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Decline in coal imports will affect Port's earnings says Indian Credit Rating Agency

The continuing decline in coal volumes handled in Indian ports, at a more rapid pace, compared to the previous years, is a cause for concern for the long term impact for the port sector since many ports and terminals have significant dependence on coal imports according to a senior official of ICRA. (Indian Credit rating Agency)

A prolonged decline in coal import requirement in the absence of diversification into other cargo categories will impact the returns for such port sector players. Mr K Ravichandran senior vice president corporate ratings ICRA said.

Coal volumes handled by Indian ports declined by 12 per cent during the first five months of the current financial year while iron ore exports grew by 29 per cent during the same period.

Ports like Paradip, Haldia, Visakhapatnam, Krishnapatnam, Ennore and Tuticorin depended on coal to large extent on traffic earnings. In fact the Kamarajar port at Ennore has invested heavily on construction of exclusive coal berths when the thermal stations in Tamil Nadu are backing down in view of the spurt in demand for cheap solar and wind energy sources.

Chennai port will not be affected by this trend since coal handling in the port was stopped by the Supreme Court on environmental grounds six years ago. About 40 per cent of the port cargo came from coal when the handling was banned.

Cargo throughput at Indian ports registered a 5.7 per cent growth to 1,133 million tonnes (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 Odisha as well as healthy growth of 6 per cent in POL and liquids (petroleum, oil and lubricants) and other cargo (9 per cent).

However, volume of coal was down by 12 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 ex-im 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 Union government 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, overcapacity in the container terminal segment could result in acute pressure on the margins of the terminal operators, said a release.

Mr 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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