Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable’ rating on the bond issue (Rs 11.72 crore) of Kamarajar Port Ltd (KPL). CRISIL Ratings has also withdrawn its rating on the bond issue of Rs 82.93 crore, on receipt of an independent confirmation of their redemption. The withdrawal is in line with the withdrawal policy of CRISIL Ratings.

 

Operating income is expected to grow by 6-8% year-on-year (y-o-y) in fiscal 2024, driven by higher traffic, with pick-up in economic activities, and better realisations. Traffic grew 3% in the first nine months of fiscal 2024 (y-o-y) to 33.44 million tonnes, while realisation improved to around Rs 234 per tonne (up by 5% to Rs 226 per tonne in fiscal 2023). Operating margin was robust around 83% for the first nine months of fiscal 2024 and should remain within 80-82% over the medium term, backed by healthy revenue and fixed cost absorption.

 

Financial risk profile is strong, as reflected by low gearing and total outside liabilities to tangible networth (TOL/TNW) ratios of 0.22 time and 0.33 time, respectively, as on March 31, 2023. Gearing should remain under 0.3 time going forward as well. Liquidity is adequate, backed by healthy cash accrual of over Rs 300 crore expected per fiscal (including dividend payout of Rs 300 crore) against moderate debt obligation of Rs 110-120 crore, from fiscal 2024 onwards and unencumbered cash and equivalents of around Rs 100 crore as on February 14, 2024.

 

The company plans to incur capital expenditure (capex) of Rs 300-350 crore per annum over fiscals 2024-2027, majorly funded through internal accrual. Bulk of the capex will be towards dredging work for development of the capsize vessel facility (1 lakh DWT and above), with estimated capex of Rs 400-450 crore in next two years. The company can also raise debt of Rs 200-250 crore in fiscals 2025 and 2026, depending on the requirement and progress of work. Debt protection metrics are expected to remain healthy in the medium term.

 

The rating continues to reflect the healthy business risk profile of KPL, driven by steady cargo offtake, healthy realisations, an efficient landlord-based operating model, and the strong financial risk profile. The rating also factors in the benefits enjoyed by KPL, given its criticality to the ultimate parent, the Government of India (GoI). These strengths are partially offset by exposure to risks related to addition and utilisation of new capacities and increasing competition across ports on the eastern coast of India.

Analytical Approach

The rating is notched up to factor in likely support from the ultimate parent, GoI. Being one of the 12 major ports in India, KPL will remain critical for GoI, given its focus on the sector and on economic growth.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy business risk profile, supported by steady cargo offtake and efficient operating model: Utilisation of the operational capacity of 54.4 million tonne per annum (MTPA) averaged 61% in the first nine months of fiscal 2024. It had improved to 80% in fiscal 2023, from 71% in the previous fiscal, driven by higher traffic. Utilisation levels should remain healthy at 75-80% over the medium term.

 

Operating income grew by 18% to Rs 994 crore in fiscal 2023, backed by 12% y-o-y rise in cargo volume and sustained realisations. Furthermore, the favorable location of the port, high level of mechanisation, and steady growth expected in non-coal cargo should support revenue growth over the medium term. For the nine months ended December 31, 2023, revenue grew by nearly 7% over the corresponding period.

 

KPL was initially meant to operate as a satellite port for the Chennai Port Authority (CPA) and handle coal cargo. Over the years, the company has successfully diversified across non-coal cargo segments (liquid, RoRo [roll-on roll-off], container, and multi cargo), and now plans to expand its non-coal cargo capacities over the next 3-5 years. It is also the only corporate port among major ports in India, having the autonomy to set its own tariffs. This has helped maintain healthy realisations on cargo movement and generate a strong operating margin (over 75% over the past five fiscals).

 

KPL operates under the landlord model, which limits capital investment to only setting up basic facilities and has helped maintain strong profitability. Other essential and capital-intensive functions such as development of terminals, operations and management activities are handed over to private operators on a build-operate-transfer or BOT basis (includes captive terminals of BOT operators also). The company is undertaking sizeable projects to strengthen infrastructure in and around the port, and improve road and rail connectivity. These plans should support the operating model and enhance overall efficiency.

 

• Strong financial risk profile: Steady growth in revenue and healthy operating margin have ensured sufficient cash accrual of over Rs 200 crore per fiscal, over the past five fiscals through 2020. Despite the expected high dividend payout to CPA, the accruals should still comfortably remain over Rs 300 crore, against annual repayment obligations of Rs 80-120 crore in the medium term.

 

Net worth has increased steadily due to profitability and steady accretion to reserves and stood at Rs 2,655 crore as on March 31, 2023. Debt was moderate at Rs 593 crore as on March 31, 2023, as a large part of capex was funded internally. As a result, gearing remained low at 0.22 time as on March 31, 2023. Debt protection metrics are strong, marked by adjusted interest coverage of over 14 times for fiscal 2023. While debt levels are expected to increase over the medium term to fund future capex, debt protection metrics should remain comfortable on the back of improvement in revenues due to increase in traffic.  

 

• Criticality of the port for the government: Despite sale of stake to CPA, KPL remains critical to GoI, given the latter’s focus on ports and on economic growth. As one of the 12 major ports in India, KPL remains strategically important for overall economic growth. It is also one of the select public sector institutions allowed to issue tax-free bonds in fiscals 2013 and 2014. GoI, through the Ministry of Shipping, monitors the company’s performance and will continue to play a critical role in the decision-making process, and also extend need-based support.

 

Weaknesses:

• Exposure to risks related to addition and ramp-up of utilisation of new capacity: Delay in commissioning of new facilities has constrained significant pick-up in operational capacity over the past 2-3 years. The company is currently in the process of a 33 MTPA capacity expansion. The Tamil Nadu Generation and Distribution Corporation Ltd (TANGEDCO) was handed over coal berths 3 and 4 in June 2019 and August 2018, respectively; however, commissioning has been stretched on account of delay in installation of top-loading facilities and commissioning of power plants under construction. The commissioning of coal berth 4 is expected in fiscal 2025. The iron ore terminal, being converted to a common user coal terminal (planned in 2016), also remains non-operational as the license agreement was terminated with the BOT operator in June 2021, following instance of default by the latter.

 

Offtake in newly operational capacities and the liquid natural gas (LNG) terminal (5 MTPA; February 2019) is yet to pick-up. Ability to commission the ongoing capacities and increase capacity utilisation of new terminals in a timely manner are key rating sensitivity factors. Better capacity utilisation of the container and liquid cargo terminals would lend diversity to revenue over the medium term.

 

• Increasing competition across ports on India’s eastern coast: KPL faces stiff competition for non-TANGEDCO coal cargo from neighbouring ports, and for container cargo from ports on the eastern coast of India. Strong operating parameters of non-major ports, along with increasing capacities, intensifies competition further. On the coal cargo front, there is notable competition from Krishnapatnam and Karaikal ports, while Kattupalli and Chennai ports, adjacent to KPL, vie for container cargo. Growth will hinge on the ability to offer competitive tariffs and ensure healthy operating efficiency. Any significant diversion or loss of traffic to competitor ports and resultant impact on operating efficiency remains a key monitorable.

Liquidity: Strong

Expected cash accrual of over Rs 300 crore per fiscal over the medium term, despite higher dividend pay-out to CPA, will suffice to fund the yearly debt of Rs 30-120 crore over the medium term. Capex plans of Rs 300-325 crore per fiscal will be funded through a mix of internal accrual and debt. Unencumbered cash and bank balance of around Rs 100 crore as on February 14, 2024 and unutilised bank limit of Rs 50 crore will further aid liquidity. CRISIL Ratings believes that the company should continue to receive need-based support from GoI.

Outlook: Stable

CRISIL Ratings believes KPL will sustain its strong financial risk profile over the medium term. The business risk profile will continue to be supported by the favourable location and operating model, and steady cargo offtake and realisations.

Rating Sensitivity factors

Upward factors:

• Healthy and sustained revenue growth of over 25% while maintaining profitability.
• Higher-than-expected offtake from operational berths.
• Earlier-than-anticipated completion of ongoing expansion plans and pick-up in offtake.

 

Downward factors

• Sustained decline in revenue by over 15%.
• Significant delays in ongoing expansion plans, leading to lower than expected growth.
• Any larger-than-expected debt-funded capital expenditure plan.

About the Company

KPL (formerly Ennore Port Ltd), based in Ennore, Tamil Nadu, is the 12th major port on the eastern coast of India, located about 24 kms north of Chennai port. On March 27, 2020, KPL became a fully owned subsidiary of CPA, after GoI sold its entire stake in the company. Prior to the stake sale, GoI owned about two-thirds stake in KPL, and CPT held the balance.

 

KPL commenced commercial operations in June 2001. It was originally conceived as a satellite of Chennai port, primarily to handle the coal requirement of thermal power stations of TANGEDCO. Later, the Tamil Nadu government expanded its scope to handle other dusty and hazardous dry and liquid bulk cargo under the landlord concept, through the BOT model, along with private operators. KPL has 10 terminals, of which four are for coal, two for liquid, two for general cargo (largely automobiles), one for containers, and one is a multipurpose cargo terminal.

Key Financial Indicators

Particulars	Unit	2023*	2022
Revenue	Rs crore	994	844
Profit after tax (PAT)	Rs crore	374	440
PAT margin	%	37.6	52.1
Adjusted gearing	Times	0.22	0.28
Interest coverage	Times	14.4	11.1

*PAT is low in fiscal 2023, due to exceptional items of Rs 147 crore.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate	Maturity date	Issue size (Rs crore)	Complexity level	Rating
INE363O07046	Tax-free bond*	26-March-2013	7.17%**	25-March-2028	11.72	Simple	CRISIL AA/Stable

*Non-convertible tax-free infrastructure bonds

**Additional coupon of 0.50% per annum is to be paid to original allottees under category IV portion

 

Annexure - Details of rating withdrawn

ISIN	Name of instrument	Date of allotment	Coupon rate	Maturity date	Issue size (Rs crore)	Complexity Level	Rating
INE363O07020	Tax-free bond*	26-March-2013	7.01%**	25-March-2023	82.93	Simple	Withdrawn

*Non-convertible tax-free infrastructure bonds

**Additional coupon of 0.50% per annum is to be paid to original allottees under category IV portion