Essar Shipping’s demerger set to unlock value in ports biz

Essar Shipping Ports & Logistics Ltd’s (ESPLL) planned demerger is expected to unlock value for its shareholders, more so as its ports division gets listed as a separate entity.

Analysts say the ports division is expected to be on a major growth trajectory as its operations have just kicked off. The company has a huge expansion plan in the ports segment which is eventually expected to bring in around 25% business from third party players alone.

ESPLL is also required to reduce its total promoter shareholding from the current 83.71% to 75% as per the new Securities and Exchange Board of India guidelines. While the final method of diluting this shareholding has not been decided, company officials hint a qualified institutional placement could be considered. The company has around two years time for it.

As an immediate plan, Essar would be demerging its shipping, logistics and oilfields business by March 2011 into a new entity named Essar Shipping, while the existing company would change to Essar Ports.

The share capital of ESPLL will be split in the ratio of 2:1. For every three ESPLL shares, the shareholders would get two shares of Essar Ports and one share of Essar Shipping.

With addition of new port capacities, “the total volumes from captive business would be reduced 75% from the current 99%, with 25% third party business in three years,” said Rajiv Agarwal, CEO and managing director, ESPLL.

“We see a good growth for both companies to be formed post the demerger. Comparatively, the ports division will see more growth than the shipping company as it has just started operations,” said an analyst from a domestic brokerage firm.

“Earlier, we were looking at a complete logistics story which would include all the aspects like shipping, ports and logistics. But now we feel that the port segment has become more like an infrastructure business with steady cash flows and an annuity based model. We believe the demerger will help shareholders unlock greater value,” said Agarwal.

According to an Antique Stock Broking research note, Essar’s total revenues from its port and terminal division are expected to increase from `413 crore in fiscal 2010 ( pre-demerger) to `2,540.4 crore in fiscal 2014 (post demerger).

Total revenues for the shipping and oilfields division are expected to increase from Rs2.615.9 crore in fiscal 2010 to Rs4,126.7 crore in fiscal 2014.

The report said a significant re-rating is expected for the port’s business after the demerger.

Thus, this expected revenue growth translates to a 515.11% increase for the ports and terminal division and a 57.75% increase for the shipping company (shipping, logistics and oilfields).

At present, Essar has port terminals at Hazira and Vadinar in Gujarat. While it is bullish on Gujarat, it will be looking at other states too for port expansion.

Essar has lined up two port terminal projects—Paradip (Orissa) and Salaya (Gujarat) along with planned expansions at Vadinar and Hazira.

The management is open at looking at new port projects in other states both on the eastern and the western coasts.

On possibilities of entering the container space, Agarwal said, “Not at the moment, but we are doing some container handling for captive purposes at Hazira.”

ESPLL also has plans for its other business segments as well.

In the oilfields segment, two jack-up rigs are on order, to be delivered by fiscal 2012. Also, 12 new vessels are also on order.