Essar Shipping: Sailing ahead

The proposed de-merger of the company’s ports and shipping businesses augurs well.

Essar Shipping got shareholders’ approval to demerge its ports and shipping businesses last week. In August, it had announced plans to separate shipping, logistics and oilfields businesses and club these into a separate entity – Essar Shipping (ESPLL). The existing entity will be renamed as Essar Ports.

According to the proposal, Essar Shipping will issue one equity share for every three in the existing company, while the promoters will continue to hold 83.7 per cent stake in the new companies. The port division can handle 76 million tonnes (mt) cargo every year and intends to raise this to 158 mt by 2013. The new entity will get 25 vessels, along with 13 rigs, including a semi-submersible one. All transshipment assets and land logistics fleet will also be with Essar Shipping. Also, 12 ships and two jack-up rigs are on order.

The ports business recorded a turnaround in the first half of the current financial year, posting a net profit of Rs 8.81 crore as against a loss of Rs 47.8 crore in the corresponding period a year ago. The top line surged 70 per cent year-on-year to Rs 338.9 crore, with operating margins at 76 per cent. However, the shipping segment was dented by weak freight rates. Some respite came from better deployment of rigs, which pushed revenues to Rs 1,353.63 crore (up 18.5 per cent year-on-year).

After valuing each division on a discounted cash flow basis, analysts at ICICI Direct have arrived on a sum-of-the-parts price target of Rs 112. Ports and terminals contributed Rs 68 to this, while sea and surface transport and oil services accounted for Rs 24 and Rs 19, respectively. Thus, the proposed share capital split in the ratio of 2:1, where for every three shares of ESPLL, shareholders will get two shares of Essar Ports and one share of Essar Shipping, looks fair.