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Varun Shipping, India's largest liquefied petroleum gas (LPG) tanker operator, is on its way to doing away with the offshore and very large gas carrier vessel businesses that will halve its debt from about Rs 1,600 crore as on December 31, 2013. This, however, is worrying analysts because, according to them, the move might reduce the problem to some extent but not resolve it completely.
"Selling the two business segments will bring down the company's debt, but it will also bring down the company's revenue stream," said Bharat Chhoda, analyst with ICICI Securities. "So serving the balance debt is again going to be a challenge for Varun Shipping," he added.
The shipping company aims to bring down 60 per cent of its total debt by selling assets. It hopes to get Rs 700-750 crore via sale of offshore business by September and Rs 360 crore through sale of the two very large gas carrier vessels.
The company, which recently sold off one of its 1992-built very large gas carrier vessels for $30 million (Rs 180 crore), now looks to sell the second one for an equal amount.
After the sale of these assets, Varun Shipping will be left with eight mid-sized LPG vessels and three crude oil tankers.
"Rates for mid-sized LPG carriers are relatively stable and so we plan to focus on that segment going ahead," said Yudhishthir Khatau, chairman and managing director of Varun Shipping.
At one end, where the company is banking on LPG segment for its future business, market dynamics are hinting at a positive outlook mainly in the offshore segment.
Globally, the demand for offshore vessels is robust mainly because of increasing oil and gas exploration activities in Europe and the West Asia region.
"The rates of offshore vessels have gone up significantly by 20-25 percent," said an industry official with one of the leading shipbuilding companies. "The outlook is bullish for the offshore segment. There is surely a pick up in the business there," he added.
Varun Shipping runs its offshore business via its subsidiary Varun Cyprus under which there are three anchor handling tug supply vessels at present, said Khatau. "The asset price in the offshore segment is strong but since it is a niche market, entering and exiting it is difficult," he added. "We are in the market and are engaged in talks; so let's see."
As of September 2012, the company's consolidated revenue stood at Rs 1,063 crore, according to Capitaline Plus data. "The offshore segment forms 15-20 per cent of the total revenue generated by the company," said Khatau.
Normally, a shipping business gives about 20 per cent earnings before interest, taxes, depreciation and amortisation (Ebitda) margin but since Varun Shipping is into the specialised segment of LPG, it could have the potential to get higher Ebitda of about 35 per cent, analysts said.
In order to service the balance debt of Rs 500-600 crore, the company will have to generate revenues worth at least Rs 400 crore a year the next five years, assuming that the repayment period of debt is five years, analysts said.
"The company is exiting the bullish offshore business and plans to continue with the one (mid-sized LPG) where rates are just stable. In such a scenario the company will have to look at higher-capacity utilisation levels of the fleet and also get favourable charter rates if it has to service the balance debt," said Sudarshan Shreenivas, analyst, India Ratings.
The 41-year-old business run by one of Mumbai's oldest business families - the Khataus - has a 27-year-old track record of not just being profitable but also distributing uninterrupted dividend to its shareholders.
In the past two years, however, the company has moved into losses mainly because of poor business climate due to global economic slowdown amid mounting debt.
Despite the tough situation the company has been facing, promoter Khatau continues to draw a hefty salary of Rs 4.8 crore per annum.
"Since the shipping sector is now beginning to look up, Varun Shipping could look at fund infusion by a global PE (private equity)," said an analyst with a local brokerage. Apart from that, the company could also exercise an option to take vessels on lease, mainly in the offshore segment where the outlook is bullish for the sector, he added.
