Gujarat Pipavav Port Ltd. is one wonderful addition to the state's maritime sector. It is a lesson of how to build and operate a port as an out-and-out private initiative, and a gentle tease to other private players to take this sector more seriously. The Dollar Business travels to Pipavav to get a feel of how APM Terminals has been turning the port's fortune since 2011.
Sisir Pradhan | August 2016 Issue | The Dollar Business
Travelling to the coastal regions of Gujarat can be quite an ordeal because of the connectivity hassles. For a state reckoned for its industrial and economic prosperity, this might sound a contradiction. But this is also one reason that makes the vibrant state of Gujarat a land of surprises. Gujarat is a large state. And unlike other coastal Indian states like Maharashtra, Tamil Nadu, Andhra Pradesh, barring Karnataka, Gujarat cannot boast of a modern era road and rail connectivity in its coastal districts. Even the airports are visited by only a handful of airlines due to lack of competition. You can choose Bhavnagar (125 km), Rajkot (190 km) or Diu (80 km) – these are by far the nearest airports to Pipavav Port. And you bet, the drive to reach the port is bound to be long and exhausting.
We picked Bhavnagar Airport, an airport with a quiet terminal, located right outside the town. What an ordeal it was to get a bus to our destination. But as we drove past the town, we came across Alang Ship Breaking Yard. The view was absolutely breath-taking. One could see glimpses of its former glorious self even today. Well, back in the days, Alang used to be one of the largest ship-graveyards in the world, where ships are cut into pieces and sold in the scrap market.
Also, there was a time when it gave a lot of direct and indirect employment to the local youth and migrant labourers. However, today this ship-graveyard has lost its past glory. The downfall of Alang is the result of Asian countries fighting each other to offer competitive and cheaper labour costs. As a result, a significant volume of Alang’s business was lost to Bangladesh.
After a drive of three hours from Bhavnagar – roughly 125 km from it – we reached Rajula via Talaja, a small town known for a Jain temple. Why Rajula? It's the nearest town to Pipavav Port, our ultimate destination.
Rajula is a languid town, a municipality in Amreli district, in the southern part of Gujarat. Most of its economy depends on farming, ginning mills, and the industries in the surroundings like power plant, UltraTech Cement Plant, Pipavav Defence Offshore Engineering company, and, of course, the Pipavav Port.
In the nearby regions, there are limestone reserves, a key raw material for cement manufacturing, which attracts investment in the sector. We can only wonder the kind of difficulties Nikhil Gandhi, the original promoter of the Port, must have gone through, developing the port in this far-flung location.
Gujarat Pipavav Port Ltd. (GPPL) is the first port and SEZ in India to be developed by private investors. The construction started in the early 90s and its commercial operations commenced in 1998. The challenge for the promoter was not just restricted to constructing a Port. There were the attendant challenges of developing a road and rail network. While the Port still does not have good rail connectivity to ferry people, it is the first rail route in the country to move double-decker container rakes. Incidentally, Pipavav has many firsts to its credit.
The real growth story of the port was rewritten, when multinational port and terminal operator, APM Terminals, bought out the majority stake from Gandhi in 2005. It raised many eyebrows when APM Terminals, majorly a global container terminal operating conglomerate, bought a Port which was into bulk cargo handling. But the calculated risk paid off! The Port is now buzzing with business from bulk to container, to liquid and gas, and to automobiles. It took a couple of years to earn profit, but in CY2011, the Port started to earn its entitled share of revenue.
This BSE (Bombay Stock Exchange) listed company has come a long way since then and it currently has a market cap of about Rs.85 billion. At the end of FY2016, the Port had a turnover of Rs.659.96 crore, with a net profit of Rs.236.66 crore.
The Port serves both domestic and international RO-RO (roll-on/roll-off) vessels carrying passenger vehicles, which come all the way from Hyundai plants in Chennai, Ford plant in Sanand, and many others from Gujarat and Maharashtra. In addition, it also has a hinterland extending up to Rajasthan, Punjab and NCR (National Capital Region).
The Port’s proximity to the financial capital of the nation, Mumbai, also helps to a large extent. Moreover, it greatly benefits from Group companies, which include shipping major Maersk Line. APM Terminals Mumbai also operates one of its container terminals in JNP (Jawaharlal Nehru Port), at Nhava Sheva, which is one of the busiest container port in the country by volume, and at time these two group companies complement the GPPL.
Our visit coincided with the announcement of the Port’s expansion plans and investment in infrastructure upgradation. The Port has installed new ship-to-shore cranes, which have increased its annual container handling capacity from 0.85 million TEUs to 1.35 million TEUs. In fact, the first thing that one notices at GPPL is a large gantry crane of Pipavav Defence and Offshore Engineering Company, a company into cargo and war ship building, which was taken over by Reliance Defence and Engineering Limited, from the original promoter, Nikhil Gandhi. Since the Port is located in a remote region, APM Terminals has invested extensively in terms of developing the support infrastructure like an office for Customs, a Port Users’ Complex, recreation centre and staff quarters, among others.
Company officials claim that in recent times APM Terminals has invested Rs.400 crore to upgrade infrastructure at the port. Apart from the new container handling jetty and shore crane, the company has upgraded the existing berth and has invested in dredging to increase draft. It has also improved the container yard and internal roads at the Port.
The Port has recently appointed Keld Pedersen, a veteran from the parent company, APM Group, as the Managing Director. This appointment envisages a new level of growth for the Port in the wake of rising competition. In fact, currently, competition in the Indian port sector is at an unprecedented high and Gujarat has the highest concentration of operational ports, including the Adani Group’s flagship Port at Mundra.
In the bulk cargo segment, the company has the capacity to handle about 4-5 million MT of dry bulk cargo, 2 million MT of liquid bulk cargo, and approximately 250,000 passenger cars per year. While the current Union Government is emphasising a lot on development of coastal shipping, GPPL has already started working towards it. In fact, the passenger car shipment from Chennai to Port in February earlier this year was the first domestic coastal shipping of RO-RO service in the country.
Officials are hopeful that the company will benefit from modal shift incentives in terms of shifting of domestic cargo from road to sea which is currently under evaluation by the Union Government. [Fingers crossed!]
The scope for Port and Port-led industrial growth on the local economy is immense in this region. However, both state and Union governments need to work on the road and rail connectivity, to help fuel growth in this less developed region. Luckily, there are signs of improvement already. Most farms in the region have individual electricity transformers to power water pumps. Even hotels along highways are brimming with business despite being remotely located.
As we were checking out of the hotel, we overheard an intriguing conversation in the lobby. Someone was trying to convince officials of Reliance Defence and Engineering to consider his business proposal. Hearing about kilo-class submarines and Russia in this sleepy town of Gujarat definitely portends that this Port and the surrounding region will see a lot more action beyond just shipping in the near future.
Keld Pedersen Managing Director, Gujarat Pipavav Port Ltd.
TDB: Can you give us a brief background of the Port?
Keld Pedersen (KP): The first 10 years, from 2000 to 2010, of the Port operation were quite challenging for us, as we embarked upon a journey to turnaround the Port's business and make it a profitable entity. However, from 2010 onwards, we are witnessing significant business growth. At the moment, we are handling around 0.7-0.8 million TEUs of containers annually.
Although the liquid berth has been in operation since 2010, liquid tankages became operational only in 2015. The liquid tankages facilities turned out to be a significant addition to our existing container and bulk business.
In addition, in 2015, we have launched RO-RO (roll-on/roll-off) service and subsequently subleased land to NYK Auto Logistics to set up a RO-RO yard at the port with an annual capacity of 2.5 lakh vehicles. In Q4, FY2016, the volume of cargo under RO-RO service went up 96% as against Q3 of FY2016, as we managed to export 8,700 cars. So far, we have exported more than 10,000 cars from the port.
TDB: Are there any operational restructuring plans on the cards?
KP: Transportation being the focus, we have identified five key areas and initiated restructuring operations. With the intention to be in line with the growth path, we have invested Rs.3,600 million to enhance container handling capacity from 0.85 million TEUs to 1.35 million TEUs. We are also working on a massive expansion plan. We have installed three Post Panamax cranes with spreaders, which replaced the old cranes.
In fact, the three new Post Panamax ship-to-shore cranes have already been commissioned and pressed into service. We have invested in dredging at berth pockets and purchased two Rubber Tyre Gantry (RTG) cranes with spreaders. In addition, phased development of container yard, internal roads and gate complex ranks high on our expansion agenda. And as a result of that, at GPPL, we now have a new complex and newly-constructed internal roads as well as a container yard.
The best part of GPPL is that it has the bandwidth to further scale up its seaside and landside infrastructure, depending on business requirements. At the end of Q4, FY2016, we have achieved container volume of 1.77 lakh TEUs, which is in line with the Q4, FY2015, numbers. For the record, we have an EBITDA of Rs.991 million, which is equal to an EBITDA margin of 62% and a PAT of Rs.498 million.
However, after deducting the onetime expenditure of Rs.60 million for dismantling and scrapping of old ship-to-shore cranes, we have found that we have managed to achieve an EBIDTA margin of 65%, which is up by 4% compared to that of previous quarter. PAT has also increased by 5% from previous quarter, thanks to the steady container volumes, growth in liquid cargo and RO-RO cargo as well as other cost efficient measures. Hence, the GPPL board has recommended a maiden dividend of Rs.1.9 per equity share and the recommendation is subject to approval of the board members in Annual General Meeting.
TDB: The Union Government has decided to reduce coal imports, and Coal India has also been mandated to ramp up production. How has that affected your business?
KP: Dry bulk remains a challenge, mainly due to the drop in coal volumes. However, we have managed to maintain growth with the liquid cargo. We have handled 2.47 lakh MT of liquid cargo in Q4 of FY2016, up by 30% as compared to immediate previous quarter. It’s the highest volume of liquid cargo handled by us in a quarter till date. The rail cargo volume has also witnessed a steady growth quarter-on-quarter due to the growing volume of fertiliser cargo.
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