Sep 20, 2000|
“We may consider buy-back of shares at the right time…”
Mr. Bharat Sheth is the Managing Director of the Great Eastern Shipping Company Limited, India’s largest private sector shipping company. With more than a decade’s experience in the shipping industry behind him, Mr. Sheth currently heads the company’s shipping division.
In an interview with Equitymaster.com, Mr. Sheth shared with us the prospects of the shipping industry in general and Great Eastern’s future plans in particular.
What is your view on the economy? On one hand you have external trade improving and on the other there is a recovery in the domestic economy. Would this lead to higher growth in goods movement?
Basically we look at the shipping industry on a global basis. Since shipping is not a country specific business, for Gesco, trading in India, Europe, America or Asia is the same. On the economy front, we expect world trade to grow in excess of 4% this year. Even assuming that the US economy is going to slow down, the improving sea-borne trade in other parts of the world like Europe, Japan and Asia should boost industrial activity. Overall, we do not expect world trade to go below 3%.
You have initiated a cost cutting measure. How soon do you expect the result of this to flow in the company’s financials?
We expect a major part of the benefit as a result of these cost initiatives to flow in the current year itself and the rest in FY02. More than 60% of this you will see in this financial year and the remaining we will squeeze in FY02.
With world trade booming, how do you see freight rates and tanker rates moving in the future?
As far as the tanker market is concerned, my view is that it is at an extremely strong level. All indications are that, for the next 12 months, the market would continue to remain strong.
There are different reasons for tanker rates going up sharply. First and foremost, the regulatory issues and environmental concerns. The sinking of “Erika” along the French coast has influenced almost all-major oil companies to go in for fresh tonnage. Those with old tonnage have realised the need for fresh tonnage. This resulted in large scale scrapping of capacities. The second reason is OPEC’s decision to increase crude output by 2 m barrels a day since last year. So, supply went up from 26.2 MT in FY99 to 29 MT currently.
Another important factor that has led to higher demand is the improvement in industrial in South East Asia and Japan. The changes in consumption pattern among consumers have also resulted in higher demand for oil (in excess of 6%) this year. This when compared to a negative demand in FY99 is significant, though may not be a sustainable level. The third reason for this sudden spurt is the consolidation among ship owners. Very large ship owners have got together and have pooled their capacities collectively. Moreover, since the markets remained lacklustre for major part of FY99, not many shipping companies went for fleet expansion. While the supply side remained stable, the demand for tonnage actually started to pick up from March 2000. This demand-supply mismatch led to hardening of tanker rates. So, it is the combination of all these factors that have led to this buoyancy. Going forward, we expected the tanker rates to remain firm.
On the dry bulk front, rates have improved, albeit at a slower rate and the immediate prospects are good. Growth would be less pronounced as compared to the tanker market.
How is Gesco positioned to capitalise on such a buoyant market?
On the crude market front we have three crude tankers. Two of these three are on spot market basis and so have benefited on every single rise in the tanker rates. On the remaining one, we have fixed on a period charter basis, for a period of 12 months starting from April 2000. So, we did not enjoy the benefit totally.
On the product market front, out of the 13 tankers, we have taken the benefit on one third of the fleet. The balance fleet would see the benefit starting October 2000. This is because, the agreements that we have entered into last year, terminates between September and November 2000. Therefore, the full benefit for the remaining tankers is likely to accrue starting from early November 2000.
The demand for product tankers is expected to slow down since the domestic refining capacities have gone up considerably. To counter this, India has started exporting crude products this year. How do you plan to tackle this?
Contrary to popular thinking, inspite of additional refining capacity going up in India, imports of refinery products have become virtually non-existent. India used to import anywhere between 15 MT and 20 MT of crude products every year. This has now come to a virtual standstill. On the Indian coast, before these refineries and pipelines came up, India at any point in time used to take out 25-26 tankers for product transportation. That number still remains at the same level since different refineries always have a mismatch. Somebody has a surplus of kerosene, diesel or naphtha. So, to bridge this mismatch, product transportation on the Indian coast will always be there.
But what has changed is the size of the ship. The demand for smaller ship i.e. 26,000 dwt to 30,000 dwt has reduced but the demand for bigger ones have gone up. Physically the number is the same but the sizes have varied. Secondly, the 20 MT products that India used to import, are still being produced. But instead of India buying it, other parts of the world are buying it. So the ton-mile demand has actually gone up because it takes 4 days to transport products from Gulf to India. But if you consider transporting the same product to Europe or to America, the demand for shipping has actually gone up. It is not important if India is going to import 20 million tonnes of products every year because some other country would be buying the same. So, as far as Gesco is concerned, in FY99, 100% of my product business was in India but today less than 70% of my demand is from India. Going forward, I would like this proportion to be around 60%-40% or 50%-50%.
There is lot of talk about Liquefied Natural Gas (LNG) shipping? How do you see this segment growing in the future?
Since the whole world is moving to an environmental conscious state with everybody really getting conscious about clean air we expect the demand for LNG to go up sharply in the future. If we become India specific, the Enron project is already through. Petronet LNG is very much on the cards with large sums of money already committed to the project along with some of the major oil companies, which includes ONGC, BPCL, NTPC and Indian Oil. The project is due for completion by the end of FY03 and early FY04. We expect the delivery of two LNG ships for the Dahej project by the end of FY03/early FY04.
In addition, Shell is also looking at setting up an LNG facility at Hazira and has contracted two ships. British Gas is also looking at a LNG plant in Pipavav and Indian Oil has just got an approval to import LNG at Kakinada. Others like Birla have received approval. As far as Gesco is concerned we have tied up in a consortium to bid for Petronet LNG that includes SK Shipping-Samsung and Indian Oil. Since LNG projects are typically complicated and highly capital intensive, there won’t be any day-to-day activities.
How do you see LNG shipping revenues contributing towards Gesco’s turnover of LNG shipping in the longer term?
The money is not going to flow into Great Eastern directly, as it is a joint venture. The Petronet LNG agreement states that within a period of five years, the technical know-how has to be transferred to the Indian company. This means that after five years Great Eastern would be handling the entire operations and management of the project. For this, we would receive management fees as well charter rate from the two LNG ships. We expect this business to give us sustained returns for a longer term since LNG contracts are generally for 20 to 25 years. Thus, it locks the volatility in income, which is present in crude oil market.
What was the rationale behind retaining a portion of the de-merged construction division?
When we did the demerger, there were some property, which would have attracted considerable amount of stamp duty and transfer charges, had we moved that into the demerged company. Due to the serious tax implications, we decided to retain half a dozen properties. The current book value of these would be around Rs 1,100 m (all equity funded). We expect to divest from this within a period of three years. But we are not going to commit fresh funds into any of these projects. They are only at the divestment stage now.
You are a net cash earner every year. How do you plan to utilise these funds?
There are two or three things. First of all, since we are in the shipping business, we need funds to match volatility in the markets. We always believe in holding certain amount of cash in order to meet all our debt obligations. Further, we may also require funds for expanding our operations to a much higher level both on the offshore as well in the shipping businesses. We need to modernize our fleet, which requires funds. Between product and crude we would like to have more exposure towards crude because we think crude will expand much faster than product tankers in terms of sea-borne trade. Moreover, at the right time, we may look at exercising buy-back.
Your have been increasing your offshore fleet over the last two years. How do you see the proportion of revenue coming in the future from this division?
The proportion of any division will always be a function of the market. Not necessary that the market move in tandem. So in one year you could have an exceptionally high shipping revenue and in other year in offshore. In terms of capital employed today, we are 25% in offshore and 75% in shipping. But in offshore, we see a lot of potential and exciting growth opportunities.
For a long while the shipping industry has been prolonging for an infrastructure status. Have you been given that or what are looking at?
No, we haven’t been given that. Worldwide, particularly in Europe, the majority of tanker owners do not pay tax because they have what is called ‘flag of convenience’. They have an option of registering in an offshore tax heaven and get rebates. But, in India registration is mandatory. In order to encourage shipping industry both UK and European countries have introduced a new concept called as ”tonnage tax”. So on every ton that you own, you pay a fixed amount and it has nothing to do with your profits or loss. Though it is double-edged sword, it has the benefit of limiting your tax upfront. We are trying to push for this concept in India and we have adequate support from administrative ministry. I think it will be good if the ministry provides a level playing field.
If you look at pricing of Great Eastern Shipping, despite high dividend yield and high net asset value, somehow, the stock does not seem to attract investors much? What do you think are the reasons behind this perception?
I suspect that it may due to the fact that market perceives shipping industry as very volatile and It is just that people don’t understand the business. The other reason could be that, shipping industry has not been adequately researched. This is because a large number of shipowners are private companies.
What is Gesco's approximate Net Asset Value?
In FY99, our NAV was around Rs 40 and we think it is currently on either side of Rs 55 (Pre-demerger NAV was Rs 65).
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