The effect of downsizing on the cargo shipping industry
When economies downsize (as happened in 2008 and 2009, following the after effects of the blowout caused by the mother of all financial scams), one major cross border industry that gets automatically bushwhacked, is the cargo shipping industry. When countries produce less as a result, there is even less to export. One may recollect the previously unheard of development of rice shortage in America in 2008, as citizens started hoarding rice there, following the clampdown of exports of this commodity by major producer nations like Vietnam.
Companies like Great Eastern (G.E.) Shipping specialize in the dual trade of bulk cargo - crude oil, petroleum products, gas, ores, steel, fertilizers, chemicals, and such like, which cannot be transported in any other manner. Such shipments however involve specialized tankers, and in the case of dry bulk cargo, container ships. The company at end FY10 made do with 32 tankers, characterized under crude oil carriers, product carriers and, gas carriers, with a dead weight tonnage of 2.5 m tonnes, and 6 dry bulk carriers with a dead weight tonnage of 4.2 lakh tonnes. It also appears to charter ships, judging from the entries in the P&L account. The company currently has ships on order for a total dead weight tonnage (dwt) capacity of 1.3 m tonnes. The chairman in his message to the shareholders states that the company will spend US $570 m in capex in the next 3 years in pursuit of capacity addition.
The bluest of blue chips
Great Eastern was in the days of yore, one of the bluest of blue chips in the Bombay Stock Exchange, and was not only a speculators' favorite, but was also the only shipping company to my knowledge which was listed for trading in the coveted 'Forward' list at the BSE. After 62 years of sailing the high seas, it shows little leakage in its hull, though stock market wise it has lost its sheen. GE Shipping and the now defunct South India Shipping were also known as the only two shipping companies which were run by people who understood the shipping business. The management's specialty was in its ability to understand the nuances of the shipping market, and use these acquired skills to buy ships cheap, and sell ships dear, optimize operations, and, maximize profits for the company. It also admirably managed its funding needs to coincide with its capex.
Adept at reading the market in ships
The tradition of profitable buying and selling continues to this day. Ships are big ticket items involving tens of crores of rupees. In both FY10 and in the preceding year, the profit on sale of ships has contributed in no small measure (Rs 1.8 bn versus Rs 2.5 bn in the preceding year) to its revenue flows. The big difference today is that shipping companies have to deal with the volatility of the forex derivatives market, which trumps even the 'Almighty'. Forex bets lead to big hits in the solar plexus or to big profits, and given the very nature of its business, the company has large forex exposures on both revenue and capital account. In FY09 the company registered a forex gain of Rs 815 m, but in the latest year it registered a loss of almost Rs 2 bn.
The big diversification
The management in its wisdom decided to get into the offshore oilfield services sector in 2002 through a wholly owned subsidiary, Greatship India Ltd. This is another business which calls for mega buck outlays of capital. GE Shipping has pumped in a total of Rs 11.2 bn as equity and preference capital into this subsidiary. Greatship is one of the four subsidiaries that GE Shipping has germinated. Greatship in turn has spun off four subsidiaries, two of which, including the Singapore subsidiary, are in the same line of activity. Greatship along with its subsidiaries own or operate 5 platform supply vessels and 8 anchor handling tugs.
A glorious past
A look at the brief financials of Great Eastern shows that over the decade the company has shown a steady growth in profits after tax each year, over that of the preceding year, barring the very latest year. That is no mean achievement for a cargo shipping line, which is constantly buffeted by the winds of uncertainty. The revenue inflows too, barring an odd year here and there, has also grown appreciably. (In the latest accounting year FY10 however, it was hit by gale force head winds. Revenues were down 33% to Rs 22.5 bn, while net profits almost slid below the plimsoll line (the marking on a ship's hull that shows how low or high the ship is resting in the water), by 71% to Rs 4 bn. Curiously enough this was also the only year of the decade when the gross block took a beating. The company had to sell more ships than it acquired, just to balance its books, it appears). The only moot point here is how the company manages to do with such low percentage interest rate payouts on its sizeable debt. Judging from the figures of FY10 the interest paid averaged a low 4.3%.
Diversifications that do not gel
If the mother unit is chugging along on safe waterways, the same cannot be said about its subsidiaries, and the offspring of its subsidiaries. Some of the subsidiaries are encountering heavy turbulence in calm waters, and it is of management's own making. Besides, what is not coming across either is how the operations of Greatship (India) complement the operations of the parent. Moreover, the parent's humungous capital investment in this subsidiary yields a piffling return of Rs 76 m as dividend. The financials of GE Shipping's other pro-creations is chaotic to say the least.
GE Shipping's London based subsidiary (The Great Eastern Shipping Co. London) with a capital base of Rs 13.2 m, even ran up a loss of Rs 92 m on a piddling turnover of Rs 1.2 m! The Great Eastern Chartering LLC goes one better, but in the opposite direction. On a teeny-weeny capital base of Rs 1.8 m, it boasted reserves of Rs 1.2 bn, and, generated a turnover of Rs 3.2 bn. To pull something off like this must call for human dexterity of a very high order indeed. Each subsidiary in turn seems to be outdoing the other in providing comic relief of sorts.
Finances that do not add up
The plot thickens. The financials of the four subsidiaries of Greatship are flummoxing to the extreme. Collectively the four companies have a capital base of Rs 14.4 bn, an asset base of Rs. 26.7 bn, but a comparatively minor revenue flow of Rs 3.5 bn. Not surprisingly the net profit is only a pedestrian Rs 237 m. Such results cannot by any yardstick be deemed to be a proper husbanding of one's capital resources. The company with the biggest capital base by far amongst these subsidiaries is Greatship Global Holdings. Given its very name, the company ought to be some sort of holding company of the group. It has a very sizeable capital base of Rs 6.8 bn, though its investment portfolio is zilch! It has no revenue of any sorts either, but ran up a miniscule loss for the latest financial year! This is financial engineering of a celestial kind, or some such. This hotch-potch diversification effort could also be the management's way of effecting a firm control of the group, due to its minority holding of 30% in the parent.
The Singapore connection
The parent also has a fascination for promoting companies based out of Singapore. Three companies are incorporated in Singapore-two in offshore service and one in energy services. Together with Greatship, the three offshore biggies collectively have a capital base of Rs 9.4 bn, total assets of Rs 40.7 bn and revenue flows of Rs 10.1 bn, which when added up is very sizeable to boot. But the chairman's letter to the shareholders makes only a passing mention of this business, and refers only to Greatship by name. This is quite incomprehensible. Even the directors' report goes by the belief that the less you say the more you convey. Here too the emphasis is purely on Greatship and its plans to raise capital through a prospectus to further its business objectives.
In sum total you get the picture of a company which is part good, part bad, and for the most part, very ugly.
Please note that I am not a shareholder of this company
Erratum: Due to extreme oversight it was earlier stated that there is a divergence in the capital base of Greatship in the books of Greatship on the one hand, and the capital holding in Greatship by Great Eastern Shipping on the other. While both the figures mentioned therein are correct (Rs 1.7 bn and Rs 11.2 bn respectively) the difference is due to the fact that the capital in Greatship was acquired at a premium to the face value by Great Eastern. The similar mistake also occurred in comparing the capital base of other subsidiaries and GE Shipping’s investment in them. The error is regretted.
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.