| Still in rough seas |
| Ram Prasad Sahu / Mumbai December 14, 2009, 0:20 IST |
Without a strong global economic recovery, the maritime sector will find it tough to overcome the demand-supply mismatch.
While freight rates, an indicator of health of the shipping industry, have moved up from their September lows this year, a faster global economic recovery seems to be the best bet in tackling over capacity and a slump in demand. The Baltic Dry Index (BDI), which measures international shipping freight rates of dry bulk cargo, has moved up about 70 per cent over its September lows. While this trend is positive, the index is still 69 per cent down from its highs of May last year, when it was trading at 10,000 levels. Similarly, the Baltic Dirty Tanker Index, which measures shipping freight rates for transport of crude oil, is up 56 per cent since its August lows to 730 but is 69 per cent down from its July highs last year. While the worst might be over, the sector still has a long way to go before companies can think about returning to the super normal profits scenario that prevailed before the downturn struck.
Recovery tentative
Going ahead, analysts believe that the Baltic shipping indices (which measure freight rates) are likely to be volatile and range bound reflecting the uncertainty regarding the pace of global economic recovery. The International Monetary Fund, while predicting that world GDP growth will touch 3 per cent in 2010 after contracting by 1 per cent in 2009, says that “the recovery is tentative in many places and global growth is prone to new shocks.” The indices are exhibiting this sentiment. The BDI, for example, has moved 9 per cent both ways in November and has been volatile in December as well. Stock prices of shipping companies, too, are languishing due to the hazy outlook for the sector and have ended the week in the negative territory. While a gradual global economic recovery is predicted and may boost demand for shipping companies, on the supply side, the cancellations and the order book position have created a question mark on the profitability of shipbuilders.
The supply situation
In a boom like scenario, shipbuilders were packed with orders and their yards were running to full capacity but the downturn changed the situation for the worse. Average order books which were at about 50 per cent of existing global fleet at the start of the year are down. The order book to existing fleet ratio is the highest for the dry bulk segment at 63 per cent while it is 32 and 39 per cent for the tanker and container segments, respectively, as of November, 2009.
While CARE estimates that net additions to the various types of tankers will be 10-15 per cent for 2009-10 and 2010-11, a glut is offset due to slippages in delivery and phasing out of single hull tankers which account for 15 per cent of the global tanker fleet. In the dry bulk category, fleet addition in CY2010 and CY2011 is estimated between 10-30 per cent. While cancellations, which were at 25 per cent at the start of the year, are also down, they might not move down further. Says Revati Kasture, head, Industry Research, CARE, “While order cancellations across the globe are coming down, shipping companies are looking to re-schedule the vessel delivery to a later date.”
The fortunes of the shipping companies would depend on the pace of manufacturing activity in China and growth in the developed world.
Oil demand, China factor
While freight rates for the tanker business, which accounts for about 36 per cent of sea trade, are expected to rise during the winter months from the September quarter levels, the key determinant going ahead will depend on future oil demand. Industry body, the International Energy Agency estimates that crude oil demand growth in CY2010 would be 1.6 per cent after shrinking by an estimated 1.73 per cent in CY2009. This should help the crude tanker companies which have been struggling to break even at the operating level. Product tankers which carry the refined fuels, have been under pressure as lower gross refining margins meant dip in product supply which put pressure on rates.
| DEMAND FOR SHIPS | |||
| in Rs crore | ABG | Bharati | Pipavav |
| Order book* | 12,000 | 5,500 | 5,200 |
| Sales FY09 | 1,413 | 934 | NA |
| Order/sales (x) | 8 | 6 | NA |
| Market cap | 1,016 | 597 | 3,845 |
| Note: order book is as per latest reported figures | |||
| DEMAND FOR OIL | |||
| Mn bbl/day | 2008 | 2009E | 2010E |
| OECD | 47.60 | 45.50 | 45.5 |
| Asia | 17.60 | 18.10 | 18.7 |
| Total | 86.30 | 84.80 | 86.2 |
| % increase (y-o-y) | -0.23 | -1.73 | 1.6 |
| E: Esimates Source: IEA OECD: Organisation for Economic Co-op & dev | |||
On the dry bulk side, the situation is much better as at current rates, shipping companies are making profits at the net level. Going ahead, the Chinese manufacturing activity will hold key to freight rates. The Asian giant accounts for 50 per cent of iron ore trade, which along with coal accounts for half of the dry bulk business. Analysts say that the recent increase in BDI has been due to the higher demand for iron ore and coking coal (used in steel making) from China, which to some extent is due to stocking up of inventories.
While a lot depends on how this pans out, analysts are sceptical about freight rates in the medium term. Says Sudhir K Nair, head of Research, Crisil, “Going forward, we expect weakness in all the segments due to subdued trade and significant new additions which will put pressure on the freight rates in the medium term.”
Read on to know the prospects of India’s seven largest shipping and shipbuilding companies.
Great Eastern Shipping
India’s largest private sector shipping company with a fleet of 38 ships has had to bear the brunt of a dip in freight rates across segments. On a consolidated basis (the company has shipping and offshore segments), its second quarter results saw its revenues and net profits fall by 40 per cent and 81 per cent to Rs 662 crore and Rs 108 crore, respectively. The dismal performance is due to the steep fall in time charter yields (TCY) as half of its fleet, especially in the dry bulk category, was exposed to spot rates. For crude and dry bulk categories, TCYs per day had fallen by 65 per cent each to $18,779 and $17,065, respectively. The same for product tankers were down 34 per cent to $18,865 per day.
Going ahead, the company has projected a revenue visibility of Rs 442 crore for the second half of the current fiscal for its shipping business with crude and product tankers booked for 54 per cent and 70 per cent of capacity, respectively. Gas carriers, however, are occupied completely for the rest of the year.
For the offshore business, the company believes that it can gross revenues of Rs 381 crore for the second half, with its anchor handling tug-cum-supply vessels and platform supply vessels being occupied for 39 per cent and 69 per cent, respectively. Enam estimates that the company’s offshore division will grow faster registering profits of Rs 690 crore in 2010-11. The shipping segment contributed Rs 323 crore to profits (before tax and interest) while the offshore segment Rs 91 crore in the first half of the current fiscal. An SOTP of Rs 354 indicates a potential return of 30 per cent from the current price of Rs 272.
Mercator Lines
With 21 ships under its belt and exposure to rigs and dredgers, Mercator Lines has a diversified product portfolio. It has already deployed three out of four of its dredgers with Dredging Corporation of India. Recently, it added another feather to its fleet with the delivery of a 1993-built M R Tanker of 42,235 dead weight tonnage, recently. Overall, analysts expect net profits at a consolidated level to touch Rs 275-300 crore for 2010-11, out of which around 25-30 per cent could come from its non-shipping segments (dredgers, mines, rigs). The stock is currently trading at an expensive 25 times its estimated 2009-10 earnings. However, its recent quarter results were nothing to write home about. The company reported a net loss of Rs 29.19 crore in September 2009 quarter as compared to a net profit of Rs 12.75 crore for the same period last year. Net sales slumped 60 per cent to Rs 130.48 crore in the same period.
Shipping Corporation of India
India’s largest shipping company operates a 79-vessel fleet, of which 70 per cent are crude carriers. The drop in demand for oil and oversupply situation for crude carriers has had a negative impact on the company’s financials. Its revenues for the September quarter fell 29 per cent to Rs 845 crore, while net profits fell 88 per cent on higher interest costs and absence of any ship sales during the quarter. The revenue fall at 39 per cent to Rs 587 crore was more pronounced for the tanker segment, while its liner segment (break bulk and container ships) reported flat revenues at Rs 215 crore. While the tanker segment helped the segment squeeze out an Rs 58 crore profit before interest and tax, liners made losses to the tune of Rs 62 crore as against a loss of Rs 43 crore last year. While the oversupply situation is a major concern, freight rates for crude carriers have moved up substantially from their September lows on the back of higher demand for oil products which kicks in during the winter. While rates for crude tankers are still down from last year highs, if the current rates of $20,000 per day for VLCCs and Suezmax’s continue to strengthen, SCI’s financial performance is likely to improve. Analysts peg the fair value (NAV per share) at Rs 148 and considering that the stock is trading at Rs 145, there is little scope for appreciation.
| TOUGH TIMES AHEAD? | |||||
| in Rs crore (FY10E) | Sales | EBITDA | Net profit | FY10 PE | FY11 PE |
| Shipping Corp | 8,753.00 | 2,421.60 | 1,081.50 | 11.30 | NA |
| Great Eastern | 3,050.20 | 1,310.60 | 841.10 | 7.40 | 4.30 |
| Mercator | 4,044.80 | 2,028.10 | 486.20 | 8.10 | 5.10 |
| Varun Shipping | 1,899.00 | 1,279.00 | 121.10 | 6.90 | 9.30 |