Essar Vizag Terminal Limited

Transcription

1 Essar Vizag Terminal Limited April 11, 2017 Ratings Facilities Amount Rating 1 Long-term Bank Facilities CARE BBB-; Stable (Triple B Minus; Outlook: Stable) Total (Rs. Six hundred and seventy four crore only) Rating Action Revised from CARE BBB (Triple B) Detailed Rationale & Key Rating Drivers The revision in the rating assigned to the bank facilities of Essar Vizag Terminal Ltd (EVTL) takes into account lower than expected throughput during FY16 (refers to the period April 1, 2015 to March 31, 2016) leading to lower generation of cash flows, and delay in the infusion of equity contribution from promoters required for the ongoing project. The rating continues to derive strength from the acquisition of an operational berth at Vizag Port having good track record for cargo handling providing revenue visibility for the modernization project, various approvals in place relating to environmental clearance, right of way for rail and road infrastructure as well as availability of utilities (power and water). The rating also takes into account abundant iron ore availability in the hinterland, the competitive advantage from the neighbouring private ports due to lower tariffs, low project implementation risk, debt tie-up in place with reasonable debt coverage indicators, fixed price supply and EPC contract with Essar Projects (India) Limited (EPIL) which mitigates cost over-run risk to an extent as well as considerable expertise of EPIL in building port infrastructure. The rating is however, constrained by the weak credit profile of the promoters, off-take risk post implementation with the decline in through-put at port in the last four years, weak credit profile of one of the major customers - Essar Steel India Limited (Vizag plant) with risk of lower iron ore pellet production therefrom which might lead to lower throughput, exposure to any change in government policy related to iron-ore export and susceptibility to variation in demand from major global consumers, which may put pressure on company s cash flows. Ability of the promoters to bring in the balance equity/internal accruals in a timely manner, complete the project within the envisaged cost and time, and achieve Minimum Guaranteed Cargo throughput for a consecutive period of three years as required by the Concession Agreement are the key rating sensitivities. Detailed description of the key rating drivers Key Rating Strengths Experienced Promoters; albeit restrained credit profile- EVTL is a part of the Essar Group. By virtue of being in the Essar Group, EVTL derives comfort from the group s extensive experience in executing various Greenfield and Brownfield projects including port infrastructure, power plants, oil refineries, end-to-end steel manufacturing facilities, etc. Essar Ports Limited (the key sponsor) has a combined port capacity of around 120 MMTPA through various port asset holding companies. The current port facilities are of strategic importance to the Essar group as a raw material feed for ESIL s Hazira steel plant, which is partially supplied from its 8 mtpa iron ore pellet plant at Vizag. However, the overall credit profile of promoters is weak. Operating port asset and adequate cargo available- VPT is one of the key Major Ports in India handling iron ore cargo and is well connected by road & rail. Since, VPT is an operational port, from the date of award of concession and handling over the asset to EVTL on May 14, 2015, the revenue has started accruing for the company. 1 Complete definition of the ratings assigned are available at and other CARE publications 1 Credit Analysis & Research Limited

2 The throughput has seen a declining trend from FY15 owing to the takeover process. EVTL took the port on May 14, 2015 and with the gradual modernization of the port, the capacity handled increased during 10MFY17 to 7.08 MMT from 5.07 MMT in FY16. Low demand risk however, dependent on volatile steel industry -There is abundant availability of superior quality iron ore in the hinterland (by way of proximity to mines located in Chhattisgarh, southern Odisha and Jharkhand), the demand of which remains high. On the other side, the competing ports are mainly private ports i.e. Dhamra and Gangavaram enjoying the similar hinterland to a great extent; however their bulk cargo handling tariffs are relatively very high as compared to pricing of Vizag port, which is regulated under TAMP. Low implementation risk The promoters have, over the years through greenfield and brownfield projects, built and operate port assets of around 104 MTPA capacity for dry as well as liquid cargo reflecting strong port infrastructure development capabilities. Secondly, EVTL entered into fixed cost contract with EPIL which also has significant relevant experience in constructing port. Besides, all approval related to environmental clearance, right of way for rail and road infrastructure, availability of utilities (power and water) etc are already been taken by VPT. Key Rating Weaknesses Significant debt funded project nevertheless debt coverage parameters are comfortable-the project debt to equity ratio is 3:1 wherein the promoter s is required to bring in 25% of its total equity commitment upfront and remaining over 2 year of implementation period. The remaining equity could be in the form of internal accruals from existing operational facility. Thus, there is significant dependence on debt for the project completion. Capital intensive nature of business and Minimum Guarantee Commitment-The overall project and nature of business is capital intensive. Further, being a commercial berth within a major port, there is no long-term contract or fixed take or pay agreement with any of its customers. Thus, the company s cash flow remains susceptible to variation in throughput. However, good track record of volumes handled by the port exists. Besides, the company is required to share 31.01% of gross revenue to VPT as royalty on the maximum TAMP rate. Any discount or under-recovery would be borne by VPTL. Furthermore, as per the CA, is there is a stipulated Minimum Guaranteed Cargo (MGC), in case of failure to achieve MGC for a consecutive period of 3 (three) years, it will be constituted as event of default and may attract certain minimum guarantee related contingency on part of EVTL. Dependence on ESIL for around 30%-40% of business-in the past around 40% cargo at port was from Essar Steel India Ltd (ESIL), which is projected to remain as a major customer for EVTL. In case of continued underperformance of ESIL and lower pellet production by ESIL, EVTL may have to look out for other customer which may lead to volatility in company s revenue. Analytical approach: Standalone Applicable Criteria Criteria on assigning Outlook to Credit Ratings CARE s Policy on Default Recognition Rating Methodology - Infrastructure Sector Ratings Financial ratios Non-Financial Sector About the Company EssarVizag Terminals Limited (EVTL), is a special purpose vehicle (SPV) incorporated on June 19, 2013 and a part of Essar group s port business headed by Essar Ports Ltd (EPL). EVTL has entered into a Concession Agreement (CA) with Visakhapatnam Port Trust (VPT) on December 13, 2013 with a revenue share of 31.01% for upgradation of the existing mechanized iron ore handling facility of Outer Harbour (OB-I & OB-II) to achieve a rated capacity of 8000 TPH (Phase I) and creation of mechanized facility at WQ1 berth of Inner Harbour for handling iron ore (including CLO upto -40 mm, fines and pellets) (Phase II) at Visakhapatnam Port under Design, Built, Finance, Operate & Transfer (DBFOT) basis for a period of 30 years. 2 Credit Analysis & Research Limited

3 The completion of the takeover of port berth and land area alongwith other handling facilities (to be mechanized) was completed on May 14, Project Details As per the CA with VPT, EVTL shall undertake development of facilities in the Outer Harbour (OB-I & OB-II) as part of Phase I of the project. The cost of Phase I of the project is estimated at Rs.745 crore. The same is being funded by debt of Rs.559 crore and remaining from equity (Rs.155 crore)/internal accruals (Rs.31 crore) and is expected to be completed by April As on March 4, 2017, the promoters have infused equity to the tune of Rs crore (approx. 94% of the total equity for the project in the form of Compulsory Convertible Cumulative Participating Preference shares (CCCPPS) and internal accruals of Rs.20 crore. Additionally, the promoters are expected to infuse Rs.9.52 crore equity during FY17 and Rs.11 crore will funded out of internal accruals. In FY16 (refers to the period April 1, 2015 to March 31, 2016), the company posted a net loss of Rs crore on a total operating income of Rs crore. Status of non-cooperation with previous CRA: NA Any other information: NA Rating History for last three years: Please refer Annexure-2 Note on complexity levels of the rated instrument: CARE has classified instruments rated by it on the basis of complexity. This classification is available at Investors/market intermediaries/regulators or others are welcome to write to care@careratings.com for any clarifications. Analyst Contact: Name: Sharmila Jain Tel: sharmila.jain@careratings.com **For detailed Rationale Report and subscription information, please contact us at About CARE Ratings: CARE Ratings commenced operations in April 1993 and over two decades, it has established itself as one of the leading credit rating agencies in India. CARE is registered with the Securities and Exchange Board of India (SEBI) and also recognized as an External Credit Assessment Institution (ECAI) by the Reserve Bank of India (RBI). CARE Ratings is proud of its rightful place in the Indian capital market built around investor confidence. CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise capital for their various requirements and assists the investors to form an informed investment decision based on the credit risk and their own risk-return expectations. Our rating and grading service offerings leverage our domain and analytical expertise backed by the methodologies congruent with the international best practices. Disclaimer CARE s ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE has based its ratings/outlooks on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. In case of partnership/proprietary concerns, the rating /outlook assigned by CARE is based on the capital deployed by the partners/proprietor and the financial strength of the firm at present. The rating/outlook may undergo change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the financial performance and other relevant factors. 3 Credit Analysis & Research Limited

4 Annexure-1: Details of Instruments/Facilities Name of the Instrument Fund-based - LT- Term Loan Non-fund-based - LT-BG/LC Date of Issuance Coupon Rate Maturity Date Size of the Issue Rating assigned along with Rating Outlook - - FY CARE BBB-; Stable CARE BBB-; Stable Annexure-2: Rating History of last three years Sr. No. Name of the Instrument/Bank Facilities 1. Fund-based - LT-Term Loan Type Current Ratings Amount Outstanding Rating LT CARE BBB-; Stable Rating history )CARE BBB (19-Feb-16) 2)CARE BBB (16-Jun-15) Non-fund-based - LT- BG/LC LT CARE BBB-; Stable - 1)CARE BBB (19-Feb-16) 2)CARE BBB (16-Jun-15) Credit Analysis & Research Limited

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