Shipping stocks moored as freight rates tank

Freight rates in the tanker and dry bulk segments have eased considerably on a y-o-y basis in the Dec quarter.

Shipping stocks have underperformed the Sensex over the past fortnight as well the last one month following a drop in spot freight rates.

Freight rates in the tanker and dry bulk segments have eased considerably on a y-o-y basis in the December quarter.

For instance, spot freight rates in tanker segments such as very large crude carriers (VLCC) had more or less peaked in Q3 FY05 at about $125,400 a day and in Q3 FY06, they were estimated to be about 35 per cent lower.

Similarly, in the dry bulk segment, freight rates are also down by about 35-40 per cent y-o-y in Q3 FY06.

As a result, Essar Shipping stock was more or less unchanged over the past fortnight compared with an about 6.5 per cent gain in the Sensex. Meanwhile, Great Eastern Shipping was down 5.4 per cent during this period, while Varun Shipping was down almost 3.1 per cent.

Also, over the past one month, Essar Shipping was down almost 6 per cent compared with 4.6 per cent rise in the Sensex.

Great Eastern Shipping was down about 7 per cent during this period, while Shipping Corporation was more or less unchanged. Analysts highlight that all hope is not lost for this sector, as spot freight rates have shown signs of picking up over the last few weeks in both freight and tanker segment.

Great Eastern Shipping had earlier reported a 27.3 per cent fall on a y-o-y basis in its operating profit to Rs 252.67 crore (excluding other income and sale of ships) in the December 05 quarter. To the company's credit, it has attempted to offset the weaker spot freight price environment by placing a number of its tankers on long-term contracts.

However, during the last quarter, the company undertook six dry dockings, mainly of older vessels, which resulted in an increase in its expenditure relating to repairs and maintenance.

As a result, segment profit of the key shipping division fell 31.78 per cent y-o-y to Rs 183.57 crore in the last quarter.

In contrast, Shipping Corporation of India, however, managed to grow its operating profit (excluding sale of ship and other income) by 16.4 per cent y-o-y to Rs 343.12 crore, due to a reduction in staff cost and other expenditure.

A key exception to this trend has been Varun Shipping, whose stock price has gained about 14.75 per cent over the past one month.

The company had grown its operating profit by almost 147 per cent y-o-y to Rs 110.79 crore in the last quarter.

Analysts highlight that Varun Shipping's focus on more profitable areas such as the Caribbean and the UK market, enabled them to get better realisations than those prevailing in the spot market.

In addition, the company has expanded its fleet over the past 15-18 months, which helped them transport enhanced volumes.