Adani's foothold in cargo business grows stronger

Having established itself as a major player on the western coast, the company plans to make inroads in the East where the potential for business is immense

With India's requirement of coal, crude, chemicals and liquefied natural gas expected to increase in the coming years, the port business has good prospects since much of this cargo will have to be brought into deep draft ports along the country's coastline. Keeping this in mind, Gautam Adani has acquired the Dhamra port in Odisha for his Adani Port and Special Economic Zone Ltd (APSEZL). The acquisition is a strategic move on the part of Adani to make inroads in the business on the east coast. The company has already established itself as a major player on the west coast with ports in Mundra, Hazira, Dahej, Tuna Tekra and Goa and having expanded in the south through terminals in Ennore and Vizag ports.

The acquisition of Dhamra Port Company for Rs 5,500 crore will not only boost APSEZL's port business, but will also complement the Adani group's mining operations in Australia - where the Queensland state government recently granted it approval for the $16.5-billion Carmichael Coal Mine and Rail project - and facilitate import of coal from south-east Asia.

The port is a joint venture between Tata Steel and L&T Infrastructure Development Projects. Newly developed in Odisha's Bhadrak district, the port began operations in May 2011 and handled 14.3 million tonnes (mt) of cargo in 2013-14. It has two fully mechanised berths, 63 km of private rail line connecting Bhadrak station to the main trunk line, and environmental clearance for the development of 12 additional berths.

"The acquisition gives us an opportunity to replicate the development and phenomenal growth of Mundra port on the eastern coast and, thereby, continue to execute on our pan-India strategy," Adani Group Chairman Gautam Adani had said after the acquisition. The company plans to raise funds for the acquisition through "a combination of internal funding and external borrowings".

Sudipta Bhattacharya, CEO, APSEZL, says, "Dhamra port is strategically located on the east coast where we needed a gateway. Being one of the deepest ports in the country, this acquisition opened up a strong frontier for us in the east where there is immense hinterland potential and scope for significant economic development for the next several decades."

Experts too have viewed the deal with optimism. Suren Vakil, managing director, BMT Consultants India, believes that the acquisition of Dhamra bodes well for the Adani group's port business. "The group has ambitious plans for Dhamra, and the port's impact on the economy of the eastern states will also be positive," says Vakil.

Meanwhile, rating agency ICRA notes that the purchase is not likely to impact the credit profile of APSEZL. An ICRA reports says that the total payout for Adani, excluding the external debt on the books of Dhamra Port Company and including the shareholders loans, is expected to be about Rs 3,000 crore. This will be funded through a mix of debt and surplus funds available with Adani Port. While the transaction would lead to an increase in the net debt of the company, given healthy cash accruals generated by APSEZL, the long-tenure debt on its books and strong liquidity position, the transaction is not expected to materially impact the credit profile of the company.

The acquisition is likely to improve the business risk profile for APSEZL through the diversification of its pan-India presence and the ownership of a ready port asset with good rail and road hinterland connectivity. As Dhamra port already has a long-term contract with Tata Steel for handling coking coal as well as short-term contracts with other customers and the potential for attracting new customers, ICRA expects the company's cash generation to improve modestly in the near to medium term.

Blueprint for growth
The company's immediate plan is to add two new berths to the existing two that have a combined capacity of 25 mt. Later, it expects to construct more berths in a phased manner by diversifying into other types of cargo such as crude oil, liquefied natural gas, containers and break bulk cargo. By 2020, it hopes to be handling over 100 mt of multi-cargo capacity at the Dhamra port.

"We expect that the availability of these capabilities at Dhamra will rapidly stimulate the movement of cargo and faster development of businesses in the surrounding areas," says Bhattacharya. "The need has always existed, but the lack of facilities to move goods in and out along the east coast has been a bottleneck." Based on its experiences at its Mundra, Dahej and Hazira ports, APSEZL plans to build capacity in advance at the Dhamra port.

Since Dhamra is strategically located to serve the rich mineral belt of the eastern states, the company will hope to tap into the demand from power, steel, coal and mineral mining businesses in order to increase cargo volumes and grow at a compounded average growth rate of 15-25 per cent over the next decade. "This is precisely why the construction of the additional berths immediately is such an important part of our growth plan," Bhattacharya explains.

The company expects investments in the port and associated infrastructure to trigger new businesses or expansions of existing businesses in the nearby regions. For example, investments into liquid terminals and liquid storage systems would develop a regional ecosystem for liquid and chemical businesses.

With general power deficiencies across the country driving the need for imported coal, the infrastructure available at Dhamra to handle coal will allow natural synergies between APSEZL and the group's holding company, Adani Enterprise, the country's biggest coal importer.

On how the port will complement its Australia operations, Bhattacharya says, "We evaluated the merits of Dhamra on a standalone basis. That said, the port's location and the draft advantage along with the state of the art infrastructure we are developing provide it with a logistical and economic advantage in importing coal not only from Australia but also from south-east Asia."

Riding the waves
Though there seems to be no significant challenge before APSEZL, ICRA in its report has raised red flags about the company's financial support to its subsidiaries and pending litigations over environmental clearance to its SEZ project in Gujarat.

ICRA notes, "The company has been extending temporary financial support to some of the ventures which are being carried on by its subsidiaries, the quantum of which although increasing is not very significant at present. However, going forward, material increase in support to subsidiaries might impact the credit quality of APSEZL."

Despite this, Vakil of BMT Consultants India sees no big technical challenge before the company. "They have shown the capability to build ports efficiently and within the budget. They also have an in-house fleet of dredgers that will keep dredging costs in check," he says. "As such, I do not see any insurmountable technical challenge for them at Dhamra." This perhaps explains why it made sense for Adani Ports to add Dhamra to its portfolio.