• NOVEMBER 13, 2002

SCI: Beyond disinvestment

Shipping Corporation of India (SCI) has been on the decline on the bourses with disinvestment sailing into rough weather in the last three months. Apart from disinvestment, the global slowdown continue to hamper current growth prospects of the company and is reflected in 1HFY03 numbers.

(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Sales 7,413 5,966 -19.5% 15,335 11,198 -27.0%
Other Income 64 57 -11.3% 97 129 34.0%
Expenditure 5,559 5,229 -5.9% 10,864 9,831 -9.5%
Operating Profit (EBDIT) 1,854 737 -60.3% 4,471 1,367 -69.4%
Operating Profit Margin (%) 25.0% 12.3% 29.2% 12.2%
Interest (net) 135 154 14.1% 268 279 3.9%
Depreciation 619 647 4.5% 1,268 1,251 -1.3%
Profit before Tax 1,164 (7) - 3,031 (34) -
Extraordinary items - 824 - - 824 -
Tax 520 47 -91.0% 1,270 80 -93.7%
Profit after Tax/(Loss) 644 770 19.6% 1,761 711 -59.6%
Net profit margin (%) 8.7% 12.9% 11.5% 6.3%
No. of Shares (eoy) (m) 282.3 282.3 282.3 282.3
Earnings per share (Rs)* 9.1 10.9 12.5 5.0
P/E (x) 11.5

The effect of the global downturn in apparent from the first half numbers of SCI. While shipping revenues have declined by 27%, operating margins have more than halved during the same period. The performance of SCI has to be viewed in context of weaker industrial activity in major economies viz. US, Japan and Europe, oversupply of tonnage and reduction in crude output effected by the Organisation of Petroleum Exporting Countries (OPEC). Crude transportation accounts for around 60%-70% of revenues. The OPEC reduced crude output by 1.5 m barrels per day once in January this year and this had a significant impact on freight rates of crude tankers, notably very large carriers. The impact was also seen in other smaller vessel segments like Suezmax and Aframax, where Indian shipping companies' like SCI have major presence. Compared to the highs in December 2000, tanker freight rates are down 65%-70%. This has had a negative impact on SCI's performance.

Added to the woes for SCI are excess refining capacity situation in the domestic market. SCI traditionally has been the apex supplier of both crude and petro-products for domestic PSU refinery majors under the administered price mechanism regime (APM). However, dismantling of APM in 2002 means that PSU refineries are allowed to offer crude transportation contracts to private sector players like GE Shipping. Though select PSUs have retained SCI as the preferred supplier, private players have already made some inroads into SCI's market share. With refining capacity also increasing sharply over the last five years in the domestic market, product transportation to the country has reduced significantly thus affecting prospects of SCI.

Shipping majors are also faced with other key factor that could have a bigger impact in the long run. Stricter safety regulations for tanker transportation in 2000-01 resulted in a sharp spurt in scrapping of existing tonnage and significant build-up in new order book. The latest Gibson report highlights that starting 1999 and till September 2002, almost 430 tankers (including chemical and combination tankers) totaling 59,057 kdwt have been sold for scrapping. If one were to view the existing global tanker fleet, 28% of existing tonnage is accounted by tankers above 16 years (in absolute terms, it works out to 39%). So there is every possibility that scrapping might continue in the near-term.

Tanker age profile…
Segment Nos % k dwt %
0-5 yrs 595 25.1% 84,813 32.0%
6-10 yrs 473 20.0% 65,586 24.7%
11-15 yrs 385 16.2% 41,732 15.7%
16-20 yrs 341 14.4% 22,727 8.6%
21+ yrs 576 24.3% 50,280 19.0%
Total 2,370 100.0% 265,138 100.0%
Source: Gibson

That said, if one were to look at the capacity infusion in 2002 till 2005, as much as 29% of existing capacity will be added in the global market thus limiting benefits from scrapping. Given the current scenario where supply continues to outstrip demand, overall freight rates may remain range bound in the near term. However, freight rates have started to rise since September 2002 on the back of rise in crude prices and increased tonnage demand ahead of crude inventory build-up for the winter season. Tanker freight rates across the globe have risen since 1QFY03 and this could translate into higher shipping income for SCI in 3QFY03.

Tanker deliveries–Big concern
Year Nos % k dwt %
2002 165 30.1% 24,261 35.5%
2003 226 41.2% 27,273 39.9%
2004 141 25.7% 15,047 22.0%
2005 17 3.1% 1,780 2.6%
Total 549 100.0% 68,361 100.0%
% of existing fleet 23.2% 25.8%
Source: Gibson

Since shipping companies generally operate on high fixed cost, any fall in freight rate tend to have a larger impact at the operating level. While input costs have increased, notably fuel cost, SCI is unable to pass on the rise to customers due to a weaker demand scenario. Both the factors have affected operating margins in 1HFY03. Extraordinary income here pertains to income tax refund for previous years and the interest thereon. If one were to exclude this unusual income, SCI has actually posted a loss in 2QFY03 and 1HFY03.

The stock currently trades at Rs 58 implying a P/E multiple of 11.5x annualised 1HFY03 earnings. It has been a downhill ride on the stock markets since the highs of Rs 112 in June 2002. We had done a value analysis of SCI on the basis of existing tonnage capacity and the fair value was estimated in the range of Rs 65-75 per share. But with the LNG venture of the company also in doldrums (Greenfield Shipping Company that was initiated with the objective of transporting LNG to the Dabhol Power Project), earnings visibility also stands reduced. This affects valuations of the company even further. Looking beyond disinvestment, prospects of the company in the near-term are challenging.

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