a healthy annualised profit growth of 35.5 per cent despite a negative 7 per cent growth in revenue.
Logistics: the right connections

Logistics players, due to the dual effect of a slowing international trade and a weak domestic monsoon in the last few years, showed a weak revenue growth last fiscal. Among these, in the last three fiscal years, the revenue growth for companies that performed basic and commoditised transportation services was close to zero per cent compared to a near 8 per cent annualised growth rate from integrated transportation players.

The developments envisaged by the Centre are expected to benefit integrated players, who operate and provide service using a combination of rail, road and sea transportation, container freight station (CFS) and Inland Container Depot (ICD), and other bundled logistic solutions.
Of the listed players, the Container Corporation of India (Concor) can see its business improve with these measures. The expected start of dedicated freight corridor operation in 2018-19 and the added advantage that Container Corporation of India has by leasing terminals from its parent, Indian Railways, at below market rates, will place the company at a good cost advantage compared to other container terminal operators.
Network congestion and haulage charge increases played spoilsport for the company in recent times. Though the revenue increased at an annualised rate of 9 per cent between FY-14 and FY-16, the net profit decreased at an annualised rate of 9 per cent in the same time period.
Gateway Distriparks, which has its own CFS, ICD, rail operations and cold supply chain networks and Allcargo Logistics and Transport Corporation of India with its own cargo ships, warehouses and IT enabled integrated supply chain system, are also expected to benefit in the long run. These integrated logistics players hit a road block in their revenue growth due to a slowing global trade. For FY-16, revenues of Transport Corporation of India and AllCargo Logistics grew at 4 and 1 per cent, respectively, while Gateway Distriparks’ revenue dropped by 6 per cent.
Challenges ahoy
The draft (depth) capacity of terminals for ships to harbour needs to be increased. Jawaharlal Nehru port trust, one of the biggest ports, has a maximum draft of 14 meters while cape size vessels require a draft of 16 meters and higher. With nearly 25 per cent of India’s containerised cargo transhipped from other international ports, the existing maritime and connecting rail and road infrastructure needs an overhaul.
Major port tariff regulator, Tariff Authority for Major Port’s (TAMP) inability to fix a market-oriented tariff in major ports and a skewed revenue sharing mechanism for private terminal operators with the major port trusts continues to hamper traffic flow dynamics. The Centre’s intention to operate a greater number of major ports through Sagarmala Project may not be the solution under the given tariff mechanism. Greater autonomy needs to be passed on to the major ports for them to operate efficiently.
Similarly, a troubled macro-economic scenario and a strong balance sheet requirement may deter private players to invest in green field ports.
Given the sub-optimal modal mix and lack of end-to-end logistics and supply chain solution for moving industrial and containerised goods for exports, a substantial fall in logistics cost for India Inc looks unlikely in the near term. Similarly, the intent to develop 101 inland waterways when most of the chosen rivers run dry and to reach the intended draft capacity of 2.5 meters in these rivers, appears a tall task.
Unless the roadblocks are removed, transporting goods or creating allied infrastructure will remain a distant dream.

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