SAROD-Ports - a dispute resolution mechanism
Aims to resolve the disputes in the ports sector in a cost-effective manner. September 2020
The Indian port sector has been adversely impacted due to the COVID-19 outbreak and the subsequent lockdown introduced by India and other major economies. Although the sector has been classified under essential services and has remained operational during the lockdown, the impact on domestic economic activity as well as slowdown in global trade has resulted in steep contraction in cargo volumes at the major ports in April 2020, with throughput decline of 21 per cent. While, the decline was across major cargo categories, POL, thermal coal and container segment witnessed significant contraction. As per ratings agency ICRA, going forward, the outlook for port sector remains negative in near to the medium term.
Regarding the impact on the credit profile of port sector entities, K Ravichandran, Senior VP and Group Head, ICRA Ratings, mentioned: “The credit profile of port sector companies is expected to witness pressure in the near to medium term, due to the impact of COVID-19 outbreak and the subsequent lockdown imposed. Further, entities that have recently commenced operations or concluded debt funded capacity expansions or have concentrated cargo profile like containers could come under severe pressure. Nonetheless, well diversified players (cargo-wise) and SPVs promoted by stronger sponsors should have higher financial flexibility to weather this downturn and their debt servicing is unlikely to be materially impacted.”
ICRA takes note of the support and concessions provided by Ministry of Shipping (MoS) to various stakeholders in the port sector, including free storage, suspension of minimum guaranteed obligations during the lockdown period, deferment of revenue share/royalty for three months and reduction in lease rates to the extent of decline in volumes. These measures will provide some cash flow relief to PPP container terminals in the near term.
On the concessions provided by MoS, Sai Krishna, Assistant Vice President and Associate-Head, ICRA Ratings, added: “The concessions will provide short term cash flow reliefs to PPP terminals operating at major ports, however, sustained cargo contraction post the lockdown and the need to offer discounts to revive volumes would put pressure on cash flows of the terminals, subsequently. Any additional support may have to be directly extended by the government, since the extension of the current concessions over a longer period will adversely impact the port trusts’ cash flows, some of whom have weak credit profiles.”
While, all cargo segments are vulnerable, the container segment is expected to be more adversely impacted. Whereas the recovery in cargo segments like coal, POL and other bulk commodities should happen in line with ramp up in domestic economic activity and demand with easing of lockdown, the recovery in the container segment may be more long drawn since exim trade recovery will also be dependent on the global economy and trade patterns. ICRA expects that while general cargo throughput may witness ~5-8 per cent contraction for full year 2020-21, the container segment may witness a decline of 12-15 per cent during the same period.