Shipping Stocks: Will the Bon Voyage Continue?

In 2022, we saw the implications of Russia-Ukraine war and which segments of the Indian share market were impacted.

The shipping sector was and continues to be one of the few sectors that benefits enormously from the current Russia-Ukraine war. Spot freight rates in the key tanker segments in November 2022 have risen nearly 8 to 9 times from a year ago.

Tanker segment vessels are used to transport crude oil, refined oil, and other petroleum products across the globe.

Senior executives at shipping companies have pointed out that given the war in Ukraine, western European nations have sharply reduced crude oil imports from Russia.

As a result, crude oil from Russia is being transported for 'substantially longer distances' from Russia to importing countries in Asia and Africa.

In addition, there is strong demand emanating for tanker vessels from Indian oil refiners to send refined oil from their facilities to western Europe and African nations.

As a result, in tanker segments like very large crude carrier (VLCC), average daily freight rate in November 2022 was US$84,364 (Rs 7 million) per day versus US$5,461 per day a year earlier, pointed out top company officials at leading Indian shipping companies.

Meanwhile, in other tanker segments like Suezmax, average daily freight rate in November 2022 was US$79,045 per day vis-a-vis US$9,218 per day a year earlier.

Similarly, in tanker segments like Aframax, average daily freight rate in November 2022 was US$80,070 per day versus US$11,725 per day a year earlier.

Indian shipping companies typically have 60-65% of their total freight capacity dedicated to the tanker segment.

In the dry bulk segment, which consists of transporting merchandise like iron ore, steel etc. the Baltic Dry index averaged 1,348 in November 2022 vis-a-vis 2,780 a year earlier.

Weakness in the dry bulk segment in November 2022 is attributed to sluggish demand conditions from China, given covid lockdowns in different parts of that country.

Indian shipping companies typically have 25-30% of their total shipping capacity dedicated to the dry bulk segment.

Indian shipping companies utilise a combination of short term and long term contracts with their customers to maximise their earnings.

However, top level executives at Indian shipping companies point out that in the tanker segment they are increasingly opting for short term contracts with their customers, in a bid to benefit from the current surge in spot shipping freight rates.

Why shipping stocks are rallying

The surge in spot tanker freight rates has not gone unnoticed by Dalal Street. Shares of shipping companies have rallied.

Great Eastern (GE) Shipping ended yesterday's trade at Rs 709.4, while its 52-week high is Rs 734.5. Today again, the stock is up 1.5% when the benchmark Sensex is down over 700 points.

In the case of Shipping Corporation of India (SCI), it ended yesterday trade at Rs 140.6 vis-a-vis its 52-week high of Rs 147.4.

Today, the stock surpassed its previous 52-week high and rallied 3% to hit a new high of Rs 151.

Great Eastern Shipping owns 3.44 million dwt (dead weight tonnage) shipping capacity at the end of the September 2022 quarter. The company had reported a consolidated net profit of Rs 7.6 billion (bn) in the September 2022 quarter vis-a-vis Rs 2.2 bn a year earlier.

Shipping Corporation owned 5.31 million dwt shipping capacity as on 1 May 2022.

Performance of Shipping Stocks

Company Name	CMP (Rs)	1 Month	3 Months	1 Year
The Great Eastern Shipping Company Ltd.	709.4	14%	31%	165%
Shreyas Shipping & Logistics Ltd.	300	1%	-23%	38%
Dredging Corporation Of India Ltd.	392.3	-4%	23%	30%
Global Offshore Services Ltd.	56	-1%	-2%	24%
Essar Shipping Ltd.	9.9	15%	7%	7%
Shipping Corporation Of India Ltd.	140.6	9%	18%	6%
Seamec Ltd.	980.2	3%	-19%	-8%
Chowgule Steamships Ltd.	13.4	-1%	-8%	-17%
Hariyana Ship Breakers Ltd.	70.1	8%	-20%	-23%
Mercator Ltd.	1.2	4%	-10%	-38%

Source: Equitymaster

Valuations

GE Shipping trades at nearly 4 times estimated consolidated FY23 earnings, while Shipping Corporation of India trades at 14 times.

Great Eastern Shipping has traded with a PE multiple ranging from 5 to 14.7 times over the past five years, while Shipping Corporation has traded in a range of 6 and 19.4 times.

The shipping industry is inherently cyclical with Dalal Street remaining cautious on how long the current uptrend in spot freight rates in the tanker segment will last.

With both Great Eastern Shipping and Shipping Corporation trading within their historical PE ratios over the last five years, investors could look at adding shipping stocks to their watchlists for the new year.

Happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...