Even as investments in the broad infrastructure sector have slowed down over the past

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few quarters, the ports and logistics sector has indicated better growth prospects with strong growth expected in maritime container traffic and positive investments coming in for the rail infrastructure segment.

In August 2011, cargo traffic at major Indian ports grew 3.6 per cent to 44.3 million tonnes, while year-to-date in the present financial year, total cargo volumes grew 4.6 per cent year-on-year to 237 million tonnes. The volumes were driven by liquid and container cargo, which reported growth of 7.8 per cent and 9 per cent, respectively. However, solid cargo growth was muted at 0.6 per cent year-on-year, as fertiliser and iron ore cargo volumes de-grew 22.2 per cent and 32.3 per cent, respectively. In addition, a ban on iron ore exports also continues to be a drag on volume growth. Container cargo in August grew 16.4 per cent year-on-year to 9.7 million tonnes, and year-to-date was up 9 per cent to 49.4 million tonnes. August cargo volumes were driven by container cargo, followed by coal and port of loading (POL).

Kotak Securities in its latest report on logistics sector says that it has noticed a positive bias towards investments in ports and railways. The report says that the National Maritime Development Project has projected investments of Rs 60,000 crore and a 12 per cent compounded annual growth rate (CAGR) in container traffic in India's maritime sector through financial year 2016. The container transportation segment has been opened up to private competition and investments have picked up in rail infrastructure. The opening of the port sector to private players and development of dedicated freight corridor (DFC) are some of the factors that would contribute to the overall growth of the sector.

However, Hemant Bhattbhatt, senior director at Deloitte, says, that there is vast difference between rhetoric and real growth. The rail freight corridor was promised for operations by 2015, however, with the tardy growth witnessed, it seems it would not come up before 2019-20. “This means huge cost overruns and finances getting stuck,“ Bhattbhatt said. Investors are finding it hard to commit finances for projects that don't have environmental nods and land acquisition completed before the projects seek finances abroad, he said.

Growth prospects As a part of Agenda 2020, the government is seeking at least 96 per cent of the total funding for PPP projects worth 160,000 crore to come from the private sector.

“The whole idea is completely misplaced since the projects themselves are not viable without the environmental clearances and land acquisitions. Also, the entire development cannot be funded from a single pocket,“ he adds. The option is to remove the concept of PPP and allow only private players to build and operate ports.

Experts also say that India needs to add on to the gateway capacity at ports because around 90 per cent of trade, in terms of volumes, are by sea and water transportation. At present, major ports like Jawaharlal Nehru Port Trust and Mundra are operating at more than 100 per cent capacity, which leads to huge efficiency rundowns. Also, the turnaround time for ships is getting longer. Containerised cargo traffic in India is expected to grow at a rate of 12 per cent and reach an estimated 15 million 20-foot equivalent units (TEUs) by financial year 2016 from its present 7.5 million TEUs at the 12 major ports. “We estimate export import rail container traffic to be 5 million TEUs by financial year 2016. This would be a huge opportunity and will benefit container rail operators,“ the Kotak report says.

The report adds that even if the number of operators at 16 appears high in the rail freight business, there is enough volume for each of them. Also, with 350 rakes expected to be operational by financial year 2013, players are eyeing around 2 to 4 per cent or 100 million tonnes of the overall freight market. “However, volumes need to be shifted from road to rail, for which operators have to offer timely, reliable and value-added services, with last-mile connectivity and customised solutions. We believe players offering integrated service would be at an advantage,“ the report said.

Long gestation Ports and container rail are highly capitalintensive and have long gestation periods with hefty investments required in building capacities at ports in the form of terminals, jetties and adding rakes and rail sidings for cargo consolidation and valueadded services to attract volumes by container freight operators.

Experts say that asset turnaround time and utilisation levels assume greater relevance for an operator to derive economies of scale and be profitable. Once an operator achieves critical mass it can earn a return on capital employed (RoCE) of mo re than 15 per cent and could be further augmented by offering integrated services.

Kotak Securities prefers Gateway Distriparks as the growing company. The largest private container rail company is at present operating 21 rakes and two functional inland container depots (ICD). Blackstone recently invested Rs 300 crore in the rail business, which the company would be investing to add rakes and ICDs.

The bleeding rail business is now expected to make material contribution to earnings for GDL in financial year 2012 and 2013 and is expected to be a key segment for the company. Even the rail haulage volumes are expected to grow at 14 per cent over financial year 2011 to financial year 2013 for GDL, compared with 5.6 per cent for Concor. GDL also recently won a contract of Vallarpadam terminal and that would boost CFS volumes of the company from financial year 2013.

Allcargo also looks strongly placed with its presence in the non-vessel owning common carrier space and also has a strong hold on domestic multi-model transport operations (MTO) business. It should benefit from the growing container traffic and improving containerisation globally.

Stock performance Stocks of port and logistics sector have performed mixed this year. Where Essar Ports and Arshiya International have declined 60.88 per cent and 47.97 per cent, Gateway Distriparks and Mundra Port and SEZ have advanced 23.34 per cent and 3.89 per cent, respectively. ABG Infralogistics fell 3.27 per cent, much better than BSE 500 index, which declined 20.15 per cent during the same period.

Bharat Chhoda of ICICI Direct expects Essar Ports to post 9.9 per cent growth in RoCE and earnings per share of Rs 2.90 in financial year 2011 and believes the stock has potential to reach Rs 139 per share level. On Arshiya International, Tejas Sheth of Emkay Global Financial Services in a recent note, said, “The incremental growth from free trade warehouse zone generates nearly 25 per cent RoCE with potential upside from higher operating leverage.“

(With inputs from Amit Mudgill)