 "SCI")
Trade in the dry bulk segment is getting close to dead and outlook for the tanker division, which has performed well so far, looks cautious for 2016. However, Indian shipping companies have done better that market benchmark Sensex. The sector still holds a few green apples for investors provided they remain parked in with a long-term perspective of more than a year.
State-owned Shipping Corporation of India, Great Eastern Shipping, Varun Shipping and Mercator are some of the top shipping companies in the domestic market.
During the current financial year, the benchmark index, Sensex, has fallen 13%, but the index of shipping companies prepared by Business Standard Research shows nearly 10% returns led by Shipping Corporation, Mercator and Essar Shipping. Some companies have performed badly, but the market is not writing off all of them. Essar Shipping is in a delisting mode, while Shreyash Shipping is active in coastal shipping.
The global benchmark for shipping freight, Baltic dry (bulk) index (BDI), is at its nadir falling from an all time high level above 11,000-mark in 2008 at 300-level, following slowing Chinese economy and commodity price crash, sending ripples around globe.
The World Bank has projected slow growth era with 2015 growth falling from 2.6% seen in 2014 to 2.4% in 2015 and in 2016 it could reach a 2014 level of 2.6% only. This shows outlook has yet not turned optimistic for shipping freight market.
The BDI measures change in transportation cost of raw materials like metals, grain and fertilisers by sea, while Baltic Dirty Tanker index and Baltic Clean Tanker index is used for crude oil and petroleum products, respectively. The tanker segment is doing well due to increased demand for crude oil for storage. How long will it remain so is an issue.
“Last year, demand for crude oil was higher, while in 2016, we see the demand at 1.00-1.25 million barrels per day. From the supply side, there is no growth seen this year. Last year, supply was up by good three million barrels,” G. Shivakumar, group chief financial officer of Great Eastern Shipping said at the December quarter earnings conference call. “Also, we do not know how storage will play out in crude oil since facilities on land are coming close to tank tops,” he added. “Due to this, earnings from the tanker segment are going to be lower in 2016 compared with 2015,” he added.
Great Eastern Shipping and state-owned Shipping Corporation of India continue to be the preferred bets by brokerages.
In case of Shipping Corporation of India, by virtue of it being a state-owned entity, chances of defaulting is dim. In addition, out of the total fleet size of 69 vessels, about 50% is into the tanker division including the VLCCs (very large crude carriers) division, which insulates the company from the bad weather the dry bulk is going through for its 17 bulk vessels.
Since the last few quarters, the state-owned company has gradually got onto its feet and in fact also reported a profit in the year gone by after a gap of about three years. An analyst with a foreign institution said GE Shipping and SCI are their favourite shipping stocks for 2016. He was, however, not willing to be quoted for specific companies stock recommendations.
Great Eastern Shipping, with presence in the dry bulk with eight vessels, in tanker division with 21 vessels and also in the offshore segment is the most favourite among analysts for being the lightest balance sheet (when compared with peers) with debt-equity ratio well below 1. The company has been able to reap profits despite the challenging business environment, which is what lures brokerages.
Shipping and logistics company Mercator recently did away with the pain in business by exiting its dry bulk business carried on by its Singapore arm by way of divestment as part of the company’s ongoing portfolio-restructuring exercise. Now, with coal prices having come down significantly and tanker too not as strong as last year, challenges will continue for the company going ahead, said analysts.
Debt-laden Varun Shipping which has strong presence in Liquified Petroleum Gas (LPG) has looked to demerge its business into shipping and ship management, but has not been able to make any significant different to its heavy balance sheet.
However, according to Vikram Suryavanshi, analyst with Philip Capital, it will not be easy going for shipping companies as, “the shipping industry is going through a tough time and is certainly going to test the patience of investors,” said
China is showing a way out for overcapacity in shipping sector. Daiwa securities analyst said in a report that, “one of the China government’s priorities in 2016 is to cut capacity in sectors saddled with overcapacity, including mining and shipbuilding”. CIMB said in a note to its investors, “We see stronger momentum for commercial ships.”
Glut in capacity in dry bulk segment has given rise to the demand for scrapping excess capacities. However 20% fall in scrap prices is discouraging ship owners. Another solution is to focus on the coastal shipping.
“We have been into coastal shipping for last 2-3 years, but noting the grim scenario overseas, we are looking to focus more in domestic market mainly for coal needed for power plants,” said a senior official with Shipping Corporation of India. “We want our dry bulk vessels to remain deployed and employed on water and so will turn higher focus to coastal going ahead,” he added.
Great Eastern, however, thinks differently, although it has deployed vessels for coastal shipping. “The market is not too different for coastal, there is limited scope there as well. We don’t get any premium in Indian trade. It is the same as global. We will continue to keep the same number of vessels at 4-5 for coastal,” informed Shivakumar.
Figures are in percentage| Return over April'15 | Return over August'15 | |
| Shipping Index | 9.86 | -3.27 |
| Sensex | -12.9 | -12.44 |
