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Ports and terminals that significantly depend on coal imports and have not diversified their cargo basket will feel the pinch as coal imports decline
The volume growth at major ports was low at 3 per cent during the first five months of current fiscal, FY2018 as coal volumes recorded 12 per cent decline during the period, even as iron ore volumes grew 29 per cent. “The continuing decline in coal volumes, at a more rapid rate, as compared to the previous periods, is a concern over the long-term for the port sector since many ports and terminals have significant dependence on coal imports. A prolonged decline in coal import requirement in the absence of diversification into other cargo categories will impact the returns for such port players,” cautions K Ravichandran, Senior Vice-President and Group Head, Corporate Ratings, ICRA.
Cargo throughput at Indian ports registered a 5.7 per cent growth to 1,133 MT during FY2017 as against 1,072 MT recorded in FY2016. The growth was supported by 133 per cent growth in iron ore cargo volumes (82 MT against 35 MT) supported by a resumption of mining operations in Goa, Karnataka and Orissa as well as healthy growth of 6 per cent in POL & liquids (Petroleum, oil and lubricants) and other cargo (9 per cent). However, volume of coal was down by 9 per cent during the period as demand side issues and higher domestic production continued to reduce the domestic demand-supply deficit.
In terms of the cargo growth outlook, port sector players will continue to experience healthy growth in cargo in the near term, albeit somewhat lower compared to the recent fiscals, as revival in iron ore exports, pick up in POL volumes as well as impetus for coastal shipping will be partially offset by lower coal imports and slowdown in container volumes due to weak exim trade. Moreover, cash accruals of the players will be supported by steadily rising handling rates, barring the projects where the tariff setting process is mired in litigations. Over the medium to long term, various initiatives under the Sagarmala programme will aid the long-term growth trajectory of the industry.
While the keen interest of the government of India on the development of the port sector is positive, however, resolution of pending tariff related issues and faster resolution of connectivity related issues will be the key for the sector’s growth over the long term. Going ahead, cargo volumes and EBITDA margins of non-major ports/ private terminal operators could come under pressure on account of increasing competition from the major ports that have seen significant improvement in their efficiency parameters in recent quarters. In particular, over-capacity in the container terminal segment could result in acute pressure on the margins of the terminal operators. Ravichandran added, “Given the high leveraging of some private port sector entities (over 3x Total Debt/EBITDA) and the issues faced in achieving optimal returns (Return on Capital Employed <10 per cent) from the business, ICRA believes that consolidation trends could gather further momentum going forward. Credit profiles could come under pressure on account of any leveraged M&A transactions, recurring cargo related setbacks or any adverse movement on tariff related litigations.”
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