Dhamra port deal to help L&T, Tata Steel cut debt

Adani's takeover of Dhamra Port from Tata Steel and L&T at an enterprise valuation of Rs 5,500 crore is a win-win deal for all the three players.

The deal will not only help L&T and Tata Steel to cut their debt but increase Adani Port's footprint across India. The transaction will also help Adani to export coal from its mines in Eastern India to power stations in western India.

Industry insiders say the deal was struck post a meeting of Tata group's top officials, L&T group chairman AM Naik and Adani group chairman, Gautam Adani many months ago.

But all the three companies were waiting for the Odisha government's clearance to the second phase of the port expansion and permission from the environment ministry. Once the permission was received in January this year, the deal talks moved onto the fast lane.

"The deal was agreed upon a long time ago but the announcement was delayed as the port had not received permission from the wildlife board," said a L&T official.

The environmental clearance for the 11 berths in the second phase will take the port capacity to 80-100 million tonne from about 14.3 million tonne of cargo it handled in fiscal 2014.

As the port was also not showing any signs of making money in the near term, both L&T and Tata Steel ( both not having any experience in running ports) decided to sell off their stake in late 2012. The Adani group - which is on aggressive expansion drive and has emerged as India's biggest private sector port operator - immediately made an offer.

Analysts say the initial project cost of loss-making Dhamra Port was Rs 3,600 crore. As on August last year, its outstanding debt was Rs 2,600 crore. Thus, analysts calculate possible capital gains from the transaction at Rs 1,400 crore (see chart).

For Adani Ports, the acquisition would result in a slight drag on profitability in the near term even as the group ramps up its handling capacity. The port would be beneficial not only to ship Adani Ports' own coal from mining development operations in the east to the west coast but also provide stable cash flows, with Tata Steel and other resources companies in east India using the port for coking coal imports. The deal will add about 27% more debt or Rs 3,000 crore to Adani Port's FY14 net debt of Rs 11,200 crore.

On the other hand, Tata Steel had invested in the port to help it evacuate products from its new steel plant in Kalinga Nagar. The plant is almost ready and it will start production by this year-end. But during the last few years, Tata Steel's debt has reached alarmingly high levels following the acquisition of Corus. It has therefore taken several steps including asset sales to reduce its debt.

Tata Steel's net debt increased from Rs 56,215 crore as on March 2013 to Rs 70,095 crore as on March 2014. On account of the ongoing capital expenditure, the debt levels of the consolidated operations are likely to stay at very high levels and analysts expect net debt to increase from Rs 70,095 crore in fiscal 2014 to Rs 75,826 crore by fiscal 2015.

By selling its 50% stake in the port, the company will be able to reduce its debt marginally and exit from a non-core business, say analysts.