A port with promise - Visakhapatnam | Outlook Business
Home  /  Specials  /  State Of The Economy 2015  / A port with promise | MAR 27 , 2015

Photographs by RA Chandroo

State Of The Economy 2015

A port with promise
Vizag is reinventing itself into a cluster focused on the new economy

Krishna Gopalan

Great expectations: Visakhapatnam has a lot going for it, its location being a strategic advantage 

Sitting in his large room overlooking the sea, Sushil Mulchandani breaks into a smile when asked about his business. “There is definitely more optimism than last year and things are looking up,” he says. Mulchandani is the COO of Visakha Container Terminal, set up in 2003 under the aegis of Visakhapatnam Port Trust. 

Over the last year, business has grown by 18%, which comes by catering to clients such as the Vedanta Group, Bhushan Steel, Hindalco and ITC’s paperboards business. What has come as a bit of a surprise to Mulchandani has been the demand for apples and kiwis from China, Australia, New Zealand and USA. “We do about 10 containers a month (each has 10-12 tonnes) and another 800 containers of rice,” he says.

Much of the optimism around Visakhapatnam comes after the Andhra Pradesh bifurcation, which came through in June last year after many a hiccup. For the business community, there is a sense of relief thanks to the end of ambiguity and uncertainty. Today, Visakhapatnam is being spoken about as the financial capital of Seemandhra, the newly carved-out state. If things go as per plan, this city will be a new IT destination, in addition to having institutes of higher education, such as a brand-new Indian Institute of Management (IIM). 

With the state playing a supportive role, Visakhapatnam is confident of growth in FY16

People here are hopeful that business will gain thanks to the many infrastructure projects being planned. This includes sectors such as power, roads and highways and water, to name a few. At least 75% of Visakhapatnam’s 1.7-million population is employed with public sector undertakings (PSUs) — across shipyard, refining, steel and power — but the composition of the economy is likely to change over the next few years with the entry of new industries.

At present, there are 95 large-scale industries in the district, with major sectors being metallurgy, engineering and textiles, among others, which employ 77,000 people. There are 55 additional units under implementation, and these are expected to provide employment to another 20,000 people. Meanwhile, there are 9,652 micro, small and medium enterprises (MSMEs) covering construction material, coir products , fabrication, etc. They provide employment to more than 70,000 people. 

The question is whether Visakhapatnam can live up to the hype and successfully position itself as a preferred industrial hub. For that to take place, this city in transformation will need to get many things right.

Madhav Bellamkonda, Novotel Visakhapatnam Varun BeachSushil Mi\ulchandani, Visakha Container Terminal A promising horizon

In 2012, many MSMEs in Visakhapatnam had to stop work for three days a week due to power issues. This was in addition to four hours of power cuts every day. Having a back-up meant costs would double, so it became uneconomical to execute incoming orders. 

Hospitality wasn’t sheltered either. Twelve months ago, one of the biggest issues haunting Hotel Novotel Visakhapatnam Varun Beach was the power situation. “There was no power for 2-3 hours each day. Today, we have no power cuts at all,” says Madhav Bellamkonda, the general manager of the property, which is owned by the ₹2,500-crore Varun Group. “The Telangana agitation also affected our business, but occupancy rates are better now. We have also gained because of a lack of fresh supply of rooms in the city,” he says.

From 55% a year ago, occupancy rates have moved up to 70% at the 225-room property overlooking the sea. Now, his group is rolling out a serviced apartment project at Bheemili, 30 km away from Visakhapatnam. “The big advantage here is that real estate is still more affordable than at Vijayawada (the proposed capital for the new state). If an acre costs ₹10 crore there, here it’s ₹2 crore,” he explains. Attractive land prices have enabled his group to start constructing a new hotel with 200 rooms, which will open its doors in about two years. “There is a sense of optimism, but we will have to wait and see how it unfolds,” he says quite candidly. 

That said, it is this mood that has worked well for those like V Ajay Kumar, MD of the ₹1,000-crore Vijay Nirman Company, a name in the city’s engineering and construction business. “We have had enquiries from the public and private sector. This could be for a part of the Delhi Metro or a residential project in Chennai or Bengaluru,” he says. The reliable power situation has left him quite relieved too.

“Steel prices have dropped from ₹50,000 per tonne to ₹43,000. Diesel, too, has dropped along with the price for bitumen,” he says. The only cause for concern is the rising cement cost, which, he adds, has been offset by not having to spend on a power back up. Vijay Nirman’s order book stands at ₹2,800 crore with another ₹1,500 crore of projects in the pipeline. The cost saving thanks to a 24-hour power supply is upwards of 15%.

According to N Yuvaraj, the city’s collector and district magistrate, the task at hand is to create infrastructure which will result in investments. “Industrial power is no longer a problem and additional capacity will come from new projects by the Hinduja Group and NTPC,” he says. Together, these will bring in over 5,000 MW of power into the city. According to him, a key concern is the quality of manpower, which will be partially addressed by the setting up of a petroleum university. But local businessmen feel that a lot more needs to be done in the area of skill building, given the high manpower requirement. 

Core industry apart, a vital area where the city has a lot of untapped potential is the IT sector. “Visakhapatnam is a distant second to Hyderabad. Its IT exports are to the tune of ₹16,000 crore, while Hyderabad does over ₹66,000 crore,” says Ramana Bodepudi, CEO, PreciStat IT Solutions, a $2 million company in Visakhapatnam, with 150 seats serving clients in the US. He plans to invest ₹20 crore in setting up a 1.27 lakh square feet facility here. “Wipro and Tech Mahindra are already here. We have been talking to the government to make the city an IT centre,” he says.  

Soon, that may become a reality. “For the IT industry, we will have a Signature Tower that will house IT companies from India and abroad,” says Yuvaraj. This is a project that aims to make Visakhapatnam a smart city. Google will work with the state government to make Seeemandhra a digital hub.  

But it’s not just IT; Visakhapatnam seems to have a lot more potential. “Visakhapatnam has an advantageous location with access to around eight states. We need to capitalise on that,” says Mulchandani.

Plans are afoot to make that happen. MT Krishna Babu, chairman of the Visakhapatnam Port Trust speaks of having an integrated logistics and warehousing park about 40 km from the city. “There is a lot of demand from e-commerce companies and those manufacturing white goods. Once this comes up, there will be a huge improvement in operational efficiencies along with cost savings,” he says. Plus, the port is also looking to increase handling capacity from 84 million tonnes to 124 million tonnes by 2019. 

While the future looks promising, what is really helping businesses for now is reliable power and water supply, together with attractive land prices.

K UMesh, Lansum PropertiesVenkatramana Mavuri, CMR Central High tide and glad tidings

Lansum Properties is constructing a 36-floor residential building that will have a project cost of ₹500 crore. “We are expecting a lot of investments. This is in addition to the port and steel plant that already exist,” says K Umesh, the company’s CEO. Touted as the city’s tallest structure, the building will have 680 apartments with an average size of 2,400 square feet each. “We have sold more than half of the apartments,” says a visibly excited Umesh, whose company is part of a ₹2,000-crore group. 

The new government has announced a metro rail project for the city and this is in addition to a proposed new airport, road projects to the tune of ₹7,500 crore and better rail connectivity to cities such as New Delhi. “It is crucial to have people move into Visakhapatnam to absorb the infrastructure,” says Umesh. 

Umesh is not alone when it comes to being upbeat. Sanjit Singh Lamba, managing director of the ₹200-crore Eisai Pharmaceuticals, has seen capacity utilisation at his production facility increase by 20%. “Today, we operate at an 80% utilisation as compared to 60% a year ago. Our staff strength is also up by 25% and we have a three-shift schedule,” says Lamba.

Also, his inventory cycle stands at 30-45 days, reduced from 60-70 days a year ago. Business is certainly better this year. He is quick to add that doing business in Visakhapatnam has been aided by measures such as common effluent treatment and waste disposal, which to his mind are huge positives. Pharma companies in Hyderabad have long been complaining about the lack of these facilities — which provide solutions against environmental hazards.

But there are larger problems only the central government can resolve. One problem is the removal of minimum alternate tax on pharmaceutical companies in SEZs. “Our investments will depend on this, and we may just be forced to look at other destinations such as Singapore,” he says. 

The good news is, the uptick in business is showing up in more ways than just lower inventory cycles. The lull of last year, according to Venkataramana Mavuri, MD of CMR Central, the city’s largest mall, has now made way for more consumer spending. “People were negotiating really hard on rentals at this mall. Today, we do not discount as much and are still able to get tenants at good prices,” he says. The mall is doing better business (up by 20%) and this has prompted Mavuri to open another mall 10 km away. “I am a lot more confident today,” he says, proudly pointing to a crowd waiting to watch a film at 11 AM.

Choppy water for some

If there is a rip in the port city’s tide, it is in the way that the MSME story has played out. In the early 1980s, most of these units sprung up on the back of production commencing at the Visakhapatnam Steel Plant. This mega project was meant to give a fillip to the MSMEs and rake in the moolah for them as well. That story has turned out to be a disaster. 

VVN Murthy, owner of Sajeela Enterprises, an ancillary unit to the steel plant, is angry and helpless. Last year, his unit had revenues of ₹2.5 crore and employed 50 people. “Now, my turnover is barely ₹1 crore and only five people work with me,” he laments.

He is joined in the conversation by three more people running MSMEs and their stories are the same. Among the many issues they are confronted with, the biggest is that the steel plant is sourcing from outside Visakhapatnam as well. What is even more painful is that the plant has been increasing capacity, while very little by way of business comes back to the city. “We set up our units based on the assurance that business will be given to us. Today, we are stuck and have nowhere to go,” says Murthy. If that’s not bad enough, their payments from the steel plant have not been made for years. “Interest costs have been going up and we don’t know when we will get our money,” he adds.

There are at least 200 MSMEs in the city that depend on the steel plant for business. The situation, say people like Murthy, has resulted in only two or three units registering a turnover in excess of ₹1 crore. “I have been working for the steel plant for 22 years and the situation has never been this bad,” he says, throwing his hands up in despair. There is very little to suggest that things will get better, even as work progresses smoothly at the steel plant, now a ₹13,500-crore entity. 

Representations from the MSMEs have been made for years, though nothing has come of it. “Even this year, we have no expectations. Most of us have either scaled down or are looking at other options,” says Murthy. 

Equally worrying is the mood at Essar Steel, the 8 million tonne facility for manufacturing iron ore pellets. S Venkatesan, CEO (Vizag complex) says he is concerned since there is no clarity on infrastructure for the two new states. “There will be no fresh capex for us this year. We will just make the minimum operational capex,” he explains. According to him, construction activity has slowed down and there is still a high level of uncertainty. 

Much of Visakhapatnam’s focus is on creating infrastructure to make it a smart city where old and new industries co-exist. “This city has a lot going for itself. We just have to get a few things right,” says Babu. 

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