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Shipping: Taken aback

Apr 3, 2003

Shipping companies saw a reversal in fortunes in the fiscal year 2003. After riding on the back of a sharp spurt in freight rates in 2001 that had a spillover effect on 2002, the impact of the September 11 has been significant on the shipping sector in 2003. Except for a brief period in the third quarter of 2003, there was not much in offer for Indian shipping majors. If one were to look at the prominent losers and gainers, GE Shipping has managed to outperform its peers despite the global downturn. The performance of other majors like Shipping Corporation of India (SCI) has been muted during the downturn, which is not surprising. GE Shipping, with its younger fleet and the diversified presence, has an advantage.

The verdict
(Rs) Mar-02 Mar-03 Change (%)
Gainers
GE Shipping 30 38 27.1%
Losers
Essar Shipping 7 5 -29.6%
SCI 68 50 -26.1%
Varun Shipping 12 9 -21.3%
Chowgule 3 3 -11.8%

The table below highlights the combined nine months performance of both GE Shipping and SCI. As apparent, both revenues and profitability have suffered. However, the impact has been severe especially when one considers that fact that it was the tanker segment that saw significant erosion in tonnage revenues. Since both GE Shipping and SCI predominantly operate in this segment, the impact has been adverse (63% of GE Shipping's fleet and 43% of SCI's fleet cater to the tanker market). After remaining lacklustre in 1HFY03, freight rates for the tanker market started to show signs of strength.

Growth weakens…
(Rs m)* 9mFY02 9mFY03 Change
Net sales 31,616 24,121 -23.7%
Other Income 424 473 11.5%
Expenditure 22,240 18,880 -15.1%
Operating Profit (EBDIT) 9,376 5,241 -44.1%
Operating Profit Margin (%) 29.7% 21.7%  
Interest (net) 813 508 -37.5%
Depreciation 3,437 3,150 -8.3%
Profit before Tax 5,551 2,055 -63.0%
Extraordinary items 40 1,041 -
Tax 1,720 282 -83.6%
Profit after Tax/(Loss) 3,871 2,815 -27.3%
Net profit margin (%) 12.2% 11.7%  
Market capitalisation   21,600  
P/E (x)**   5.8  
(*Combined GE Shipping and SCI results)
(**annualised nine months earnings)

The rise was also supported in part by various factors like the Venezualean strike, the sinking of 'Prestige' that resulted in large-scale cancellation of order for older tonnage and the usual spurt in demand for tankers ahead of winter in the US. This time demand was on the higher side during the winter season in light of the fluid situation in the Middle East (the US started to build-up inventory earlier in anticipation of a war). As a result, the decline in revenues for both SCI and GE Shipping in 3QFY03 was lower compared to the first two quarters. Just to put things in perspective, crude carriers earned an average US$ 21,900 per day, a fall of around 37% from the historical highs in 3QFY02 (US$ 34,700 per day). However, as compared to 2QFY03, the average earnings were higher by around 14%. Similarly, average earnings were higher by 10% for product carriers in 3QFY03 as compared to 2QFY03.

Consequently, the fall in revenues for GE Shipping in 3QFY03 was 16% as compared to 36% and 17% in 1QFY03 and 2QFY03 respectively (the decline was similar for SCI as well). Moving away from the tanker segment, freight rates for dry bulk also saw a spurt during the course of FY03. This despite significant inflow of fresh capacity. With demand for commodities like steel showing a sharp upturn in FY03, tonnage for iron ore transportation also increased.

Cumulative tanker deliveries…
Year First half Second half Total (dwt)
FY02 67 98 165 30,261
FY03E 108 118 226 27,273
FY04E 68 75 143 15,047
FY05E 8 9 17 1,780
Total 251 300 551 74,361
% of existing fleet 10.6% 12.7% 23.2% 28.0%
Source: EA Gibson

So, what is in store for Indian shipping companies in FY04? We expect the rise in freight rates for the tanker segment during the course of the war as a temporary phenomenon. The reason being that there are concerns regarding significant influx of new capacities. As per EA Gibson of UK, in the four years (including FY02 and FY03), cumulative tanker deliveries is expected to add 74 mdwt (million dead weight tonnage). This surmounts to 28% of existing tanker capacity. That said, the sinking of 'Prestige' has forced the regulator to take a tough stand, especially for the tanker segment. This should result in large-scale scrapping of tonnage that could partially offset the rise in deliveries. Overall, we expect yet another lacklustre year for shipping companies.


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