Projects under Sagarmala worth INR 8000 billion put in motion, however, mobilization of funding will continue to remain a challenge: Under the Sagarmala project, the government had set ambitious targets under the four pillars - port modernization (including new port development), port connectivity enhancement, port-linked industrialization and coastal community development for phase-wise implementation over the period 2015 to 2035. MoS data indicates that out of the 700 projects initially identified for execution, about 500 different projects valued at about INR 8,000 billion are already in motion and are at various stages of feasibility study/ award process.

As per the approved implementation plan of the Sagarmala Programme, these projects are to be taken up by the relevant Central Ministries/Agencies and State Governments preferably through private/PPP mode. ICRA research believes that there has been considerable progress on the implementation of the projects, especially in the port connectivity and port modernization projects, where several project awards h ave been made. While about 15-20% of the projects (out of the Rs 8,000 billion) are already under implementation, the balance portion of the planned projects is currently at feasibility stud y stage.

At the same time, ICRA Research believes that given the modest budgetary support of Rs 6 billion for Sagarmala project for the year, there continue to be significant challenges in te rms of mobilisation of funding, especially towards the other two pillars of Sagarmala - Development of industrial clusters and coastal communities, where progress has been limited.

Growing POL and Container volumes filling up the void created by the weakness in coal cargo: In the eleven months of FY2018, volume growth at major ports was low at 3.2% as coal volumes recorded a modest growth of 2% during the period, while POL and container volumes grew by 7% each. As expected , as compared to the decline of 5% seen in coal volumes during H1FY2018, some reversal has been observed in Q3FY2018 and Q4FY2018 with the improve ment in power plant load factor (PLF) levels as well as the relatively insufficient production from Coal India Ltd to meet the requirement. While the slight revival in coal volumes is a relief, the overall weakness in coal cargo is a concern over the long term for the port sector since many ports and terminals have significant dependence on coal imports. A prolonged slackness in coal import requirement in the absence of diversification into other cargo categories can impact the r eturns for such port sector players.

In H1FY2018, the total cargo handled at Indian ports registered a 2.5% increase to 575 million tonnes as compared to 561 million tonn es handled in the previous year.

The growth was supported by healthy growth of 11% and 5% in container and POL volumes respectively. Other cargo also registered healthy growth of 5% during this period as trade movement showed some signs of recovery. Overall volume growth was pegged down by a 9% decline in coal volumes . Major ports and Non-Major ports registered cargo growth of 3.2% and 1.4% respectively. While Major ports benefitted from a relatively stronger growth of 7% and 29% in POL and Iron Ore, Non -Major ports largely benefitted from a strong growth of 20% in containers and 12% in other cargo.

Contrary to earlier years, in FY2016, FY2017 and H1FY2018, major ports have witnessed stronger volume growth overall as compared to non -major ports. As a result, in terms of market share, major ports grabbed back some of the lost share and the NMPs share stood at 43% of the total cargo in H1FY2018 as against 45% in FY2015.

Surplus container terminal capacity could result in pressure on realizations and returns in the medium term, especially where they are heavily clustered: ICRA Research believes that the Mundra-JNPT (North West) and the Chennai cluster (South East) of container terminals are likely to witness faster growth in overall handled volumes as well as see higher competitive intensity on account of surplus capacity additions in these regions. With JNPT addi ng large capacity over the next 3 years, there is likelihood of Mundra, Pipavav, Hazira and other JNPT terminals facing severe competitive pressures for a larger shar e of the exim cargo belonging to the northern region. Higher competition will not just lead to a fight for incremental volumes, but could also drive down average realisations for terminal operators as companies grapple to corner higher volumes. Similarly, the Chennai-Ennore-Kattupalli-Krishnapatnam (South East) cluster is likely to face strong competition for volumes over the next 3-5 years, with current surplus capacity. While the recent capacity creation in these region is in anticipation of strong demand growth, increase in exim cargo movement would be gradual and in the interim, terminals could witness pressure on volumes. Terminals with short to medi um term contracts with container lines could partly address the volume risk, while pressure on realization and margins is imminent as the lines drive a hard bargain on rates.

Status quo continues on the tariff front:
The existing terminals operating at major ports are guided by different tariff guidelines issued by the independent regulator – Tariff Authorfity or Major Ports (TAMP), which were applicable at the time of contract award, leading to disputes with the port and impacting t he competitive advantage of these terminals vis.a.vis minor ports which are not governed by such regulations. The legislation ‘Major Port Authorities Bill 2016’ provides for delegation of power to fix rates for services and assets to the Board of the Port Authority. However, the Board/ committee would continu e to be guided by the 2005 or 2008 tariff guidelines and hence it is not going to solve the problem. While, the Government had offered an option for migration to market based 2013 tariff norms for exis ting operators, they were asked to re-bid for in accordance with the terms and conditions including the tariff setting guidelines for 2013 tariff norms used for bidding out new port contracts and the existing operators would have been given the right of first refusal to match the highest price quo tation (if they are not the highest bidder in the auction) and take the contract. However, the same was not agreed upon by the existing players, who under the banner of Indian Private Ports and Terminals (IPPTA), had petitioned the Honourable High Court to direct the Government to issue guidelines to fix tariff on a competitive basis. The status quo on the tariff front continues, with no traction on the issue of migration of existing operators to market based 2013 tariff norms. In ICRA resear ch’s view the directon of the outcome would be critical for financial profile of existing terminals.

Key credit issues:
The business risk profile of major ports, in addition to their government parentage, would benefit from the greater autonomy for decision making with the enactment of the Major Ports Authority Bill, 2016 in the future. Kamarajar Port Limited already benefits from its status as the first corporatized port, which gives it relatively greater autonomy to decide financial and administrative matters; and the flexibility to determine its tariff levels as it does not fall under the purview of the Tariff Authority for Major Ports (TAMP). Performance of some major ports remains constrained by connectivity issues and compe tition from more efficient non- major ports. For some non-major ports, access to a larger hinterland along with diversification in cargo have supported cargo growth as all Indian ports continue to grapple with the challenge of declining coal cargo. However, several non-major ports have also underperformed owing to cargo ramp-up issues amidst stiff competition for hinterland cargo. Given the low returns and high leveraging being faced by certain private sector port players, the sector could see further consolidation. Credit profiles of companies could come under pressure on account of any leveraged M&A related impact, cargo related issue s or any adverse
movement on litigations.

Outlook:
Stable. Overall, the port sector players will continue to experience moderate growth in cargo in the near term supported by the revival in iron ore exports, pick up in POL volumes as well as the impetus for coastal shipping, partially offset by lower coal imports and the slowdown i n container volumes due to weak exim 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, cargo growth is expected to gain further traction, driven by domestic requirements of crude oil, for meeting domestic petroleum requirements; and containers, given the cost and logistical advantages associated with containerisation and iron or e, given the increase in mining activity.

On the regulatory front, the cabinet has approved the draft MCA, which coupled with other policy initiatives, which are in various stages of implementation should boost investor sentiment, reducing the long-term risks associated with the sector. Further, the Major Port Authorities Bill 2016 is likely to usher in the changes that would allow incumbents to take investment decisions at major ports with more clarity. The major ports are already being targe ted for modernisation and efficiency improvement under the Sagarmala project. Through the gradual but detailed formalisation of the Sagarmala project, the GoI has expressed a keen interest on port -led development. The MoS has chalked out a roadmap over the next five to ten years, wherein significant investments would be made in the sector to boost trade and development. In the long run, ICRA believes the implementation of the project could lead to increased cargo for the ports, ho wever, several challenges remain, given the vast scale of the project and the significant funding resources and PPP participation required to make the targets a reality.

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