SCI to buy 18 new ships for $1.5 billion

Shipping Corporation of India Ltd (SCI), the country's largest shipping company, has chalked out plans to buy 18 new ships for nearly $1.5 billion, company's chairman and managing director P K Srivastava said in an interview Tuesday.

The new ships would be purchased over few years, he said.

The new acquisitions include two very large crude carriers, six handysize bulk carriers, six LR-I product tankers, two container ships and two Aframax tankers.

SCI board has already given its approval to buy 16 ships (excluding two Aframax). "The proposal is now forwarded to the government for final approval," he said.

For the remaining two Aframax costing nearly $110 million, the board approval would be sought in the next meeting, he said.

SCI has already floated global tenders for some of these ships, he said.

"All these 18 acquisitions would cost us around $1.5 billion," Srivastava said.

SCI, which has cash reserves of Rs 1,000 crore, would fund the new acquisitions by a mix of internal accruals and debt, he said. At present, the new building rate (placing an order with a shipyard) of a VLCC of 300,000 dead weight tonnage is $120 million.

The new building rate for a 50,000 dwt handymax bulk carrier, 45,000 dwt product tanker and 110,000 dwt Aframax are $32 million, $42 million and $63 million, respectively.

Srivastava agreed that the company was unable to rapidly grow its fleet as other private companies as it does not go for second-hand ship purchases. "Lot of questions are raised for second-hand purchases and hence, this route has been totally given up by us," he said.

The policy of not buying second-hand vessels has checked growth of SCI. As a result, in 2005-06 (April-March) SCI would see addition of only ship (VLCC) to its existing fleet of 89 ships, he said.

"Except for the VLCC which will join the fleet in August, there will not be any additions to the fleet," Srivastava said. The VLCC will cost $65 million. "A dirt cheap price as compare to current new build prices," he said.

In 2004-05, SCI added one VLCC and two suezmax carriers and one liquefied natural gas ship to its fleet.

"This year (2005) so far has not been as good as last year. Compared to 2004, freight rates in 2005 are depressed but still these are sufficiently high enough for us to make good money," said Srivastava, who expects freight rates to remain at these levels for the whole year.

According to him, average freight rates in 2004-05 have risen 30-40 per cent. "Days of low freight are over now," he said.

No wonder that even at such high costs, ship acquisitions are happening because ship owners expect the international trade to grow, he said. "This is an healthy sign for shipping," he added.

According to him, introduction of tonnage tax regime last year has put shipping industry in the limelight.

Shipping industry got another shot in the arm this year with Union Budget for 2005-06 bringing dredging operations under tonnage tax regime.

The budget also attempted to slightly change the nature of the service tax by extending its scope outside India by levying the tax on services rendered by a foreigner to an Indian resident.

Traditionally, service tax is levied on services rendered inside the country.

Since shipping companies get lot of their work done outside India including ship repairs, the new change in service tax norms may hurt the industry immensely, according to analysts.

Srivastava said Indian National Shipowners' Association has taken up the matter with the government.

Srivastava, who will retire in August after serving his second five-year term at SCI, said the company has transformed over the decade.

The company has been given some operational autonomy over the last decade by virtue of the mini-ratna status but there is need for further autonomy to realise its full potential, he said.

A mini-ratna status allows a company to make capital investments of up to 3 billion rupees per project without seeking government clearance.

Srivastava said SCI should be given more autonomy for making capital investments as it operates in a very capital intensive industry.

"We have everything, be it money or fleet to leverage the boom but have been denied more autonomy," he said.

He felt the government plans to sell minority stake in the company would not bring any functional change in the company.

"The 5-10 per cent stake sale in the company will not change the way SCI is run," he said adding that it would just be an exercise to collect money for the government.

According to media reports, shipping ministry is in favour of divesting a minority stake in the company but wants to retain 75% stake in SCI. Currently, government holds 80.1% stake in SCI.

In 2004, SCI announced its plans to enter container handling operations. The company plans to bid for Jawaharlal Nehru Port Trust's proposed fourth container terminal.

The company has finalised 2-3 potential partners for the new foray, he said.

To start with, SCI and its foreign partners, will form a special purpose vehicle. "We have decided to take only a minority stake in the venture as this container handling is not our core area," Srivastava said.

The foray, however, is seen helping its container business in the long run.

"For diversification, container handling is the best allied area to be in," he said.

Analysts are expecting SCI to invest at least Rs 30-40 crore as equity in the SPV.

JNPT's fourth terminal is expected to cost Rs 250-400 crore.

Today, SCI shares ended at Rs 165.10 on the National Stock Exchange, down 2.5 per cent from Monday's close.