Demerger will not only help unlock value but also help management focus better.
Fund managers tend to look backwards to interpret the future better. An analysis done by foreign fund managers threw up an interesting fact — investment in Chinese port companies yielded the best returns across asset classes. An economy that’s clocking 8-10 per cent GDP growth year after year will need ports to ship in raw materials and ship out finished goods.
The story in India is no different. Major Indian ports are operating at a capacity utilisation of 90 per cent against an optimum utilisation of 70-75 per cent. However, foreign investors wanting to participate in the ports story have had limited options so far. With the demerger of Essar Shipping, Ports and Logistics (ESPL), investors will now get an opportunity to invest in another pure-play ports company. Late last year, ESPL decided to split the company into two separate entities — one comprised of the ports business and the other of shipping and logistics. The two newly minted entities will be listed on the bourses over the next one month. Shareholders of ESPL will get two shares of Essar Port and one share of Essar Shipping.
While the demerger will clearly unlock value, it will also allow the respective managements to be more focused, analysts believe. Essar Ports has aggressive plans to ramp up the port capacity from the present 88 mtpa to 158 mtpa in 2013. Funding for the expansion of both companies has been tied up. In its report on the potential of both companies, post the demerger, Credit Suisse says: “Essar Shipping and Essar Ports are both at an inflection point currently and we expect steep earnings growth in the next two years. The consolidated earnings should grow at a CAGR of 110 per cent over the next two years as contracted volumes at the ports ramp up and new ships and rigs are deployed.”
The needs of the group’s power and steel businesses tie in very well with the ports and shipping businesses, as coal, crude oil and other raw material needs to be shipped in to India. The port and logistics business would be providing services to group companies like Essar Steel and Essar Power for the handling of bulk cargo and Essar oil for crude import and export of finished products. The scaling up in operations of these group companies also provides strong visibility to earnings, claim analysts. Having control over the ports and logistics chain will ensure the company is not held to ransom by the volatility in freight rates.
Essar Ports has enjoyed support from captive volumes of the Essar group, but now the company is also looking at tapping merchant cargo. Credit Suisse believes this is an opportune time for Essar Ports to shift part of its capacity to tap merchant traffic.
