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Fitch Downgrades Essar Shipping

Fitch Downgrades Essar Shipping
Fitch Ratings has today downgraded Essar Shipping Ports and Logistics Ltd.'s (formerly Essar Shipping Limited, ESPLL) INR1,600m commercial paper (CP) programme to 'F2+(ind)' from 'F1(ind)'.

Fitch Downgrades Essar Shipping

Fitch Ratings has today downgraded Essar Shipping Ports and Logistics Ltd.'s (formerly Essar Shipping Limited, ESPLL) INR1,600m commercial paper (CP) programme to 'F2+(ind)' from 'F1(ind)'.

The downgrade reflects the high financial leverage of the company, exacerbated by volatility in charter rates due to the economic slowdown. Around 70% of the shipping revenues are derived from dry bulk shipping, which has been sharply impacted owing to the reduction in world trade.

Other segments, such as oilfield services, are vulnerable to low asset returns (since rigs were purchased at high price levels) while yields have fallen as a result of softening in rental rates in recent times. However, Fitch notes that the company has entered into various long term contracts which would mitigate the impact of the fall in charter rates, most notably the two year contract of their semi-submersible oil rig - Wildcat with Gujarat State Petroleum Corporation - and the fact that 80% of the company's shipping tonnage are being contracted on a long-term basis.

The rating continues to reflect the strong industry position held by the company, diversification in its business model, and the commencement of higher margin businesses such as oilfield services and port terminals. The Vadinar Terminal and the semi submersible rig have generated robust revenues and profits in FY09 and Q409 respectively. From FY10, the company continues to expect significant profits from its oilfield services and terminals businesses, including the commencement of operations at its Hazira Terminal (in Essar Bulk Terminal Ltd, EBTL) for Essar Steel Ltd.

While there has been some deleveraging, the pace has been slower than anticipated on account of lower FY09 profitability and is likely to continue to be gradual due to uncertainties in the economic environment. Fitch derives comfort from the scaling back of capex at various verticals, which has helped keep leverage lower. The agency views equity infusion and the consequent deleveraging as positive for the ratings, while margin contraction due to long term contract revisions may move the ratings downward.

For FY09, ESPLL's consolidated operating revenues grew 39.7% to INR25.7 bn compared to the previous year, aided by revenues from terminals and oilfield services. The shipping division's FY09 operating revenues rose 32% yoy to INR10.2bn, and rose 37% on a Time Charter Equivalent (TCE) basis - after deducting direct voyage expenses - to INR4.8bn. Shipping EBITDA margins (as a percentage of TCE) expanded to 57% in FY09, compared to 50% in FY08. Consolidated EBITDA was INR8.3bn, of which the major contributor was Vadinar Oil Terminal Ltd, with an EBITDA of INR3.1bn. The debt levels as on 31 March 2009 are estimated at INR65bn, while leverage (Debt/EBITDA) was 7.5x and interest coverage was 1.9x.

ESPLL is one of India's leading shipping and logistics companies. The company now operates in three segments, other than its core shipping business - oilfield services through Essar Oilfields Services Ltd, ports and terminals through Essar Ports and Terminals Ltd - the holding company for Essar Bulk Terminal Ltd and Vadinar Oil Terminal Ltd - and logistics through Essar Logistics Ltd.


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