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Essar Ports Ltd Management Discussions

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Dec 23, 2015|12:00:00 AM

Essar Ports Ltd Share Price Management Discussions

The discussion and analysis below covers the financial results and business outlook of Essar Ports Limited and its subsidiaries for the financial year 2014-15. This outlook is based on assessment of the current business environment and Government policies. The change in future economic and other developments are likely to cause variation in this outlook.

Indian Economy and Infrastructure Sector

Economic expansion in India has picked up in recent years. Inflation markedly declined helped by policy initiatives and lower global oil prices. The Indian Economy grew in excess of 7.2% in the financial year FY2015 as against a growth of 4.7% in FY2014.

The Reserve Bank of India (RBI) has recently softened repo rates by 25bps in two tranches last year, given the easing inflation numbers. There is an expectation of further cuts in interest rates, resulting in a revival of investor sentiment in the country. The recent positive measures by the Government aimed at addressing inflation, keeping external balances in check, simplifying the regulatory regime for investors, increasing foreign direct investment, and facilitating infrastructure development also led to Moody’s affirming Government of Indias sovereign rating of Baa3 and changed rating outlook to Positive.

Based on the overall cues of economy growth and improving investment scenario, it is believed that a further pickup in economic growth is expected. GDP growth is expected to improve to 7.5% backed on policy initiatives focused on attracting FDI inflows.

Infrastructure sector in India looks well placed to attract investments and experience high growth. Infrastructure sector is core to the Indian growth story due to massive historic shortfall in physical infrastructure and growing economic activity. The sector is expected to be resilient and continue to attract investor interest.

RBI has over the past 1.5-2 years taken several initiatives like 5/25 financing scheme for elongated maturity, infrastructure bonds and encouraging infrastructure debt funds to facilitate flow of funds to the sector. These initiatives are aimed at easing financing terms for infrastructure projects which will increase the pace of investments into the sector.

Ports Sector

Major ports continued to suffer from capacity constraint and thus, congestion at these ports resulted in higher cost for industry. In view thereof, a large part of the incremental traffic has shifted to non-major ports over the period. This has resulted in significant increase in share of non-major ports in total traffic. Non-major ports handled about 43% of total traffic in 2014-15 as compared to 43% during 2013-14.

The traffic at Indian ports has increased at a slow pace of 4.4% CAGR during the last five years from 850 MMT during 2009-10 to 1052 MMT during 2014-15. Slow growth in traffic was caused by the ban on iron ore mining and exports since 2011, due to which the traffic declined. POL continues to account for the largest share of traffic at Indian ports in 2014-15. The share of coal traffic increased to account for about a fifth of the total traffic. The surge in coal traffic can be attributed to the increase in thermal coal imports since domestic coal production failed to meet the growing demand, mainly from the power sector. Between 2009-10 and 2014-15, traffic at non-major ports has grown by about 10.3% CAGR as compared to about 0.7% at major ports.

Series of steps have been taken by the current government to increase private participation in the ports industry development viz, PPP projects, Private sector participation in Major Ports, Sagar Mala Project for tourism development and JV with foreign ports.

Performance Overview

During the year under review, your Company has delivered consistent growth and results were in line with the targets. The Company is now well poised for next level of growth and continues to be the 2nd largest private sector port operator in India by handling 53.1 MMT of cargo in FY 2014-15 across all its ports.

Your Company has delivered another year of consistent growth in financial performance. The emphasis continues to be on development of world class facilities and to complete the projects under implementation in time. Your Company has now received all pending approvals related to environment and land clearances. Your Company is also happy to announce takeover of operations of Vizag outer harbor iron ore terminal which is an existing operational project with no gestation period.

Performance Highlights:

Your Company has current capacity of 120 MMTPA. The capacity is being expanded to 194 MMTPA over the next few years.

Your Company has four operational port terminals at Hazira, Vadinar, Paradip and Vizag. The Hazira port is an all-weather, deep-draft port with 30 MMTPA of dry bulk and break bulk cargo handling capacity. Vadinar is also an all-weather, deep-draft port with 58 MMTPA of liquid cargo handling capacity. The Paradip dry bulk terminal is also an all-weather, deep-draft port with 16 MMTPA of dry bulk cargo handling capacity. The Vizag terminal is an operational berth taken over on May 14, 2015 having capacity of 16 MMTPA.

Your Company is also setting up a dry bulk terminal at Salaya with a capacity of 20 MMTPA. Additionally, the Company plans to expand its Hazira port capacity by 20 MMTPA - taking its capacity at Hazira to 50 MMTPA. Your Company is also undertaking capacity addition by developing additional iron ore berths at Visakhapatnam Port with a total capacity of 16 MMTPA and development of a coal terminal at Paradip with 18 MMTPA capacity.

Key Performance highlights for the year are as below:

• Total Revenue (excluding trade revenues to fulfill export obligations) contribution on consolidated basis increased by 6% to Rs 1,741.4 crore from Rs 1,637.4 crore for the previous year.

• EBITDA for the year increased by 7% to Rs 1,415.8 crore from Rs 1,327.1 crore for the previous year.

• Net Profit for the year increased by 2% to Rs 391.2 crore from Rs 383.7 crore for the previous year.

• Earnings Per Share for the year was Rs 9.14 as against Rs 8.97 for previous year.

Strategic developments / Approvals received during the year

• Your Company’s subsidiary, Vadinar Liquid Terminals Limited received approval from Kandla Port Trust for development and operation of 2nd SPM & 2 product berths at Vadinar. Concession Agreement has also been signed.

• Your Company’s Hazira terminal is in receipt of in-principle approval from GMB for 1100m berth expansion contiguous to the existing 550m berth. Hazira terminal has also received environment clearance for development of mega port with 4.8 km waterfront.

• During the financial year, Salaya terminal received all pending regulatory approvals including Forest clearance, Govt./Gauchar land approval and mining approval for construction of bund. All required clearances for the project are now in place.

• Outer harbour iron ore terminal at Vizag Port was taken over by Companys subsidiary - Essar Vizag Terminals Limited on 14th May 2015. The terminal is an existing operational terminal with all relevant approvals in place.

Awards and Accolades

Your Company has been awarded over the year by various institution for best practices in Health, Safety, Environment and Quality related categories. Below is the list of awards and accolades won by your Company:

• Your Company’s Vadinar terminal won the following awards during the year:

• Won Greentech Safety Award in Gold Category;

• Was accorded Port/Terminal of the Year (HSE) in Gujarat Star Awards; and

• Won Environment Award - Lloyd’s List (Middle East & Indian Subcontinent) Award.

• Your Company’s Hazira terminal received Silver award for Outstanding achievement in Training Excellence, 2014.

• Your Company’s Paradip dry bulk terminal won the following awards during the year:

• Won outstanding project execution award under Dun & Bradstreets Infra Awards 2014;

• Won 4th Annual Greentech CSRAward; and

• Won 15thAnnual Greentech EnvironmentAward. Operational Performance Highlights

• Vadinar terminal handled 41.25 MMT of cargo during FY2014-15 as against 40.91 MMT during FY2013-14.

• Hazira terminal handled 10.63 MMT during FY2014-15 as against 10.26 MMT during FY2013-14.

• Paradip dry bulk terminal handled 1.05 MMT cargo during FY2014-15 as against 1.07 MMT during FY2013-14.

• Jetty Construction of Salaya terminal has been completed. A total of 3.5 km out of 5.5 km of bund construction was completed as on date of this report. The terminal is expected to be commissioned by March 2016.

• Vizag ironore terminal achieved financial closure and was taken over from Visakhapatnam Port Trust on May 14, 2015.

• Paradip Port Trust has cleared all encumbrances from project site earmarked for Paradip Coal terminal and has expressed readiness to handover the land. The site is expected to be taken over during FY2015-16.

Update on Delisting

Your Company based on an intimation received from a majority stakeholder for voluntary delisting of the equity shares had sought the approval of the members and the stock exchanges. Post the approval of the members, the in principle approval from BSE Limited and National Stock Exchange of India Limited has been obtained.

4. RISK MANAGEMENT & INTERNAL CONTROL

Implementation and operation of port and terminal facilities are dependent on various regulatory approvals and government policies. Changes in macro economic factors like inflation, interest rate, world trade and natural catastrophies also play an important role in the trade of goods and cargo.

Any adverse change in the above may affect the performance of your Company. Your Company periodically reviews the risks associated with the business and takes steps to mitigate and minimise the impact of risks.

Your Company has a Risk Assessment and Mitigation procedure in place. Major risks identified by the businesses and functions if any are systematically addressed through mitigating actions on a continuing basis.

The Companys internal control systems are commensurate with the nature of its business and the size and complexity of operations. These systems are routinely tested by the Internal Auditor and cover all key business areas. Significant audit observations and follow up actions thereon are reported to the Audit Committee. The Audit Committee reviews adequacy and effectiveness of the Companys internal control environment and monitors the implementation of audit recommendations, including those relating to strengthening of the Companys risk management policies and systems.

The details of foreign exchange earnings and outgo as required under Section 134 and Rule 8(3) of Companies (Accounts) Rules, 2014 are mentioned below:

Foreign Exchange Earnings & Outgo

( crore)

Particulars For the year ended 31st March, 2015
Foreign Exchange earnings 2.29
Foreign Exchange outgo 18.53

5. CORPORATE SOCIAL RESPONSIBILITY

In accordance with the requirements of Section 135 of Companies Act, 2013, your Company has constituted a Corporate Social Responsibility Committee. The composition and terms of reference of the Corporate Social Responsibility Committee is provided in the Corporate Governance Report.

Your Company has also formulated a Corporate Social Responsibility Policy which is available on the websites of the Company at www.essar.com and www.essarports.com. The Company statutorily is not required to incur CSR spend, as the Company has negative profits. The Company has initiated CSR activities through its subsidiaries. Annual report on CSR activities as required under the Companies (Corporate Social Responsibility Policy) Rules, 2014 has been appended as Annexure to this Report.

6. BOARD INDEPENDENCE

Based on the confirmation / disclosures received from the Directors and on evaluation of the relationships disclosed, all Independent Directors comply with the Independence criteria in terms of Clause 49 of the Listing Agreement and Section 149(6) of the Companies Act, 2013.

7. DIRECTORS, APPOINTMENT AND TENURE

The Directors of the Company are appointed by Members at the General Meetings. In accordance with the Articles of Association of the Company two-third of the Directors of the Board are liable to retire by rotation. Out of this, one-third of the eligible Directors retire every year. The appointment and tenure of Independent Directors are consistent with the Companies Act, 2013 and the Listing Agreement.

Shri. P K. Srivastava (DIN 00843258) retires at the ensuing Annual General Meeting of the Company and being eligible, offer himself for re-appointment.

Smt. S. Gayathri (DIN 07115908) has been appointed as an Additional Director on March 30, 2015. The Company has received notice from a member proposing the appointment of Smt. Gayathri as a Director of your Company.

It is propsed to appoint Shri. Dilip J. Thakkar (DIN 00007339), Shri. T S. Narayanasami (DIN 01786981), Shri. Deepak Kumar Varma (DIN 00213394), Shri. N. C. Singhal (DIN 00004916), Shri. Michael Pinto (DIN 00021565), Dr. Jose Paul (DIN 01256347) and Shri. Jesper Kjaedegaard (DIN 00529039) as Independent Directors for a consecutive period of three years from the date of the ensuing Annual General Meeting.

Shri. Jan Adam has resigned from the directorship of your Company with effect from December 19, 2014. Your Board places on record its appreciation for the valuable contributions made by Shri. Adam in the growth and progress of the Company during his tenure as Director.

8. HUMAN RESOURCE

Human resources have always been the key to success of your Companys business. A balance of internal and external talent was maintained to ensure right skills are available to initiate project activities. A large number of fresh talent comprising engineers and management graduates were deployed to nurture future ports facilities of the Company being implemented by subsidiaries. Your Company is known for developing future leaders and having the best people practices. This coupled with the ability to attract the best talent, provides a competitive edge to the organisation.

9. INFORMATION TECHNOLOGY

Your Company successfully implemented SAP in its financial and related systems. For dry bulk as well as oil terminals, systems have been implemented to capture end-to-end workflow covering all activities from pre-arrival intimations to actual departure of vessels. Expected berth occupancy is being plotted, thereby optimising the berth utilisation and increasing berth efficiency. Various dashboard reports have been implemented in the system for berth performance and resource monitoring.

10. SUBSIDIARIES

As on March 31, 2015, the following were the subsidiaries of your Company:

1. Vadinar Oil Terminal Limited

2. Vadinar Ports & Terminals Limited

3. Essar Vizag Terminals Limited

4. Essar Bulk Terminal Limited

5. Essar Bulk Terminal Paradip Limited

6. Essar Bulk Terminal (Salaya) Limited

7. Essar Paradip Terminals Limited

8. Petro Tankages India Limited

9. Essar Dredging Limited

10. Vadinar Liquid Terminals Limited

11. AUDITORS

Your Companys Auditors, Messrs. Deloitte Haskins & Sells, Chartered Accountants, Ahmedabad, the Statutory Auditors of the Company hold office until the conclusion of the ensuing Annual General Meeting and are eligible for re-appointment. Since Messrs. Deloitte Haskins & Sells have been functioning as Auditors of your Company for more than ten years, as per Section 139 of the Companies Act, 2013, they can be appointed for a maximum period of further two years.

Suitable resolution for their re-appointment has been included in the Notice convening the ensuing Annual General Meeting.

The Report given by the Auditors on the financial statements of the Company forms part of the Annual Report. There has been no qualification, reservation, adverse remark or disclaimer given by the Auditors in their Report.

12. CORPORATE GOVERNANCE

During the year, your Company has adopted new policies and amended existing policies such as Policy on Related Party Transactions, CSR Policy, Whistle Blower Policy, Policy on

Material Subsidiaries and Prevention of Sexual Harassment Policy in line with new governance requirements. These policies are available on the websites of the Company at www.essar.com and www.essarports.com.

A separate report on Corporate Governance is provided together with a Certificate from the Statutory Auditors of the Company regarding compliance of conditions of Corporate Governance as stipulated under Clause 49 of the Equity Listing Agreement with the Stock Exchange(s).

13. DISCOLSURES WITH RESPECT TO THE REMUNEATION UNDER SECTION 197 OF THE COMPANIES ACT, 2013

A statement of Disclosure of Remuneration Under Section 197 of Companies Act, 2013 and Rule 5(1) of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 is attached and forms part of this Report.

The details of Sitting Fees paid to the Independent Directors for attending the Meetings of the Board and its Committees and the remuneration paid to the Managing Director and the Wholetime Directors are furnished in the Corporate Governance Section of this report.

14. SECRETARIAL AUDIT REPORT

During the year, your Company has undertaken the Secretarial Audit for the year 2014-15, which, inter alia, includes audit of compliance with the Companies Act, 2013, and the Rules made under the Act, Listing Agreement and Regulations and Guidelines prescribed by the Securities and Exchange Board of India and Foreign Exchange Management Act, 1999.

The Secretarial Audit was carried out by CS. Martino Ferrao of M/s. Martinho Ferrao Associates, Company Secretaries, the Secretarial Auditor of the Company for the financial year 2014

15. The detailed report on Secretarial Audit is appended as an Annexure to this Report.

15. EXTRACT OF ANNUAL RETURN

The extract of annual return in Form MGT 9 as required under Section 92(3) and Rule 12 of the Companies (Management and Administration) Rules, 2014 is appended as an Annexure to this Report.

16. AFFIRMATION AND DISCLOSURE

The Company has framed a specific Code of Conduct for the members of the Board and the Senior Management personnel of the Company pursuant to Clause 49 of the Listing Agreement with the Stock Exchanges to further strengthen corporate governance practices in the Company.

All the members of the Board and Senior Management Personnel have affirmed their compliance with the Code of Conduct as on March 31, 2015 and a declaration to that effect, signed by the Managing Director & CEO, is attached and forms part of this Report.

17. BOARD EVALUATION

The Nomination and Remuneration Committee of the Company has approved an evaluation policy, which was adopted by the Board of Directors. The policy provides for evaluation of the Board, the Committees of the Board and individual Directors, including the Chairman of the Board. The Policy provides that evaluation of the performance of the Board, Board Committees and Directors shall be carried out on an annual basis. Your Company has initiated the process of Board evaluation which is underway. The results of the evaluation will be shared with the Board, post which action plan will be drawn to improve the identified parameters.

18. RELATED PARTY TRANSACTIONS

In line with the requirements of the Companies Act, 2013 and Listing Agreement, your Company has formulated a Policy on Related Party Transactions which is also available on Companys websites at www.essar.com and www.essarports.com. The Policy intends to ensure that proper reporting, approval and disclosure processes are in place for all transactions between the Company and Related Parties.

This Policy specifically deals with the review and approval of Material Related Party Transactions keeping in mind the potential or actual conflicts of interest that may arise because of entering into these transactions. All Related Party Transactions are placed before the Audit Committee for review and approval.

All Related Party Transactions entered during the year were in Ordinary Course of the Business and on Arms Length basis. The disclosure of Related Party Transactions as required under Section 134(3) (h) of the Companies Act, 2013 in Form AOC 2 is annexed to this report.

19. DISCLOSURES PURSUANT TO CLAUSE 32 OF THE LISTING AGREEMENT AND SECTION 186 OF THE COMPANIES ACT, 2013

Details of loans, guarantee or investments made by your Company under Section 186 of the Companies Act, 2013 during the financial year 2014-15 are appended as Annexure to this Report.

20. MATERIAL CHANGES AND COMMITMENTS AFFECTING THE FINANCIAL POSITION OF THE COMPANY

There were no material changes and commitments affecting the financial position of the Company which occurred between the end of the financial year to which this financial statements relate and the date of this Report.

21. PREVENTION OF SEXUAL HARASSMENT AT WORKPLACE

As per the requirement of The Sexual Harassment of Women at Workplace (Prevention, Prohibition & Redressal) Act, 2013 (‘Act) and Rules made thereunder, your Company has framed the Policy for Prevention of Sexual Harassment.

22. STATEMENT OF DIRECTORS RESPONSIBILITIES

Pursuant to the requirement of Section 134(5) of the Companies Act, 2013 and based on the information provided by the Management your Directors state that:

a) in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;

b) accounting policies selected were applied consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the profit or loss of the Company for that period;

c) proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 2013 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;

d) the annual accounts of the Company have been prepared on a going concern basis;

e) the Company had laid down internal financial controls to be followed by the companies and that such internal financial controls are adequate and were operating effectively; and

f) Proper systems are in place to ensure compliance with the provisions of all applicable laws and such systems are adequate and operating effectively.

23. APPRECIATION AND ACKNOWLEDGEMENTS

Your Directors express their sincere thanks and appreciation to all the employees for their commendable team work and contribution to the growth of the Company.

Your Directors also thank its bankers and other business associates for their continued support and co-operation during the year.

For and on behalf of the Board

Mumbai Rajiv Agarwal A. S. Bali
August 13, 2015 Managing Director Director Finance

ANNEXURES TO THE DIRECTORS’ REPORT

Statement of Disclosure of Remuneration Under Section 197 of Companies Act, 2013 and Rule 5(1) of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014

i. Ratio of the remuneration of each Executive Director to the median remuneration of the Employees of the Company for the financial year 2014-15, the percentage increase in remuneration of Chief Executive Officer, Chief Financial Officer and other Executive Director and Company Secretary during the financial year 2014-15.

Sr. No Name of Director/KMP Designation Ratio of remuneration of each Exceutive Director & KMP to median remuneration of Employees Percentage increase in Remuneration
1. Mr. Rajiv Agarwal Managing Director & CEO - Executive Director 5.6 7.4
2. Mr. Kamla Kant Sinha Wholetime Director - Executive Director 2.4 12.3
3. *Mr. A. S. Bali Director Finance - Executive Director 3.0 N.A.
4. Mr. Manoj Contractor Company Secretary 1.0 6.5

* appointed w.e.f. May 15, 2014.

Note :

a) The Non-Executive Directors of the Company are entitled for sitting fee as per limit approved by the Board of Directors. The details of Sitting Fees of Non-Executive Directors forms part of the Corporate Governance Report.

b) Percentage increase in remuneration indicates annual target total compensation increases, as approved by the Nomination and Remuneration Committee of the Company during the financial year 2014-15.

c) Employees for the purpose above includes all employees.

ii. The percentage increase in the median remuneration of employees for the financial year was 7%.

iii. The Company has 7 permanent employees on the rolls of Company as on March 31, 2015.

iv. Relationship between average increase in remuneration and Company’s performance:

The salary increases for the Company are decided on the basis of the performance of the employees against the set KPIs and overall business performance.

Similar approach was followed to establish the remuneration increases to the employees. Variable compensation is an integral part of the total reward package and is directly linked to individual performance rating and business performance. Salary increases during the year were in line with Companys performance.

v. Comparison of the remuneration of the Key Managerial Personnel against the performance of the Company:

The remuneration to employees and Key Managerial Personnel are directly linked to individual performance as well as that of the business.

During the year, the Companys revenue on a Consolidated basis was around Rs 1,776.95 crore. The Profit before interest and tax was Rs 1,176.55 crore, an increase of 12.06%. PAT grew by 1.95%.

Based on the business performance and the performance rating of the Key Managerial Personnel against their KPIs, increase or variable pay have been awarded to the Key Managerial Personnel for the current year, which was approved by the Nomination & Remuneration Committee of the Company.

vi. The Market Capitalisation of the Company as on 31st March, 2015 was Rs 5,391 crore as compared to Rs 2,225 crore as on 31st March, 2014.

vii. The average percentage increase made in the salaries of Employees other than the managerial personnel in the financial year was 7% whereas the increase in the managerial remuneration was 8.73%.

viii. Variable compensation is an integral part of our total reward package for all Employees including Executive Directors. variable pay is directly linked to an individual performance rating and business performance. At the beginning of the year, all the employees, including Executive Directors decide their KPAs which are reviewed on half yearly basis.

ix. The ratio of the remuneration of the highest paid Director to that of the Employees who are not Directors but receive remuneration in excess of the highest paid Director during the year : Not Applicable

x. It is hereby affirmed that the remuneration paid during the year is as approved by the Nomination & Remuneration Committee of the Company.

For and on behalf of the Board

Mumbai Rajiv Agarwal A. S. Bali
August 13, 2015 Managing Director Director Finance

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