Large capital deployed in tonnage addition, says GE Shipping MD

It is the largest private sector Indian shipping company and aims to grow bigger. Great Eastern Shipping Company (GE Shipping) was in the fray for the acquisition of the state-owned Shipping Corporation of India when the government invited bids first time round.

However, it pulled out of the race citing uncertainty over the timing of the divestment. GE Shipping felt that it was losing out on other opportunities owing to its pursuit for SCI. Since then the company has been on an acquisition spree.

The company is focusing on the energy segment and since the beginning of this fiscal it has added at least six tankers to its fleet. It has further committed a capital expenditure programme of Rs 1,038 crore between January 2004 and September 2005.

GE Shipping managing director Vijay K Sheth explains the strategy behind the acquisitions in an interview with Business Standard.

The shipping industry has perhaps never had it so good. One is witnessing an unprecedented boom in the freight markets. The dry bulk as well as wet bulk sectors are on an upward surge. What is the reason behind this?

The shipping industry is enjoying the current boom owing to several factors.

In the dry bulk market, freight rates have been strong owing to robust economic growth in Asia especially China, increased coal demand in various parts of world coupled with limited tonnage growth.

The wet bulk freight rates have also strengthened as a result of huge winter demand, low inventory level and artificial tonnage shrinkage created by slow traffic movement in certain routes.

How long do you expect this boom to last ? What is GE Shipping doing to capitalise on the boom?

As per reports of industry analysts and economists, the current boom is expected to continue for sometime. In the case of dry bulk trade, the uptrend seems unlikely to deter for another 10-12 months.

For tankers, another four to five months seem strong as winter demand is expected to be followed by a global economic upsurge.

Realising the potential of the market, the company has undertaken fleet expansion coupled with a change in its fleet profile to be able to cater to varied market needs.

For a change the stock markets are re-rating shipping stocks. The stocks have out performed the Sensex and a 100 per cent appreciation seems to be the norm this fiscal. What is the reason for the changed perception?

In the past, lack of sector awareness acted as a major deterrent to valuation of shipping stocks. Of late, sector awareness has considerably improved and the government has also shown keen interest, which has played an important role in changing investors' perception.

Enhanced awareness about the industry has been able to dilute the myth that the industry is highly volatile.

It has been realised that like in any other industry, crest and troughs are present in shipping also but there exist tools to hedge risks and smoothen the volatility. This is a very positive development.

With the surge in commodity demand, shipping has become the flavour of the market. It is now looked upon as a sector backed by strong global fundamentals, resulting in increased investor interest.

What is the relevance of tonnage tax in a scenario characterised by rising freight rates? There has been talk that Indian ships will fly flags of convenience if tonnage tax regime is not introduced. Will GE Shipping flag out vessels if tonnage tax regime is not introduced?

Tonnage tax is the tax calculated on a notional income derived from owned and operated assets during the accounting period. Hence it is isolated from freight market movements.

The Union government has initiated steps towards consideration of tonnage tax and an expert committee is working on the same. The outcome of is awaited but the industry has positive feeling towards its introduction.

As far as flagging out the vessels is concerned, I feel it is easier said than done. Flagging out has its own complexities and hence in my opinion it is too early to take a call on this.

GE Shipping has been on an expansion spree since pulling out of the SCI divestment. The criticism that is, however, levelled is that the acquisition has been predominantly of older ships...

GE Shipping has always been an investor friendly company and optimising shareholder value has been the guiding factor in its investment decisions.

The strategy has been clearly to identify, gauge and mitigate risks to be able to provide sustained earnings.

The company has deployed considerable capital in tonnage addition post its decision to opting out of the SCI disinvestment.

It has acquired second-hand ships apart from placing orders for new building tankers and offshore support vessels capable of deep water drilling.

As regards, buying older ships the rationale is to own a mixed fleet to suit various market needs. Also, older ships offer higher returns than newer vessels. Having developed in-house competencies, we are confident of running them judiciously.