Case Study - Port Project at Gujarat

Chapter 6

Proposal In Brief

M/s. ABC Limited*, a new Company promoted by a Gujarat based Super Star Trading House

envisages the setting up of facilities for a Multi-Purpose Finger Type Jetty alongwith Barge Jetty on the same Jetty approach together with related Port back-up facilities at Navinal Island, Village Mundra, Dist. Kutch in the State of Gujrat viz:
(a) Godowns for General Cargo with a total storage capacity of one lakh twelve thousand tonnes (closed storage- 87,000 tonnes; open storage –25,000 tonnes).

(b) Chemical Terminal with storage capacities of one lakh kilometers; and
(c) LPG terminal with storage capacity of 6,400 tonnes.

The cost of the project estimated at Rs. 337 crores is proposed to be financed by way of Equity Share Capital (including share premium) of Rs. 137 crores (to be subscribed by ABC Limited and its promoters, friends and associates) and Rupee Term Loan assistance from IFCI/other institutions – Rs. 200 crores.

Assumptions In The Project
(a) Means of Finance:
Debt = Rs. 200 crores
Equity = Rs. 137 crores
Debt: Equity = Rs. 1.88: 1

Above includes Rs. 700 lakhs brought to by ABC Limited. Public Issue of Rs. 13,000 lakhs will be made by offering Rs. 10 each per equity share at a premium of Rs. 10.

Equity: Promoters would bring in as initial contribution towards equity shares in ABC Limited. Public Issue of Rs. 13,000 lakhs will be made by offering 10 Rupee share at a premium of Rs. 10. Accordingly, the equity capital would be Rs. 7,200 lakhs and share premium would be Rs. 6,500.

(b) Project implementation:
(i) Project Implementation Time Schedule = 3 years.
(ii) Effective date of commencement = 01/10/2005
(iii) Expected date of commercial operation = 01/10/2008
(iv) Number of working days per annum = 300 days

(c) Tariff projections: Cargo handling at port:

Liquid Cargo

(d) CARGO HANDLING & STORING OF PORT
(A) CARGO HANDLING CAPACITY OF PORT:
(I) MAIN, FINGER TYPE, MULTIPURPOSE JETTY:
(i) Total Working Days per (Working days available Annum available at Main on front side) + Finger type jetty for (Working Days available Chemical Cargo, Liquid on rear side
Chemical Cargo & LPG
Cargo
= (300 + 300)
= 600 days per annum

(ii) No. of days required for 1.92 lakh tonnes of LPG Cargo handling @ 5000 TPD Loading Handling @ 5000 TPD Loading Handling rate.
= 1.92 Lakh Tonnes / 5000 TPD

(iii) No. of days required for 5.00 lakh tonnes of Liquid Chemical Cargo handling @ 10,000 TPD = 50 days loading/unloading rate
= 5.00 Lakh Tonees / 10000 TPD

(iv) Working days available = (i) –(ii) –(iii) on Main jetty for = 600 –38 –50 General Cargo handling = 512 days

(v) General Cargo, that can be handled on Main Jetty 3,000 TPD, during available 520 days = 512 x 3000 = 15.4 lakh tonnes

(II) BARGE JETTY:
General Cargo that can be handled = 1000 x 300
at Barge Jetty for 300 working days, = 3.00 lakh
@ 1000 TPD Tonnes

(B) CARGE STORAGE CAPACITY:
I. General cargo: Storage capacity of 1 lakh sq. meter closed Godowns (69,000 sq. mtrs. Inside Port limit & 50,000 sq. mtrs. Outside Port limit) are being built at Project site of 10 mtr. High (6 mtr. + 4.25 mtr. roof).
Available store volume = 1,00,000 sq. m. x 6 mtr. (height)
Average Bulk density of General Cargo = 0.70
Equivalent Storage Capacity = 4.20 Lakh Tonnes

II. LIQUID CHEMICAL CARGO:
Storage Capacity = 1 Lakh Tonnes
No. of Rotation per year = 5
Total Liquid Chemical Cargo to be stored annually = 5 Lakh Tonnes

III. LPG CARGO:
Storage Capacity = 6,400 Tonnes
No. of Rotation per year = 40
Total LPG Cargo to be stored annully = 1.92 Lakh Tonnes

(e) REVENUE REALIZATION :
Revenue Realization from different Cargo would be in the following form:
(i) WHARFAGE
(ii) CARGO HANDLING CHARGES
(iii) CARGO STORAGE CHARGES

(i) WHARFAGE: Wharfage is the levy being charged by Port Authorities, from Port users, for providing Port facilities (Jetty Wharf). In this particular case, since major capital investment is made by ABC Limited, Gujarat Maritime Board is expected to recover reduced Wharfage from ABC Limited, for its Captive Cargo. (As has been given to other similar facilities Usage, in the State of Gujarat).

Hence, it is assumed that users will pay 100 % Wharfage to ABC Limited. (The Client, The Promoters). And, from this 100 %, ABC Limited will pay concesional rate of Wharfage to GMB for Capitative Cargo. Whereas, in case of Others’ Cargo, ABC Limited will pay 100 % Wharfage (collected from users) to GMB.

For the purpose of feasibility calculations, following assumptions are considered:
CONTRIBUTION OF CAPITIVE CARGO:
1. Percentage of Captive Cargo to Total Cargo:
In case of General Cargo : 50 %
In case of Liquid Cargo (Chemical and LPG) : 50 %

GENERAL CARGO
1. Average Rage of Wharfage : Rs. 24/Ton
Wharfage payment to GMB for Captive Cargo : Rs. 5/Ton
2. Wharfage payment to GMB for others’ Cargo : Rs. 24/ Ton

LIQUID CHEMICAL CARGO
1. Average Rate of Wharfage : Rs. 60/Ton
Wharfage payment to GMB for Captive Cargo : Rs. 5/Ton
Wharfage payment to GMB for Others’ Cargo : Rs. 60/Ton

LPG CARGO
1. Average Rate of Wharfage : Rs. 110/T
Wharfage payment to GMB for Captive Cargo : Rs. 5/T
Wharfage payment to GMB for Others’ Cargo : Rs. 110/T

Basis for Assumptions:
(a) Wharfage of General /Liquid Chemical: of GMB Cargo.
(b) Wharfage of LPG Cargo : of Bombay Port

HANDLING CHARGES
(i) Storage Charges for General Cargo: Over and above Storage inside the Port limits, storage of 50,000 sq. m area is also planned outside the Port limits. Based on the prevailing charges of such storage facilities, it is assumed to be Rs. 50 per sq. mtr. Per month of storage capacity utilization.

(ii) Storage Charges for Liquid Chemical Cargo: These charges are assumed as Rs. 225 per tonne per month of storage capacity utilization based on the current rate at Kandla and JNPT Ports.

(iii) Storage Charges of LPG Cargo: As per the storage levied by HPCL, @ Rs. 700 per Tonne for the first 14 days and thereafter Rs. 45 per tonne per day as additional charges (i.e., Rs. 1500 per tonne per month) against these an amount of Rs. 1500 per tonne per month (Rs. 50 per day) is assumed for Profitability purpose.

(f) OPERATING COST:
I. Salary and Wages: The Salary & Wage details worked out as per Manpower requirement and their salary based on the prevailing Salary Structures and Labour Charges at Ports. Out of these expenses, Labour Charges are linked with Cargo tonnage. Hence, during third year, when cargo tonnage is maximum, the wage would be Maximum. Which is expected to increase @ 10 % every year for next three operational years.
II. Utility Expense: The details of electricity and fuel cost and consumption is worked out based on current prices of fuel and electricity, connected load and standard fuel consumption norms.
III. Repairs & Maintenance and General Administration: These charges are assumed at 0.25 %, 0.30 % & 0.50 % of Gross Fixed Assets during 1st year, 2nd year & 3rd year of operation, respectively.
IV. Land Lease Rent: This rate is assumed at the rate of Rs. 5 per 10 sq. mtr. Per year based on the charges presently recovered by the State Revenue Department.

(g) TERMS OF LONG TERM DEBT:
Term Loan = Rs. 220.00 Lakhs
Interest per annum = 18.5 % (incl. Of Interest Tax)
Moratorium Period = 2 ½ years
Repayment Schedule = 44 Quarterly Installments
The first eight installments = Rs. 250 Lakhs each
Next thirty two installments = Rs. 555 Lakhs each

i.e., 250 x 8 = Rs. 2,000 Lakhs
550 x 36 = Rs. 20,000 Lakhs
Total = Rs. 22,000 Lakhs

(h) INCOME TAX ESTIMATION:
Five year tax holiday for infrastructure Project
The rate of Income Tax 46 %

(i) DIVIDEND PAYMENT:
Dividend to the equity shareholders will be paid @ 10 % from third year onwards.
Based on the above assumptions, the projected cash flow and projected balance sheet is prepared. The Profitability and Performance indicators are as below:

PROFITABILITY/PERFORMANCE INDICATORS:

(b) Performance indicators:
(for the optimum year (2010-2011))

Gross Profit / Sales (%) : 81.51
Operating profit / Sales (%) : 8.06
Net Profit / Equity : 4.83
Break Even Profit (%) : 90.22
Cash Break Even (%) : 59.57

DSCR
Maximum : 1.71
Minimum : 1.31
Average : 1.50
Average Cost of Capital (%) : 13.74
Return on Capital Employed (%) : 14.69

Internal Rate of Return (%)*
Before Tax : 18.59
After Tax : 17.17
Fixed Assets : 1.65
Margin of Security (%) : 39.57
Dividend on Equity Share (%) : 10 onwards
(* on 20 operating years)

SENSITIVITY ANALYSIS:
A sensitivity analysis has been carried out on the projections of profitability of the project, for the following:
Case 1: Decreasing Port utilization to 250 days in a year.
Case 2: Increasing the project cost by 10 %.
Case 3: The entire Wharfage collected would be remitted to the Gujarat Maritime Board.
Case 4: Increasing revenue and operating expenses by 15 % each.
The critical financial indicators for the Project, in the above cases would be as under:

AS PER PROFITABILITY PROJECTIONS

CONCLUSIONS & FINDINGS:
(a) As can be seen from the above table that the Project is more sensitive to decreased working days.
The financial indicators of the project are satisfactory, keeping in view the infrastructure nature and long gestation period of the Project. The project is financially viable and merits institutional support.

(b) Potential Location: The Port has a tremendous locational advantage. About 30 % of country’s foreign trade enamates from various ports of Gujarat due to its large hinterland. Because of considerable increase in the growth rate of goods, traffic handled by various ports of Gujarat, the time spent by the ships waiting for a berthing has increased considerably.

(c) Captive Port: The port is being promoted by a Super Star Trading House, which has export/ import turnover of 7.60 lakh tonnes per annum. The entire cargo will be routed through port, which would mean background integration for the capacity for the port.

(d) Equity Participation by GMB: The Govt. of Gujarat has a highly positive port policy, in one sentence it can be described as, ‘take full advantages of the strategic location of the Gujarat coast in the world maritime scenario’. So, GMB in all probability will participate in the equity share capital of the proposed project. To that extent, debt will be reduced, making the project more viable.

(e) The proposed site is located will inside the Gulf of Kutch and is fully exposed to the wave action of South West Monsoon. The wave, wind and tidal current data indicates fairly rough environmental condition. So, the port cannot function all through the year as all weather port.

(f) Railway / Road Connectivity: Connectivity with the hinterland by rail or road is poor. The nearest terminal point is about 73 kms at Gandhidham. The road connection with railway terminal is also a single lane track. So, the port is likely to run into difficulties for orderly movement of cargo. Proper road connectivity and / or rail connectivity is essential before the port becomes operational.