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Shipping Sector Analysis Report 

[Key Points | Financial Year '20 | Prospects | Sector Do's and dont's]

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  • India is the sixteenth largest maritime country in the world, with a coastline of about 7,517 km. The shipping industry in India plays a vital role in sustaining growth in the country's trade and commerce. Most cargo ships that sail between East Asia, America, Europe and Africa pass through Indian territorial waters.
  • India has 12 major ports (6 on the eastern coast and 6 on the western coast) and 200 non major ports. Major ports are under the jurisdiction of the Government of India whereas non major ports come under the jurisdiction of the respective state’s Government Maritime Board (GMB).
  • Out of the 200 non major ports, 44 are functional and strategically located on the world’s shipping routes. Non-major ports are steadily gaining share and a major chunk of traffic has shifted from major ports to non-major ports.
  • Ports in India handle almost 95% of trade volumes in India. Solid cargo contributes the largest share to all traffic handled at major ports in India followed by liquid cargo and containers. Increasing trade activities and private participation in port infrastructure have supported port infrastructure activity in India.
  • Shipping is a global business whose performance is closely linked to the state of the global economy. Therefore, any impact on the global economy has an effect on the state of the shipping industry. The shipping industry is also regulated by the rules and regulations of International Maritime Organization (IMO), classification society, and the requirements of the flag state. Apart from these, there are also the rules and regulations of various countries where the vessel operates.
  • The Government of India has announced several initiatives over the years to support the shipping and ports industry. In 2015, it announced the Sagarmala Program, an initiative to reduce logistics cost for international and domestic trade with minimal infrastructure investment.
  • The Government also initiated the National Maritime Development Program, an initiative to develop the maritime sector with a planned outlay of US$ 11.8 billion. Moreover, it announced the Major Ports Authorities Bill in 2020 to provide regulation, operation and planning for the major ports in India and to provide greater autonomy to existing ports.
  • The Government of India has allowed Foreign Direct Investment (FDI) of up to 100% under the automatic route for projects related to the construction and maintenance of ports and harbors and a 10 year tax holiday to enterprises engaged in ports. The ports sector in India has received a cumulative FDI of US$ 1.6 billion between April 2000 and June 2020.

How to Research the Shipping Sector (Key Points)

  • Supply
  • Supply is determined by the addition to shipping capacity. The Maritime Agenda has a target of increasing total port capacity to 3,130 MT. Current port capacity stands at 1515 MT (FY19).
  • Demand
  • Demand in the shipping industry is closely linked to the economy – global and domestic, and trade.
  • Barriers to entry
  • High, as it requires high capital investment, adequate cash flows, and technical expertise and know-how.
  • Bargaining power of suppliers
  • Low, as there are only a few shipping companies that dominate the market.
  • Bargaining power of customers
  • High, as customers are from all over the world. Switching costs are also low as customers can switch to another company from any part of the world.
  • Competition
  • High, as shipping companies not only face competition from domestic players but from international players as well.
  • Threat of Substitutes
  • Moderate to High for solid cargo. Customers can switch to substitutes such as airlines, trucks or goods trains if there is a change in quality of service, increase in freight rates and transit time.
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    Financial Year '20

    • The total traffic handled at major ports in FY20 saw a growth of 0.8% YoY and stood at 704.6 million tonnes (MnT) as against 699.1 MnT handled during the corresponding period of the previous year,
    • The cargo traffic at Paradip Port Trust grew 3.1% YoY to 112 million metric tonnes (MMT) while the cargo traffic at Vishakhapatnam Port Trust grew 11.4% YoY to 72 MMT. Cargo traffic at non-major ports reached 447.2 MT in FY20 (till December 2019) demonstrating a growth of 4.8% YoY in the corresponding period for FY19.
    • Traffic at non major ports has constituted over 45% of the total cargo for the last financial year as there has been a significant shift of traffic from major ports to non-major ports. The government plans to further develop non major ports to decongest the road and rail network.
    • The year saw a relatively weak freight market performance in H1FY20 followed by decade high rates in H2FY20. Some of the factors that contributed to a relatively soft H1FY20 were - weak product demand growth led by trade war, planned and unplanned refinery outages, and an OPEC (Organization of Petroleum Exporting Countries) production freeze.
    • In the month of September, after the missile attack on Saudi oil facilities, a chain of events occurred which propelled crude tanker freight rates to very high levels. Some of the factors that led to this in second half of FY20 were - the US ban on a couple of COSCO subsidiaries (a multinational shipping company) which reportedly impacted a fleet of almost 50 Very Large Crude Carriers (VLCCs), a pickup in Iranian and Venezuelan floating storage for their crude production, and seasonal oil demand uptick in Q3FY20.
    • In February 2020, the US ban on COSCO subsidiaries was reversed and the freight market was on a gradual downslide, when a completely different set of events led the freight market significantly higher. This time it was the breakdown of OPEC production freeze pact (in March 2020), much lower oil demand due to Covid-19 lockdowns leading to lower refinery runs, consequent contango, and the emergence of floating storage.
    • Average product tanker freight rates improved considerably in FY20 versus FY19 with most of the strength coming in H2FY20 in line with the crude tankers. However, the extent of the overall improvement in freight rates clearly lagged their crude counterparts.
    • The year did witness a sharp rise in product tanker freight rates. Some of the key factors that aided this improvement in product tanker freight markets were seasonal pick-up in demand, Middle East refineries returning from outages in Q3FY20, long haul gas oil (IMO 2020 led) and jet fuel trade, and scrubber retrofitting.
    • In August 2020, the Government of India announced its plans to invest Rs 100 billion to build a trans-shipment port at the Great Nicobar Island in the Bay of Bengal to provide shippers an alternative port in the region. The Trans-shipment port will enable big ships to anchor and raise India’s share in maritime trade due to its proximity to the East-West international shipping route.
    • In September 2020, the Ministry of Shipping launched a dispute redressal portal, Society for Affordable Redressal of Disputes – Ports (SAROD-Ports). This portal will help develop the confidence in the private sector as ports shift to landlord models.
    • In October 2020, Adani Ports & SEZ completed the acquisition of the Krishnapatnam Port Company (KPCL) for an enterprise value of Rs 120 billion. This has resulted in Adani Ports having a controlling stake of 75% in KPCL. The acquisition will also accelerate Adani Ports stride towards a 500 MMT cargo capacity by 2025.
    • In line with the ‘Make in India’ policy of the Government of India, the Ministry of Shipping reviewed the ROFR (Right of First Refusal) licensing conditions for chartering vessels/ships through the tender process for all types of requirements. To promote the demand for ships built in India, priority for charter of vessels will be given to vessels built in India, flagged in India and owned by Indians as per amendments in the guidelines of ROFR.
    • In November 2020, JSW Infrastructure completed the acquisition of the Chettinad Group’s port business for Rs 10 bn. This acquisition will enable JSW Infrastructure to gain ownership and operational control of a deep draft international coal terminal and bulk terminal at Kamarajar Port as well as a coal and bulk commodity terminal at New Mangalore Port Trust (NMPT)

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    Prospects

    • The outbreak of coronavirus provides a good opportunity for the shipping sector in India as companies move away from China to other less-developed countries triggering a new wave of industrialization.
    • Consequently, the expansion of the manufacturing hub linked with global supply chains would increase demand for port industry on the front of cargo commodities like iron ore and fertilizers. Iron ore and finished fertilizers shipments have seen an increasing trend enabling major ports to tide over falling volumes in coal and other miscellaneous cargo.
    • Long term import of thermal coal might witness a decreasing trend, due to government focus on enhancing domestic production and availability of thermal coal blocks. Owing to lackluster volume growth in most of the commodities, major ports could manage to log meagre growth in overall cargo throughput.
    • At the domestic level, new business opportunities are being generated especially in natural gas sector and handling of container traffic. With increased vessel sizes, shipping liners prefer ports with deep draft, longer quays, high mechanization and ports infrastructure.
    • Improved rural connectivity, port modernization, reduction of logistics costs and reduction of turnaround time is expected to increase revenue for the shipping sector.
    • With rising demand for port infrastructure due to growing import (crude/coal) and containerization, public ports will fall short of meeting demand. This provides private ports an opportunity to serve the spill off demand from major ports and increase their capacity in line with new demand.
    • Dry docks can provide additional opportunities to the shipping sector as they are necessary to provide ship repair facilities. Out of all major ports, Kolkata has five dry docks whereas Mumbai and Vishakhapatnam have two. The rest have one or none at all. Given the positive outlook for cargo traffic and the resulting increase in number of vessels visiting ports, demand for ship repair services is expected to go up.
    • Operation and maintenance services such as pilotage, dredging, harbouring and provision of marine assessments such as barges and dredgers are expected to increase in the coming years. Increasing investment and cargo traffic point to a healthy outlook for port support services.
    • Special Economic Zones are being developed near several ports thereby providing strategic advantage to industries within these zones. Plants being set up include coal based power plants to take advantage of the imported coal, steel plans and edible oil refineries. Development of SEZs in Mundra, Krishnapatnam, Rewas and few others are underway.
    • Greenfield ports are being developed at shores with natural deep drafts and existing ports have invested in improving their draft depth. Higher draft depth is required to accommodate large sized vessels. Due to the cost and time associated with large sized vehicles, much of the traffic is shifting to large vessels from smaller ones, especially in coal transportation.
    • The Government of India is targeting to make the country the first in the world to operate all twelve major domestic Government ports on renewable energy. The government plans to install almost 200 Megawatt (MW) wind and solar power generation capacity which could be ramped up to 500 MW in the coming years.

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    FAQs on the Shipping Sector

    When is a good time to invest in the shipping sector?

    As the demand for the shipping sector is closely linked to the economy - global and domestic, shipping stocks are usually riskier - their fortunes are prone to economic booms and busts. For this reason, they are often called cyclical stocks. Generally considered an offensive tactic in investing, cyclical stocks can be used to generate high returns when the economy is doing well.

    Therefore, the best time to buy such stocks (shipping stocks) is at the start of an economic expansion and the best time to sell them is just before the economy begins to slow down.

    Where can I find a list of shipping stocks?

    The details of listed shipping companies can be found on the NSE and BSE website. However, the overload of financial information on these websites can be overwhelming.

    For a more direct and concise view of this information, you can check out our list of shipping stocks.

    Which shipping stocks were the top performers over the last 5 years?

    Cochin Shipyard and G.E Shipping were the top performers over the last 5 years in terms of sales and profit growth.

    Cochin Shipyard's growth can be attributed to its well established operations and long-standing track-record of four decades in the industry, Government of India (GoI) ownership and strong financial position.

    G.E Shipping has also performed well as India's largest private sector shipping service provider with an experienced management, a diversified fleet profile and healthy capital structure. However, the company's performance has been partially tempered by risks arising due to the expected economic slowdown in global markets and inherent cyclical nature of the shipping industry.

    To know which other companies performed well over the last 5 years, check out our entire list of top performers.

    What kind of dividend yields do shipping stocks offer?

    There is no consistent trend of dividends across the industry, with different companies having different dividend policies.

    For more details, check out our list of top shipping stocks offering high dividend yields.

    Which are the shipping stocks with the highest return on capital employed (RoCE)?

    Return on capital employed (ROCE) is a financial ratio that can be used in assessing a company's profitability and capital efficiency by determining how well the management is able to allocate capital for future growth. An RoCE of above 15% is considered decent for companies that are in an expansionary phase.

    Mazgaon Dock Shipbuilders and Cochin Shipyard are the top shipping stocks right now on the Return on Capital Employed (RoCE) parameter.

    To know which other shipping stocks offer great return on capital employed, you can check out the top shipping stocks offering the best RoCE here.

    Which are the best shipping stocks to invest in currently?

    Investing in stocks requires careful analysis of financial data to find out a company's true worth. However, an easier way to find out about a company's performance is to look at its financial ratios.

    Being an asset heavy and cyclical business, the commonly used financial ratio used in the valuation of shipping stocks is -

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