Shipping in India

INDIAN SHIPPING SECTOR – THE TIDE HAS NOT TURNED!

India Infoline Sector Studies

Research AnalystNishant Jadav

2685 0101 /Ext 210

India Infoline Limited24, Nirlon Complex, Off Western Express Highway,

Goregaon (E). Mumbai - 400 063.Tel : +91 022 2685 0505/0101; Fax +91 022 268505885

It's all about money, honey!


India Infoline Sector Studies 2

Sector coverage

In 2003 we saw the shipping stocks outperform the markets. India Infoline Shipping Index gavea return of 280% during the period April 1 2003 to December 31 2003, compared to 91.5% forBSE SENSEX for the corresponding period. The good news is that it’s not the end of high tideyet. We remain positive on the shipping sector as we expect a cyclical upswing for next 2 years.Freight rates for both dry and wet cargo are expected to remain firm. Capacity addition inshipping tonnage is taking place gradually but is not expected to outdo the demand growth fortonnage. Positive changes like tonnage tax introduction and increasing refining capacity in thecountry leading to increase in crude oil imports is adding to the upturn.

Stock RecommendationsCompany Recommendation ReasonGreat Eastern Shipping Company BUY One of the best picks in the industry, the

company is expanding fleet at a fast paceEssar Shipping Limited BUY A steady player focussed on logistics

solutions for marine transportShipping Corporation of IndiaLimited

BUY Being the largest in industry by tonnagecapacity, this company shows sign of growth

India Steamship Limited BUY Turnaround company with capacity additioninitiatives undertaken

Varun Shipping Limited BUY Stable earnings company with addition tofleet expected soon

Mercator Lines Limited BOOK PROFIT Rapid growth company with low quality fleet.Value already discounted in price



Summary

Spurt in dry bulk ratesDry bulk rates have seen an upswing during the last one year. This was led mostly by increasingdemand for steel, iron ore and coal from China and coal demand from Japan and Europe. On thesupply front, the tonnage capacity was inadequate to service this demand leading to increase indry bulk rates.

As many Indian companies deploy their vessels overseas to take advantage of higher rates, thedomestic rates also underwent an upward revision due to inadequate supply and increaseddemand at the domestic front.

The Baltic Dry Index that used to move within 500 to 2000 points is currently above 4000points. We believe that such high level of rates will sustain for another one year at theminimum. This is because there is no major capacity addition in dry bulk tonnage and thedemand for tonnage is strong. According to industry sources, the total addition to tonnage in drybulk fleet will be just 11% in FY04.

The demand from China for steel and iron ore is expected to persist for at least the next oneyear. There is no major addition in tonnage this year. Shipyards have limited productioncapacities. There will not be any significant addition in tonnage in the short run as shipbuildingtakes around 18-24months. Further, increase in prices of iron and steel has made shipbuildingexpensive. Dry bulk rates are thus expected to remain firm in the short term for about a year.

Fleet Details

32%

6%43%

18%1%

LPG CC PC BC OSV



Expected rise in Tanker ratesTanker rates are also expected to pick up steam for next six months. One key factor causing arate increase in the tanker segment was the winter demand for oil in US and EU. The impact ofwinter on oil demand generally varies with the severity of winter. This year with a severewinter, the tanker rates have remained firm.

Implementation of Tonnage TaxTonnage tax is a global practice of taxing shipping companies. It is calculated on a flat rate onthe Net Registered Tonnage (NRT) of the company after presuming a certain income on thesame. In India, shipping companies are taxed like any other company at the corporate tax rate of35%. After factoring the benefits available to shipping companies under section 33AC of theIncome Tax Act of India, the effective tax paid by Indian shipping companies is around 10-14%. This is still a high tax rate when compared to effective tonnage based tax of 1-2% paid bymost companies around the world.The government recently announced its intention to replace the existing corporate tax withtonnage tax taking the UK Tonnage Tax Act as the basis. It will bring taxes in line with globaltax levels without creating a need to change the tax structures and economic policies in othersectors.Tonnage tax will show a positive impact on net profits of the industry players as tax liabilitiesreduces. The net effect can however be quantified only after details of the policy are made clearby the government. Reduction in tax liability will leave additional funds in the hands ofcompanies for further expansion in the sector. International companies perceive tonnage taxmore convenient for operating in the country. This step is thus, expected to boost foreigninvestments in the sector. It will also boost the implementation of the Prime Minister’s SagarMela project worth Rs1000bn.Industry expects tonnage tax to be implemented effective from FY05 onwards with policyinitiative to be announced in the next Budget.

Attractive ValuationsMost shipping companies are trading at very low valuations. Our top pick in the sector is GreatEastern Shipping Company Limited. We had recommended a BUY on GE on November 272003. We MAINTAIN A BUY on the stock. Apart from GE, we have covered 5 othercompanies in this report. We recommend a BUY on Essar Shipping and SCI as they areattractively valued. We would however, recommend a SELL on Mercator Lines Limited as webelieve the company is aggregating low quality assets which will turn obsolete in the long term.

For the purpose of this study, we have covered the following companies

1. Shipping Corporation of India Limited2. Great Eastern Shipping Company Limited3. Essar Shipping Limited4. Varun Shipping Limited5. Mercator Lines Limited6. India Steamship Limited



Given below is the comparison of the above companies based on their Q2FY04 performance. Ithas been compared with Shipping Corporation of India Limited, the industry leader in terms oftotal tonnage.

Rs mn ShippingCorporation

Of India

GEShipping

EssarShipping

VarunShipping

MercatorLines

Limited

IndiaSteamship

Operating Income 7,185 2,659 1,311 678 532 169Expenditure (5,504) (1,601) (790) (452) (379) (125)Operating Profit 1,682 1,059 522 226 153 44Other Income 62 278* 14 1 4 31Interest (88) (104) (146) (40) (20) (13)Depreciation (690) (461) (166) (131) (35) (16)Profit before Tax 965 772 224 55 101 45Tax (165) (12) (13) (4) (17) (15)Profit after Tax 801 760 211 51 84 31Net Profit 801 801 211 51 84 31Equity Capital 2,823 1,903 3,017 725 55 475EPS (Rs) (not annualized) 2.8 4.2 0.7 0.7 15.3 0.7OPM (%) 23.4 39.8 39.8 33.4 28.8 25.8Tonnage ** (MN DWT) 4.6 2.1 1.4 0.23 0.47 0.15* including gain on sale of ships and other assets** as on respective dates mentioned in the report



The Shipping Industry

Shipping is a cyclical business and is affected by ship manufacturing activity around the world.When demand for tonnage increases, new ships are ordered to be made. Tariff rates increase bythe time ships are made, as it takes 18-24 months (subject to size and specifications) to buildships. As new ships start coming in, the rates reduce drastically due to the increased supply.

In India core sectors like iron ore, steel, coal, petroleum, chemicals, fertilizers etc rely on theshipping industry to transport majority of their raw materials and finished goods. India has acoastline of 7,516kms and majority of its trade with other countries is undertaken through watertransport. Performance of the economy bears a direct impact on the shipping business.

Shipping Tonnage

The Indian shipping tonnage increased from 0.19mnGRT in 1947 to 7.05mnGRT in 1999representing an annual growth rate of 7.2%. As on April 1 2003, the Indian Shipping tonnagestood at 6.18mnGRT. The average age of Indian fleet is 16.5 years - INSA.

Composition of Indian Fleet

Source: INSA

Concerns about quality of shipsIssues have been raised world over regarding quality standard of shipping fleet, after the“Prestige” oil spill. ‘Prestige’ was a single hull Aframax tanker carrying 70,000tons of heavy oilthat broke down in the Atlantic Ocean causing harm to environment and livelihood in thesurrounding area. EU has since then banned single hull tankers to pass through EU waters fromSeptember 2003 onwards. It has also ordered a phase-out of single hull tankers, to be replacedby double hull tankers by 2010. Governments and other organizations everywhere areemphasizing on phasing out of older and low quality fleet.

India too, does not have a very large composition of double hull tankers. Companies are in theprocess of replacing their existing single hull tankers with double hull tankers. Lack ofenforceable laws and low purchase costs of single hull tankers is however, luring Indian andother Asian companies to acquire these potentially harmful assets.

Composition of Indian Fleet (as on 1/4/03)

35%

33%15%

3%

14%

Bulk Carriers Crude Carriers Product TankersDry Cargo Ships Others



Classification of shipsOn the basis of the cargo carried, ships can be classified into liners and tramps. While linerscarry passengers and freight (containers), tramps carry dry bulk and wet bulk (tankers). Drybulk carriers are used to transport bulk goods such as grain, iron ore and coal. Tankers are usedto carry crude oil, petroleum products, chemicals, etc. Tankers can be further classified as oiltankers and product tankers.Offshore vessels are essentially tugs, supply vessels, and drill ships, etc, which transport menand materials to offshore oil installations.

Industry names for shipping vessels with approximate tonnage capacitiesCrude Oil Carriers CapacityPanamax 50,001-80,000 DWTAframax 80,001-120,000 DWTSuezmax 120,001-200,000 DWTVLCC (Very large cruse carrier) 200,001-350,000 DWTULCC (Ultra large crude carrier) 350,001 DWT and larger

Dry BulkHandy Size 10,000-30,000 DWTHandy Max 30,001-50,000 DWTPanamax 50,001-80,000 DWTCapesize 80,000 DWT and above

Product CarriersSmall 3,001-19,000 DWTHandy 19,001-25,000 DWTMedium Range 25,001-45,000 DWTLong Range One 45,001-70,000 DWTLong Range Two 70,001-100,000 DWT

Freight Passenger

Liner

Dry Bulk

Crude Carriers Product Tankers

Tankers

Tramps(carries fleet)

Shipping Fleet



Payment termsCompanies charge freight rates depending on the nature of usage of their ships i.e. whether theships are taken on time charter or voyage charter.

Time charterTime charter means that a ship is taken on hire for a particular time-period say one year. Undera time charter, the ship owner is responsible for running expenses of the ship such asconsumables, maintenance, insurance etc but the charterer has to pay for expenses such as portdues, canal tools, bunkers etc. Freight rates are determined in the beginning and remain constantthroughout the charter period. The advantage is that, one is sheltered from adverse swings in thefreight rates. The ship owner gains if freight rates fall and vice versa. The general practice ofshipping companies in India is to keep a significant portion of their fleet under time charter.

Voyage charterAs against time charter, voyage charter means that a ship is hired for a particular voyage sayfrom Mumbai to Singapore. Here, the ship owner has to incur running expenses as well asexpenses like port dues, fuel cost, canal charges etc. In this case, the freight rates are decidedseparately for each voyage depending upon the general level of freight rates. The shippingcompanies here are exposed to greater risks, as they affect the movement of freight ratesimmediately. There could be some opportunities to earn higher rates if a particular type of shipis not available or a particular region faces a shortage of ships. In case of an increasing freightrate scenario, the company that has majority of its ships on voyage charter will thus benefitmore and it will tend to loose incase of a decreasing freight rate scenario.



Factors affecting the performance of shipping companiesApart from freight rates, other cost items that impact the profitability of the industry are:

Dry-dockingDry-docking is one of the major expense items, which needs proper planning. As per industrynorms, every ship has to be dry-docked twice every five years. Moreover, the duration betweentwo dry-docks should not exceed three years. Dry-docking actually involves taking a ship out ofwater and undertaking repairs wherever necessary. A close inspection of the ship indicates thedamage occurred and need for repairs. Dry-docking is necessary to keep the ship in goodworking condition. However, dry-docking involves loss of working days for the ship resultingin loss of revenue apart from dry-dock expenses.Although dry-docking expenses depend upon the type of ships and extent of damage, undernormal conditions dry-docking of a Panamax would cost anything between Rs4-8mn. If the shipis a younger one, it should take 10 to 15 days of dry-docking. Again the number of days willdepend upon where the ship is being dry-docked. Normally, in Indian yards, the number of daystaken for dry-docking are more due to absence of modern facilities.

Bunker expensesAnother important cost for a shipping company is that of bunker or fuel which runs the ship.The current situation is quite favorable in this regard, as the fuel prices are quite low. However,when fuel prices are high they can significantly affect the margins of shipping companies.On an average, a Panamax consumes 25-30 ton of bunker per day. Bunker cost can be reducedby reducing the speed of the ship, thus reducing the consumption. However, this increases thetravel time for the ship and hence other costs. Hence a balance has to be struck between thebunker cost and other costs. Another way of reducing the bunker cost is to maintain the enginesin excellent condition by way of continuous overhauling. The latter also involves cost; hencestriking the balance is necessary.

Crew expensesIf a ship is compared with a factory then crew will be the factory workers and their salary wouldbe a major expense. In India, the government and the crew unions have certain norms regardingthe number of crew on a vessel. Foreign shipping companies follow international norms.

Profit or loss on sale of shipsFor acquisition of new ships or improving their cash flows or for getting rid of age old ships,shipping companies sell ships to realize profits or losses. Normally ships are sold dependingupon the company's expectations about future freight rates and ship prices. Profits from sale ofships account for a high proportion of profits to shipping companies.



Company Coverage:

1. Shipping Corporation of India Limited

2. Great Eastern Shipping Company Limited

3. Essar Shipping Limited

4. Varun Shipping Limited

5. Mercator Lines Limited

6. India Steamship Limited



The Great Eastern Shipping Corporation of India Limited

GE Shipping is among the top industry leaders in terms of total tonnage, sales and profitability.This year, the company has undergone vast capacity addition. The total tonnage of the companystood at 2.1mnDWT as on November 27 2003. The stock is available at a P/E of 9.2x FY04Eearnings. We had recommended at BUY on the stock at Rs.141.5 on November 27 2003. WeMAINTAIN BUY on the stock, as it is one of the best picks in the sector.

Investment Rationale

Spurt in dry bulk rates89% of the company’s dry bulk fleet is operating on spot contracts. This will enable thecompany to exploit the high dry bulk rates in the market. The company expects 100% capacityutilization in this segment on the back of high demand and firm rates. The revenue visibility ofthe dry bulk segment is expected by the company to be around Rs1552mn for the balance periodof FY04.

Expected rise in Tanker rates60% of the wet bulk fleet of GE Shipping is covered under time contract while the balance 40%remained uncovered which can take advantage of a spot rate increase.

Increased Refining ActivitiesAs domestic refining capacities in India increase, the requirement for ships to transport thecrude is also bound to increase. We believe the company is well poised to benefit from thisboom, as none of the other Indian shipping companies own a VLCC except GE Shipping.

Increasing Tonnage Capacity of the companyAt the start of FY04, GE Shipping had a total tonnage capacity of 1.32mndwt. Currently thetotal tonnage capacity of the company (including the delivery of 1 Aframax on November 152003) is 2.1mndwt (as on November 27, 2004). Thus it has added almost 64% more to its size inthe current year. This should be seen in light of the expected freight rate increase in the balancepart of the financial year.

Young FleetWith the delivery of newer vessels, the average fleet age of the company has reduced to around13.3 years (as on November 27, 2003). This will serve as an added advantage as younger fleetcan be employed more economically. At the same time, newer ships are scheduled to join thecompany’s fleet in the coming months.

Revenue from Off shore divisionA majority of GE Shipping’s revenues in the off shore division comes from the 2 drilling rigs ofthe company. Both the rigs are fully covered for H2FY04. The offshore support vessels, theconstruction barge and the harbor tugs are covered to the extent of 53%, 61% and 67% of theiroperating days respectively. For the balance period of FY 2003-04, the offshore division has arevenue visibility aggregating Rs1035mn.



Company ProfileThe Great Eastern Shipping Company Ltd. (G E Shipping) is India's largest private sectorshipping and offshore services provider. The shipping division with an owned fleet of 35 cargo-carrying vessels operates in the dry bulk, crude oil, products and gas markets. The offshoredivision has a fleet of 30 vessels comprising off shore support vessels, tugs, drilling rigs & abarge (as on November 27 2003). The shipping division and the offshore division have beenawarded ISO 9001, 2000 version. With over 5 decades of operations, the company is todaypoised to meet the needs of a growing international clientele thereby creating value. GEShipping is strongly positioned in India and has international presence through its offices andsubsidiaries in London, Singapore & the United Arab Emirates.

An integrated and systems driven approach, strict adherence to quality and safety norms andapprovals from international oil majors have enabled GE Shipping establish a global client basereaffirming the company's credibility and reliability.

Fleet details (till November 27 2003)The company is focused on the transportation of energy products. The company has twodivision, shipping and offshore. The current fleet of the company stands at 65 vessels- 35 shipsand 30 offshore units.

Out of the 35 ships, the company has 9 dry bulk vessels and 26 tankers. In dry bulk segment,the company has 1 Panamax vessel, 3 Handymax, 3 Handysize and 2 Minibulk carriers. Out ofthe 26 tankers, the company has 16 Product Tankers (2 Panamax tankers, 8 Medium Range and6 General Purpose), 9 Crude Oil Carriers (1 VLCC, 1 Seuzmax and 7 Aframax) and 1 GasCarrier. Out of a total tonnage capacity of 2.16mndwt in shipping division, dry bulk segmentconstitutes around 15% (0.32mndwt) while 85% (1.84mndwt) is in the tanker segment.The offshore division of GE Shipping caters to oil field services. It owns 30 units, which arechartered out to operators like ONGC, Cairn and Hardy Exploration. The 30 units comprise of11 Tugs, 1 Barge, 2 Drilling Units, 8 Anchor Handling Tug Supply Vessels, 3 Anchor HandlingTugs, 2 Offshore Supply Vessels, 1 Diving Supply Vessel and 2 Platform Supply Vessels.

PANAMAX1

HANDYMAX3

HANDYSIZE3

MINIBULK2

DRY BULK9

PANAMAX2

MEDIUM RANGE8

GENERAL PURPOSE6

PRODUCT16

VLCC1

SEUZMAX1

AFRAMAX7

CRUDE9

GAS CARRIER1

TANKERS26

SHIPPING35

11 TUGS 1 BARGE

2 DRILLING UNITS 8 AHTSVs

3 AHTs 2 OSV

1 DSV 2 PSV

OFFSHORE30

FLEET65



Focused play in shipping sectorGE Shipping had earlier entered into a variety of businesses including real estate, propertydevelopment, investment and commodities trading. However, it gradually reduced its interestsin those businesses in order to concentrate on its core competency – shipping.

ManagementThe company has recently restructured its management team and included younger people whoshall look after the day to day management of the company. Mr. Vijay Sheth and Mr. BharatSheth who currently manage the company have taken the positions of Mr. K.M.Sheth and Mr.Sudhir Mulji. The latter however, due to their vast experiences, continue to provide valuableguidance to their successors.

Organization Structure

Capital HistoryFrom To Paid-up Shares (No's) Face Value (Rs) Paid-up Capital (Rs

mn)1991 1992 85,578,445 10 8561992 1993 171,244,246 10 1,7121993 1994 208,372,260 10 2,0841994 1995 278,940,511 10 2,7891995 1996 287,541,001 10 2,8751996 1997 287,559,264 10 2,8761997 1998 287,562,054 10 2,8761998 1999 287,601,340 10 2,8761999 2000 258,841,206 10 2,5882000 2001 217,775,004 10 2,1782001 2002 95,000,000 10 9502001 2002 75,000,000 10 7502001 2002 202,563,786 10 2,0262002 2003 190,327,015 10 1,903

Executive Chairman Executive Deputy Chairman

Shipping Offshore

Secretarial & Legal Finance & Accounts HR & Admin IT Corporate Communications

Corporate Functions

Managing Directors

Board of Directors



Latest Financial Results (H1FY04)Period to 09/03 09/02 Growth 09/03 09/02 Growth

Rs mn (3) (3) % (6) (6) %Operating income (including gain on sale of ships and otherassets)

2752 2568 7.2 5697 4825 18.1

Expenditure (1601) (1442) 11.0 (3026) (2822) 7.2Operating profit 1152 1125 2.3 2671 2003 33.4Other income 186 48 287.3 281 104 170.2Interest (104) (107) (2.7) (208) (201) 3.5Depreciation (461) (436) 5.7 (876) (893) (2.0)PBT 772 630 22.6 1869 1013 84.6Tax (12) (62) (80.5) (142) (149) (4.9)PAT 760 568 33.9 1727 863 100.2Extraordinary items 41 (1) 100.0 36 1 100.0APAT 801.2 567.3 41.23 1764 864 104.1Equity 1903 1903 - 1903 1903 -EPS (Rs) Annualized 16.8 11.9 - 18.5 18.2 -OPM (%) 41.8 43.8 - 46.9 41.5 -

*OPM without including gain on sale of ships and other assets is 39.8% in Q2FY04.

Q2FY04• The company registered an increase in income from operations and sales (including gain on

sale of ships and other assets) of 7.2% to Rs2752mn in Q2FY04, as against Rs2568mn inQ2FY03. Other income increased by 287.3% to Rs186mn from Rs48mn for the sameperiod, due to dividend income and interest refund from Income Tax. The segmentalanalysis of the company revealed that, in Q2FY04, the shipping division contributed around67.78% to total revenues, offshore division contributed around 23% to total revenueswhereas others contributed around 9.22% to total revenues.

• The operating margin of the company stood at 41.8% in Q2FY04. It dipped by 200 basispoints from 43.8% in Q2FY03, mainly due to 36.6% increase in repairs and maintenanceexpenditure and other operating expenditure, which increased by 22.2% to Rs367.6mn inQ2FY04 from Rs300.7mn in Q2FY03.

• The net profit significantly increased by 41.2% to Rs801.2mn in Q2FY04 as againstRs567.3mn in Q2FY03.

H1FY04For the first H1FY04, the income from operations and sales of the company (including gain onsale of ships and other assets) stood at Rs5697mn, an increase of 18.1% when compared toRs4825mn in H1FY03. For H1FY04, the shipping division contributed around 68.1% to thetotal revenue and 60.7% to the PBIT, whereas the offshore division contributed around 24% tothe total revenue and 27.3% to the PBIT. The net profit rose by 104% and stood at Rs1763.5mn.



OutlookThe company is well placed in both its divisions, shipping as well as offshore activities. In ascenario of increasing freight rates and low capacity, the company is adding more ships to itsfleet. A good proportion of its tonnage, which is uncovered, can take advantage of rising spotrates. Positive changes in the industry like the probable implementation of tonnage tax willimprove revenues further. The company has a well-diversified fleet of offshore vessels. Most ofthem are already deployed for a majority of the year. The stock is available at a P/E of 9.2xFY04E earnings.

Financial Projection HighlightsYear to (Rs mn) 03/01 03/02 03/03 03/04EOperating Income 11,395 11,861 10,027 12,842% yoy 16 4 (15) 28Net profit 1,774 2,075 2,165 3,346% yoy 61 17 4 55EPS 6 10 11 18% yoy 33 81 11 55Equity 3,128 2,026 1,903 1,903Capital employed 20,124 22,875 23,978 27,536PBIDT/Income (%) 40 41 43 46RONW (%) 15 17 17 23Debt-Equity (x) 1 0.7 0.8 0.8Book NAV (Rs) 38 62 66 77

Projected Income StatementYear to (Rs mn) 03/01 03/02 03/03 03/04ETotal income 11,550 11,964 10,156 12,971Cost of sales (6,811) (6,916) (5,629) (6,927)PBIDT 4,740 5,048 4,527 6,045Interest (717) (503) (390) (455)PBDT 4,022 4,545 4,137 5,590Depreciation (2,008) (2,017) (1,680) (1,787)Profit before tax 2,014 2,528 2,458 3,803Provision for tax (240) (453) (292) (456)Profit after tax 1,774 2,075 2,165 3,346Extra ordinary /P.Y.A. (9) (103) 108 0Adjusted PAT 1,765 1,972 2,273 3,346Dividend payout (665) (771) (859) (1,264)



Projected Balance SheetYear to (Rs mn) 03/01 03/02 03/03 03/04EEquity capital 3,128 2,026 1,903 1,903Preference - 1,700 750 750Share premium 2,079 1,858 1,580 1,580Ship acquisition reserve 263 83 28 28Profit & loss/general reserve 3,027 2,749 3,322 5,404Other reserves 3,363 4,113 4,913 4,913Net worth 11,860 12,529 12,496 14,578Secured loans 6,935 7,949 8,855 10,331Unsecured loans 1,329 1,391 1,353 1,353Total debt 8,264 9,339 10,209 11,684Deferred tax liability - 1,007 1,274 1,274Capital employed 20,124 22,875 23,978 27,536

Gross Block 25,678 28,497 29,228 35,528Accumulated depreciation (10,443) (11,690) (12,502) (14,289)Net block 15,235 16,808 16,726 21,239Capital WIP 919 1,295 1,500 1,875Total fixed assets 16,154 18,103 18,226 23,115Investments 624 1,086 1,949 2,437Inventories 1,094 603 537 671Sundry debtors 853 746 875 1,094Cash & bank 2,183 3,821 3,869 2,564Loans & advances 1,527 480 491 464Other current assets 18 100 108 108Sundry creditors (1,158) (768) (850) (1,063)Other liabilities (678) (658) (469) (586)Provision for tax (25) (20) (32) (32)Provision for dividend (660) (762) (859) (1,264)Provision for leave encashment (20) (20) (25) (25)Incomplete voyages 6 (2) 49 0Working capital 3,141 3,521 3,694 3,694Miscellaneous expenses 205 166 109 55Capital deployed 20,124 22,875 23,978 27,536



Essar Shipping Limited (ESL)

Positive factors like corporate image restructuring, possible addition to tonnage, better assetutilization spell good times ahead for Essar Shipping. We recommend a BUY as the stock as itis available at an attractive P/E of 10x based on FY04E earnings.

Transformation from ‘transporter’ to ‘solutions provider’The company is changing its focus from being a transporter to a solutions provider in the seatransportation industry. ESL wants to control the full supply chain logistics of crude oiltransportation. The company believes that it is very important to provide clients optimizationsolutions in sea transportation in order to reduce their transportation costs. ESL calls thisconcept “rig to refinery and beyond”. It provides clients transportation facilities starting fromthe rig where the oil is generated to the refinery and transportation of the final product. Thisprocess includes large ships for sea travel, small ships doing lighterage operations, storagefacilities, etc. ESL manages to achieve this with optimum transportation cost and minimuminventory cost. ESL does not do just Port A to Port B shipping rather it covers the entire valuechain of sea transport. In their services, they study the oil refinery, its planned output, thecountry from where the crude will be imported, the most cost effective method of transportingthe crude oil, etc.

Increased refineries in the countryThe growth of ESL is expected to come from this segment going ahead. As more petroleumrefineries are being set up in India, it will lead to more import of crude oil and export of endproducts. The company plans to serve the value chain of oil exploration, production and export.The company also expects to provide profitable integrated coastal services to address non-pipeline transport requirements.

Double hull tankers as a plus pointThe company’s fleet of 6 double hull tankers should be seen as an added advantage consideringthe stringent EU norms and the growing awareness for quality fleet.

Reduced interest costThe company has plans to refinance US$30mn of its debt in order to take advantage of reducedinterest rates. This move will reduce the debt-financing burden of the company by almostUS$3mn. The benefits of this move are likely to be materialized partly in the coming monthsthis year and fully from FY05 onwards.



Company BackgroundEssar Shipping Limited (ESL) is one of the world's leading integrated sea logistics companieswith an asset capitalization of US$1bn. ESL operates in two main segments, energytransportation (Energy Transportation Group) and coastal transportation (Integrated CoastalTransportation Group).

The Energy Transportation Group provides sea transportation management services to theglobal energy industry. While the Integrated Coastal Transport Group provides supply chainmanagement services for the sea transportation of bulk cargo and refined products.

ESL provides crude oil transportation and sea transportation management services to US,European and Indian oil majors. ESL has over 20 years of oil handling experience. Over the last10 years the company’s fleet has handled 900 million barrels of crude oil over 3.6m nauticalmiles. ESL's fleet handles a daily average of six billion barrels of crude, 475,000 barrels ofpetroleum products and 430,000 tons of dry cargo. ESL also provides sea transportation andsupply chain management services for the steel, power, cement and fertilizer companies inSoutheast Asia and India. Currently ESL is focused on getting a high geographical market sharein terms of energy transportation.

Fleet DetailsThe company has a diversified fleet of ships. It has a presence in bulk carriers, product carriersas well as crude carriers. Its fleet of 6 Suezmax tankers is one of the largest in the world. Thetotal fleet consists of 32ships with a capacity of 1.4mn DWT comprising 14% of Indianshipping fleet. The average age of the fleet is 14 years, as compared to world average of 19years. ESL uses a combination of time charter and voyage charters (spot) in its contracts. Thecompany is currently working with 94% asset utilization.



Segment Type Units Capacity (DWT)Capesize 2 251,753Bulk carrierHandy max/size 4 145,153

Mini bulk carriers - 11 24,200Crude oil carriers Suezmax 6 919,080

Handy 2 39,206Product carriersSmall 1 6,618

Tugs - 4 1,600Dumb Barges - 2 2,000Total 32 1,389,610

Corporate StructureESL has 3 subsidiaries under it. Essar International Limited is ESL’s 100% owned subsidiarytaking care of international operations. It focuses on providing services to international clientslike Exxon Mobil, Chevron Texaco, etc. Vadinar Oil Terminal Limited is another 100%subsidiary of ESL that takes care of the company’s terminal business. ESL also holds 97% inEssar Sisco Ship Management Company (ESSMC). ESSMC is a shell company holdinginvestments in non-shipping business like investments in Essar Steel Limited and Essar OilLimited. ESL has separated the 3 companies in order to enable the investors to differentiate therevenues generated and the risk faced by each business.

Capital HistoryFrom To Paid-up Shares (No's) Reason Face Value (Rs) Paid-up Capital (Rs mn)

1984 1985 19672430 10 196.721985 1986 24672430 10 246.721986 1987 24672430 Convertible debentures 10 246.721987 1988 34873980 10 348.741988 1989 46142930 10 461.431989 1990 46394030 10 463.941990 1991 46415030 10 464.151991 1992 50372380 10 503.721992 1993 50381380 10 503.811993 1994 96729459 Rights issue 10 967.291994 1995 148709175 Convertible debentures 10 1,487.091995 1996 148721375 10 1,487.211996 1997 196865855 Amalgamation with SISCL 10 1,968.661997 2001 196865855 10 1,968.662001 2003 301865855 10 3,018.66

Classification by tonnage (DWT)

28.6%

1.7%

66.1%

3.3%

0.1%

0.1%

Bulk carrierMini bulk carriersCrude oil carriersProduct carriersTugsDumb Barges



Latest Financial ResultsPeriod to 09/03 09/02 Growth 09/03 09/02 Growth

Rs mn (3) (3) % (6) (6) %Sales 1311 1053 25 2709 2081 30Expenditure (790) (743) 6 (1601) (1393) 15Operating profit 522 311 31 1109 688 45Other income 14 14 (2) 17 28 (38)Interest (146) (99) 48 (268) (283) (5)Depreciation (166) (157) 6 (338) (332) 2PBT 224 69 82 521 102 3Tax (13) 2 724 (7) 3 384PAT 211 71 196 514 104 393Extraordinary items 0 0 - 0 0 -APAT 211 71 196 514 104 393OPM (%) 39.8 29.5 10.3 40.9 33.1 7.86Equity 3017 3017 - 3017 3017 -EPS (Rs) 2.8 0.9 - 3.4 0.7 -

The company reported a 24.5% growth in topline to Rs1.3bn in Q2FY04.The operating marginsof the company have improved by more than 1000 basis points to 39.8% in Q2FY04. This ismainly because of reduction in fleet operating expenditure to 42.8% (as a percentage of sales) inQ2FY04 as compared to 50% in the same quarter last year. Growth in income from operationsand increase in operating margins is reflected in a rise of 196.3% in net profits to Rs211mn inQ2FY04 from Rs71.2mn in Q2FY03. This translates into an annualized EPS of Rs2.80.

In H1FY04 the company has posted 30.2% rise in net sales to Rs2.7bn and 392.6% rise in netprofit to Rs513.8mn. The EPS for H1FY04 stands at Rs3.40. The company has managed toconstantly de-leverage itself in the previous five years. The D/E ratio of the company hasreduced from 1.55 in FY00 to 0.46 in Q2FY04.

OutlookPositive factors like corporate image restructuring, possible addition to tonnage, better assetutilization spell good times ahead for Essar Shipping. We recommend a BUY as the stock as itis available at an attractive P/E of 10x based on FY04E earnings.



Projected Financial HighlightsYear to (Rs mn) 03/02 03/03 03/04EOperating Income 4,802 4,797 5,277% yoy (0.1) 10.0Net profit 1,723 633.0 979% yoy (63.3) 54.6EPS 5.7 2.1 3.2% yoy (63.3) 54.6Equity 3,017 3,017 3,017Capital employed 16,047 16,195 16,723PBIDT/Income (%) 39.7 38.2 41.4RONW (%) 17.4 6.0 8.5Debt-Equity (x) 0.6 0.5 0.5Book NAV (Rs) 32.9 34.9 38.1

Projected Income StatementYear to (Rs mn) 03/02 03/03 03/04EFreight, charter hire 4802 4797 5277Income from Operations 4802 4797 5277Other income 112 106 109Profit/(loss) on sale of ships 49 58 116Total income 4962 4961 5502

Wages of floating staff (542) (559) (586)Repairs & maintenance - fleet (504) (192) (206)Other operating expenses (1593) (1896) (2322)Other expenses (239) (312) (350)Cost of sales (2878) (2959) (3114)PBIDT 2084 2003 2389Interest (566) (716) (625)PBDT 1518 1287 1763Depreciation (735) (669) (676)Profit before Tax 784 618 1087Provision for tax 939 15 (109)Profit after tax 1723 633 979Adjusted PAT 1723 633 979



Projected Balance SheetYear to (Rs mn) 03/02 03/03 03/04EEquity capital 3,017 3,017 3,017Preference Share Capital 0 0 0Profit & loss/general reserve 1,642 1,380 2,359Other reserves 5,267 6,130 6,130Net worth 9,926 10,528 11,506Secured loans 6,121 5,667 5,217Unsecured loans 0 0 0Total debt 6,121 5,667 5,217Capital employed 16,047 16,195 16,723

Gross Block 14,300 13,876 14,426Accumulated depreciation (5,348) (5,329) (6,005)Net block 8,952 8,547 8,421Capital WIP 476 0 0Total fixed assets 9,428 8,547 8,421Unauthorized lease/bare boat rentals 133 0 0Investments 2,591 3,358 3,358Advance against allotment of shares from Vadinar Oil Terminal Limited, Subsidiary 2,694 2,838 2,838Sundry debtors 1,314 1,023 1,425Cash & bank 98 56 114Loans & advances 1,083 1,293 1,544Other current assets 51 99 117Sundry creditors (922) (661) (633)Other liabilities (269) (236) (236)Provision for leave encashment (2) (2) (2)Other Provisions (17) (22) (15)Working capital 1,337 1,550 2,313Deferred Tax Liability (136) (98) (207)Capital deployed 16,047 16,195 16,723



Shipping Corporation of India

SCI is the largest Indian shipping company controlling over 40% of shipping tonnage. Thecompany plans to take advantage of the industry upswing with aggressive growth plansirrespective of its divestment status. The stock is available at a P/E of 17.4 times FY04Eearnings of Rs11 per share. We believe the company is a good investment bet given its size andgrowth potential.

Investment Rationale

DivestmentAs per our expectation, divestment of 51% stake of Government of India holding in SCI willtake some time as government keeps busy with ONGC and GAIL divestment. We believe thatthe stock may be driven more by divestment triggers than fundamentals. With the divestmentscenario improving in the country, it makes financial sense to hold on to the stock.

Increase in fleet underwaySCI had consciously slow paced its capital acquisition programme in the past in light of thedivestment initiatives of the government. In its tenth 5-year plan the company had planned acapital expenditure of US$1.2bn (approximately Rs58bn). The company had not kept pace withthis target. The total investment in H1FY04 was around US$227mn (US$130mn for acquiring 2VLCCs and US$97mn for 2 Suezmax tankers).

It is expected that some of the restrictions, related to capital acquisition projects, imposed onSCI by the government will be relaxed soon. SCI is now looking forward to expanding its fleetat a rapid pace. The company is expecting delivery of the 2 Suezmax tankers (named m.t. DeshShakti and m.t. Desh Shanti) in February 2004 and May 2004 respectively. The tankers havebeen ordered with M/s. Daewoo Shipbuilding and Marine Engineering Company Limited, SouthKorea respectively.

Diversified FleetSCI, due to its sheer size, has a presence across all segments of the shipping business. Withincreasing demand of marine trade, the company has over the years, diversified into a largenumber of areas, and is today the only Indian shipping company operating Break-Bulk service,International Container service, Passenger service, Liquid/Dry Bulk transportation service etc.Presence across a large number of segments helps the company attain stability and avoidvolatility in earnings due to poor performance of a particular segment.

Proactive boardSCI’s board is making efforts to be more proactive and flexible like other private sectorshipping companies. It is planning to induct young professionals in the senior management as itsofficers reach super annuation. This move will help the public Sector Company to take less timeto decide on issues involving huge capital outlay.



Company BackgroundThe Shipping Corporation of India was established by the amalgamation of Eastern ShippingCorporation and Western Shipping Corporation on 2nd October 1961. The companycommenced operations as a marginal Liner shipping company with just 19 vessels. Today, afterover four decades SCI has grown into a giant conglomerate having substantial interests in 12different segments of the shipping trade. SCI has a significant presence on the global maritimemap and is India’s largest shipping line that owns and operates about 40% of the Indian tonnageand has a presence in practically all areas of shipping business servicing both national andinternational trades.

Fleet details*Segment Units MN DWTCrude Oil Tankers 31 2.90Product Tankers 11 0.42Chemical Tankers 3 0.10Gas Carriers 2 0.04Tankers 47 3.46Bulk Carriers 23 0.97Liner Ships 6 0.14Offshore Supply Vessels 10 0.02Passenger-cum-cargo Vessels 2 0.01Total 88 4.6*As on October 1 2003

Vessels on orderOwn Vessels Number DWT ShipyardCrude oil tanker 2 146,860 Daewoo Shipbuilding and Marine Engineering Co. Ltd.Crude oil tanker 2 300,000 Hyundai Heavy Industries Co. Ltd.LNG(in joint venture with JapaneseLines)

2 80,000 Daewoo Shipbuilding and Marine Engineering Co. Ltd.



Organization structure

SCI is organized into 3 operating divisions (I above) supported by 2 service divisions (II & IIIabove). Each division headed at the corporate level by a full time Director forming a CorporateGroup. The Corporate Group works under the overall direction and control of the Chairman andthe Managing Director. The SCI board is headed by the Chairman and Managing Director, 5 fulltime directors of respective divisions and 7 part time directors (2 official and 5 non-official)nominated by Government of India.

Information Systems Plan & Conference

Liner & Passenger services Bulk Carriers & Tankers

Technical & Offshore Services

I

ISM Cell Purchase & Services

Public Relations Board Sectt

II

Finance Personnel Admin

III

Vigilance

IV

CM and MD

Board of Directors



OutlookThe stock is available at a P/E of 17.4 times FY04E earnings of Rs11 per share. The companyplans to take advantage of the industry upswing with aggressive growth plans irrespective of itsdivestment status. We believe the company is a good investment bet given its size and growthpotential.

Latest Financial Results (Q2FY04)Period to 09/03 09/02 Growth 09/03 09/02 Growth

Rs mn (3) (3) % (6) (6) %Net sales 7,185 5,966 20.4 14,990 11,198 33.9Expenditure (5,504) (5,229) 5.3 (10,895) (9,831) 10.8Operating profit 1,682 737 128.2 4,095 1,367 199.5Other income 62 57 9.9 107 129 (16.9)Interest (88) (154) 42.7 (138) (279) (50.4)Depreciation (690) (647) 6.8 (1,358) (1,251) 8.5PBT 965 (7) 13506.9 2,705 (33) (8175.5)Tax (165) (47) 250.4 (402) (80) 402.8PAT 801 (54) 1577.1 2,303 (114) (2129.2)Extraordinary items 0 824 0 824APAT 801 770 4.0 2,303 711 224.1OPM (%) 23.4 12.3 27.3 12.2Equity 2,823 2,823 2,823 2,823EPS (Rs) 11.3 10.9 16.3 5.0

SCI reported a 20% increase in sales to Rs7.18bn in Q2FY04 from Rs5.97bn in Q2FY03. Otherincome for the quarter increased by 9.9% to Rs62.4mn from Rs56.8mn. The operating profitmargin increased to 23.4% in Q2FY04 as against 12.3% in Q2FY03. The total expenditureincreased by 5.3% to Rs5.5bn from Rs5.2bn in Q2FY03. Operating profit for Q2FY04 increasedby 128% to Rs1.68bn from Rs0.73bn in Q2FY03. The company reported net profit of Rs801mnin Q2FY04, up by 4% from Rs770mn in Q2FY03.

For H1FY04 the total sales were Rs14.99bn, 33.9% higher than that in H1FY04. The net profitof the company stood at Rs2.3bn, which translates into a half-yearly annualized EPS of 16.3.The Company declared a special interim dividend of 170% (Rs17 per share) out of GeneralReserve on October 03, 2003.



Financial HighlightsYear to (Rs mn) 03/99 03/00 03/01 03/02 03/03 03/04EOperating Income 25,208 25,428 29,948 27,847 23,765 29,443% yoy 0.9 17.8 (7.0) (14.7) 23.9Net profit 2,013 1,616 3,826 2,416 2,748 2,988% yoy (19.7) 136.7 (36.9) 13.8 8.7EPS 7 6 14 9 10 11% yoy (19.7) 136.7 (36.9) 13.8 8.7Equity 2,823 2,823 2,823 2,823 2,823 2,823Capital employed 36,001 33,913 34,832 33,916 36,639 43,000PBIDT/Income (%) 22.4 20.3 27.8 21.8 18.1 22.3RONW (%) 11.1 8.4 17.3 11.3 11.9 11.9Debt-Equity (x) 0.9 0.8 0.6 0.5 0.5 0.6Book NAV (Rs) 64.2 68.0 78.2 75.6 81.9 89.3

Projected Profit & Loss AccountYear to (Rs mn) 03/99 03/00 03/01 03/02 03/03 03/04ETotal income 25,823 26,080 31,322 28,959 24,434 30,194Cost of sales (19,780) (20,649) (22,481) (22,316) (19,862) (23,249)PBIDT 6,043 5,431 8,841 6,644 4,573 6,945Interest (1,004) (724) (657) (226) (138) (276)PBDT 5,039 4,707 8,184 6,418 4,435 6,669Depreciation (2,589) (2,748) (2,736) (2,652) (2,578) (2,877)Profit before PYA 2,450 1,959 5,448 3,766 1,857 3,792PYA 34 68 98 (76) 31 0Profit before Tax 2,484 2,026 5,546 3,690 1,888 3,792Provision for tax (470) (410) (1,720) (1,274) 860 (804)Profit after tax 2,013 1,616 3,826 2,416 2,748 2,988Adjusted PAT 2,013 1,616 3,826 2,416 2,748 2,988Dividend payout (470) (551) (228) (988) (847) (896)



Projected Balance SheetYear to (Rs m) 03/99 03/00 03/01 03/02 03/03 03/04EEquity capital 2,823 2,823 2,823 2,823 2,823 2,823Profit & loss/general reserve 11,794 11,852 11,826 13,839 13,417 15,508Other reserves 3,504 4,508 7,422 4,682 6,879 6,879Net worth 18,121 19,183 22,071 21,344 23,119 25,210Secured loans 16,152 14,422 12,563 10,316 11,121 15,121Unsecured loans 420 308 197 69 70 169Total debt 16,572 14,730 12,761 10,385 11,191 15,290Deferred Payment Credits 1,309 0 0 2,187 2,330 2,500Capital employed 36,001 33,913 34,832 33,916 36,639 43,000

Gross Block 50,983 53,031 52,542 51,421 52,432 62,647Accumulated depreciation (22,231) (24,776) (25,591) (26,794) (28,714) (33,829)Net block 28,752 28,254 26,951 24,626 23,718 28,818Capital WIP 2,519 895 3,037 4,323 6,814 7,100Total fixed assets 31,271 29,150 29,989 28,950 30,532 35,918Investments 4 93 219 510 5 5Ships retired from operation 98 0 0 49 0 0Inventories 277 403 301 315 502 550Sundry debtors 7,179 7,673 5,253 3,128 1,930 2,566Cash & bank 2,382 1,192 2,873 4,024 3,564 4,218Deposit with public financial institutions 650 1,071 2,300 1,100 1,050 1,050Loans & advances 3,488 3,991 4,993 6,099 4,246 4,825Other current assets 507 651 664 1,568 3,325 3,867Sundry creditors (6,238) (6,228) (5,793) (6,099) (6,001) (6,975)Other liabilities (1,406) (1,666) (1,476) (1,557) (1,164) (1,140)Provision for tax (1,420) (1,430) (2,644) (3,060) (1,510) (1,926)Provision for dividend (470) (551) (228) 0 0 0Provision for leave encashment (46) (50) (53) (59) (65) (68)Other provisions (382) (339) (1,347) (1,440) (264) (320)Incomplete voyages (368) (373) (415) 0 0 0Working capital 4,151 4,342 4,428 4,020 5,613 6,648Miscellaneous expenses 477 328 196 388 490 430Capital deployed 36,001 33,913 34,832 33,916 36,639 43,000



Varun Shipping Limited (VSL)

VSL has a stable revenue stream with modest growth in top line. Majority of its fleet is on longterm contracts. Significant growth in earnings is can be expected if company undertakescapacity addition. The stock is trading at a P/E of 7.8 times FY04E EPS of Rs4.1

Strong hold in LPG carrier marketVSL is a market leader in terms of tonnage in LPG carriers transporting 61% of total LPGimports of India. There are only 2 players in India having LPG carriers excluding VSL – SCIand GE Shipping. LPG carriers are technologically superior and it takes a high degree of skill tomanage them. The availability of good LPG carriers in the world is limited. There are not manyoperators in this segment. The crew required for maintaining a LPG carrier has to be skilled andexperienced. These factors serve as entry barriers for most other companies while the companyis well placed with 4 LPG carriers. The company’s LPG carrier in the international marketcommands great credibility due to its efficient management. It has been in use for almost 100%of the days till date.

Vessels deployed on long term contractsMost of the company’s vessels are deployed on long term contracts. This strategy ensuressteady revenue stream for the company and reduces the risk of sudden movement in bulk rates.This however means that the company is not in a position to take advantage of the increasedfreights rates in the recent past.

Most vessels are medium size vesselsMost of the company’s vessels are medium sized. The company has 3 medium range productcarriers between 30,000-37,000DWT, 1 Handymax vessel in the bulk carrier category and 2small chemical carriers. The advantage of medium to small sized vessels is that they arerelatively less susceptible to rate fluctuations. This is one of the reasons why the company hasbeen able to perform satisfactorily even in worst times of the industry cycle.

Addition to fleet underwayVSL is planning to add 2 more vessels to its fleet. We expect the additions to be in the crudecarrier segment and the dry bulk segment. The reasons for this assumption are as follows: The company has a strong hold in the LPG market and thus should look at developing

presence in other areas of business The demand for crude carrier tonnage is on the rise due to increasing refining activity in the

country The demand for dry bulk tonnage is also rising due to low capacity additions and increased

transport of dry cargo.



Company BackgroundVSL is one of the leading private sector companies in India owning and operating 12 vessels infour sectors viz. the LPG, petroleum products/easy chemicals, dry bulk and offshore sector.VSL was the first Indian company to commercially operate LPG carriers in India and as on dateowns 61 per cent of the total Indian LPG tonnage including the largest LPG carrier in India.Varun set up a subsidiary, viz. VSC International Pte Ltd in Singapore in 1995 which presentlyowns two offshore supply vessels.

Fleet DetailsThe company has a diversified mix of shipping vessels. The company earlier had two bulkcarriers out of which it sold one last year.

Segment Units CapacityLPG carriers* (LPG) 4 74520Chemical carrier (CC) 2 14648Product carrier (PC) 3 97241Handymax bulk carriers (BC) 1 42628Offshore supply vessels (OSV) 2 2172Total 12 231209* does not include dwt of LPG/C Maharshi Dattatreya

Capital HistoryFrom To Paid-up Equity Shares (No's) Reason Face Value (Rs) Paid-up Capital (RS mn)

1980 1981 24000 100 2.41984 1985 48000 100 4.81985 1986 3350000 10 33.51986 1987 3350000 10 33.51987 1989 8871811 Public issue 10 88.721989 1990 8871811 10 88.721991 1992 11926640 5 59.631991 1992 9975561 10 99.761992 1993 34932591 Conversion of debentures 10 349.331993 1997 36261591 10 362.621997 1999 35655186 10 356.551999 2002 36261591 10 362.62

Fleet Details

32%

6%43%

18% 1%

LPG CC PC BC OSV



Latest Financial Results (Q2FY04)Period to 09/03 09/02 Growth 09/03 09/02 Growth

Rs mn (3) (3) % (6) (6) %Net sales 678 534 27 1,356 997Expenditure (452) (361) 25 (918) (652) 41Operating profit 226 173 31 438 344 27Other income 1 4 (82) 12 14 (16)Interest (40) (43) (6) (87) (90) (3)Depreciation (131) (123) 7 (274) (246) 11PBT 55 11 390 89 22 297Tax (4) (1) 378 (7) (2) 288PAT 51 10 391 82 21 298Extraordinary items 0 0 0 0APAT 51 10 391 82 21 298OPM (%) 33 32 32 35Equity 725 725 725 725EPS (Rs) 2.8 0.6 2.3 0.6

The company recorded an increase in sales by 27% to Rs678mn in Q2FY04 as compared toRs534mn in the corresponding period in the previous year. Profit after tax for Q2FY04 was upby 391 per cent to Rs.51.08mn as compared to Rs.10.40mn for the corresponding quarter in theprevious year.

OutlookThe company's turnover for the year ended 31st March 2003 was Rs.2302.57mn and its netprofit was Rs.113.83 million. VSL has a stable revenue stream with stable growth rate in topline. Majority of its fleet is on long term contracts. Significant growth in earnings is expected ifcompany undertakes capacity addition. In our projections we have assumed that to takeadvantage of the upswing in the industry, the company will add a vessel to its tonnage beforeend of FY04. The stock is trading at a P/E of 7.8 times FY04E EPS of Rs4.1



Projected Financial HighlightsYear to (Rs mn) 03/02 03/03 03/04EOperating Income 2,128 2,303 2,648% yoy 0.6 8.2 15.0Net profit 138 114 297% yoy (14.6) (17.8) 160.9EPS 3.8 1.6 4.1% yoy (14.6) (58.9) 161.1Equity 363 724 724Capital employed 4,491 4,965 5,293PBIDT/Income (%) 38.5 34.7 38.0RONW (%) 8.6 5.8 14.0Debt-Equity (x) 1.6 1.4 1.4Book NAV (Rs) 44.4 27.3 29.4

Projected Income StatementYear to (Rs mn) 03/02 03/03 03/04EIncome from Operations 2,128 2,303 2,648Other income 9 15 15Profit on Sale of Ships 0 50 50Total income 2,137 2,367 2,713

Wages of floating staff (234) (235) (265)Repairs & maintenance - fleet (277) (315) (344)Other operating expenses (617) (831) (909)Other expenses (177) (149) (150)Cost of sales (1,306) (1,530) (1,668)PBIDT 831 837 1,045Interest (238) (195) (174)PBDT 592 643 871Depreciation (441) (519) (548)Profit before Tax 152 124 323Provision for tax (13) (10) (26)Profit after tax 138 114 297Adjusted PAT 138 114 297Dividend payout (44) (98) (109)



Projected Balance SheetYear to (Rs mn) 03/02 03/03 03/04EEquity capital 363 725 724Preference Share Capital 120 120 80Profit & loss/general reserve 473 441 629Other reserves 655 692 692Net worth 1,611 1,978 2,126Secured loans 2,129 2,624 2,874Unsecured loans 484 118 188Total debt 2,612 2,742 3,062Finance Lease Obligations 147 125 106Capital employed 4,371 4,845 5,293

Gross Block 6,510 7,642 8,042Accumulated depreciation (2,823) (3,284) (3,458)Net block 3,687 4,359 4,584Total fixed assets 3,687 4,359 4,584Investments 209 208 208Sundry debtors 235 307 331Cash & bank 239 141 101Loans & advances 480 337 480Other current assets 17 33 40Sundry creditors (275) (281) (310)Other liabilities (33) (16) (7)Provision for dividend (44) (98) (109)Other Provisions (25) (24) (25)Working capital 594 399 502Capital deployed 4,491 4,965 5,293



Mercator Lines Limited

Strong order book position

Company bagged MRPL contract worth Rs1bn for 8 monthsThe company bagged a contact from Mangalore Refineries and Petrochemicals (MRPL) fortransporting crude oil from the Gulf coast to Mangalore. The contract is for a period of 8months from August 2003 to March 2004 and involves importing 4.2million tons of crude oilwithin that period. The company agreed to take the contract at a rate of about 5$ per tonne forcarrying 4-6 parcels per month.

Company bagged IOC contract worth Rs600mn for one yearAfter the MRPL contract, the company bagged another contract from the Indian Oil Corporation(IOC) for the coastal movement of crude imported by the latter. The contact, which is for aperiod of 1year starting from October 2003, has 2 provisions for extension for another sixmonths. The company has offered a time charter rate of UD$17,500/day for the contract.

Increasing FleetThe company has taken advantage of the limited availability of Aframax tankers for the Indianoil industry. In this financial year itself, the company acquired 4 Aframax tankers with a totalinvestment of Rs1.5bn, increasing its tonnage capacity 4 times to 470,948DWT.

Focused playerThe company works the concept of return on investment for its growth plans. The company hasalways utilized its resources in exploring the most profitable sector of the shipping industry. It isfor this very reason the company has shifted its attention from transportation of bulk cargo onthe coast to transportation of liquid cargo in the port area. This policy of the company has paiddividends, which is apparent from the performance of the company. The company also windedup its trading business contributing 2% of revenues as it was a non-core activity and profitmargins in that segment were very low.

Most ships on long tern contractsMost of the company’s tankers are on long term contracts. Out of the 9 tankers that thecompany current owns, 4 tankers are on a long-term charter with IOC and 3 on a long-termcharter outside the country. The latest 1986 build Aframax (the ninth tanker) scheduled to jointhe company very soon will also be fixed up on a long-term charter.



Wet Bulk Dry Bulk

Lighterage Shipping

Business Divisions

Issues of Concern

Single hull shipsMost of the company’s ships are single hull ships. Single hull ships are considered as lowquality ships because they are more prone to environmental hazards. The Economic Union andrecently the United States also laid restrictions on the use of single hull ships. In the long run,most of these ships will become obsolete and will have to be replaced by double hull ships.

Lower asset utilization going aheadThe company’s strategy of acquiring old second hand single hull vessels has proved to bebeneficial in the short run. The company has managed to grab good orders based on its pricingadvantage. We however think that the company will face some trouble to achieve full utilizationof assets once the orders are completed.

Company BackgroundMercator Lines Limited (MLL) is a coastal shipping company specializing in tanker tonnagewith growing presence in the international market too. It was incorporated on November 24,1983, as a Private Limited Company and was converted into a Public Limited Company onApril 3, 1984. The carrying capacity of the company has grown from about 4000 DWT in 1994to over 370,949DWT till November 30 2003. The company acquired another Aframax tanker(1986 built 99,999M/tons DWT) on December 1, 2003 which is expected to join the company’sexisting fleet by end of the month. With this, the total tonnage of the company will add up to470948DWT by the end of 2003. On December 3, 2003 Credit Analysis & Research Limitedupgraded the rating of Secured Redeemable Non-Convertible Debentures (NCDs) issued byMercator Lines Limited from CARE AA- (Double A minus) to CARE AA (Double A).

Business Divisions

MLL has two divisions viz. Lighterage (dry and wet cargo)and Shipping (tanker division). Lighterage division involvestransporting cargo both, wet and dry, from large vessels tothe shore with the help of smaller vessels like barges. Thelighterage division operates primarily in the Mumbai Portand has a dominant market share of about 65% in the region.It handles bulk liquids like petroleum products, edible oilsand specialty chemicals. The shipping division is engaged inthe coastal and international movement of petroleumproducts and other liquid cargo.



Fleet DetailsType Units Total DWT UsageTanker 8 364419 ShippingMini Tanker 2 3000 LighterageTank Barge 5 3500 “Motor Launch 1 25 “Tug 1 5 “Total 17 370949Recent Additions - Tanker 1 99,999 ShippingTotal 18 470,948Source: company

Organization Chart

Board of Directors

WholeTimeDirector

Tanker Division

Chairman and Managing Director

LighterageDivision

Finance &Accounts

Secretarial &Administration

Marketing OperationsTankerTechnical

TankerPersonal

Chartering

MaterialProcurement

TankerOperations



Capital HistoryFrom To Paid-up Shares (No's) Reason Face Value (Rs) Paid-up Capital (Rs

mn)1991 1992 975000 10 9.751992 1993 1657500 10 16.581993 1994 5000000 Public issue 10 501994 2001 5000000 10 502001 2003 5500000 10 55

Latest Financial Results (Q2FY04 Results)Period to 09/03 09/02 Growth 09/03 09/02 Growth

Rs mn (3) (3) % (6) (6) %Net sales 532 182 191.9 738 304 142.4Expenditure (379) (132) 186.8 (512) (217) 136.3Operating profit 153 50 205.5 226 88 157.4Other income 4 1 330.5 4 1 379.5Interest (20) (12) 58.3 (35) (19) 81.2Depreciation (35) (23) 55.5 (60) (37) 61.7PBT 101 16 544.9 135 32 317.4Tax (17) (7) 153.4 (22.8) (7) 217.9PAT 84 9 847.8 113 25 345.6Extraordinary items 0 0 0 0APAT 84 9 847.8 113 25 345.6OPM (%) 28.8 27.5 30.6 28.8Equity 55 55 55 55EPS (Rs) 15.3 1.6 20.5 4.6

The company registered 191% jump in top line in Q2FY04. The net profit of the companyshowed a rise of 847% to Rs84mn in Q2FY04 from Rs9mn in Q2FY03. For H1FY04, the topline recorded a rise of 142% in net sales to Rs738mn. The rise in revenues is due to the additionof 3 Aframax tankers to the fleet in that period.

OutlookThe company’s strategy of acquiring old second hand single hull vessels has proved to bebeneficial in the short run. The company has managed to grab good orders based on its pricingadvantage. We however think that the company will face some trouble to achieve full utilizationof assets once the orders are completed. The stock price has moved up a lot in the last fewmonths. We recommend that profits should be booked on the stock at these levels.



Projected Financial HighlightsYear to (Rs mn) 03/02 03/03 03/04EOperating Income 532 612 2,243% yoy 15.1 266.4Net profit 75 54.6 218% yoy (27.6) 300.2EPS 13.7 9.9 39.7% yoy (27.6) 300.2Equity 55 55.0 55Capital employed 480 666.7 1,871PBIDT/Income (%) 24.3 30.0 29.0RONW (%) 29.4 18.4 44.3Debt-Equity (x) 0.7 1.1 2.7Book NAV (Rs) 46.6 53.9 89.6

Projected Income StatementYear to (Rs mn) 03/02 03/03 03/04EIncome from Operations 531.9 612.1 2,242.8Other income 12.3 2.4 2.4Profit on Sale of Ships 18.0 10.1 0Total income 562.1 624.6 2,245.1

Wages of floating staff (11.4) (15.0) (67.3)Repairs & maintenance - fleet (75.3) (96.5) (358.8)Other operating expenses (277.0) (274.3) (1,116.2)Other expenses (49.5) (48.9) (50.0)Cost of sales (413.1) (434.7) (1,592.4)PBIDT 149.0 189.9 652.8Interest (17.6) (41.3) (161.3)PBDT 131.3 148.6 491.4Depreciation (42.9) (77.8) (225.0)Profit before Tax 88.5 70.8 266.4Provision for tax (13.0) (16.2) (48.0)Profit after tax 75.4 54.6 218.4Adjusted PAT 75.4 54.6 218.4Dividend payout (11.0) (13.7) (21.8)



Projected Balance SheetYear to (Rs mn) 03/02 03/03 03/04EEquity capital 55.0 55.0 55.0Preference Share Capital 0.0 0.0 0.0Profit & loss/general reserve 41.3 78.7 275.3Other reserves 159.9 162.7 162.7Net worth 256.1 296.4 493.0Secured loans 187.1 317.5 1,317.5Unsecured loans 0.0 0.0 0.0Total debt 187.1 317.5 1,317.5Deferred Taxation 36.6 52.7 60Capital employed 479.8 666.7 1,870.5

Gross Block 604.5 757.4 2,157.4Accumulated depreciation (144.5) (195.0) (417.5)Net block 459.9 562.5 1,739.9Capital WIP 0.0 3.0 0.0Total fixed assets 459.9 565.4 1,739.9Investments 4.9 4.9 4.9Sundry debtors 46.7 53.2 123.0Cash & bank 6.5 2.3 12.2Loans & advances 12.1 87.6 127.0Other current assets 0.0 13.3 26.0Sundry creditors (26.0) (29.4) (88.2)Other liabilities (13.6) (17.3) (52.0)Provision for tax (0.9) 0.0 0.0Provision for dividend (11.0) (13.7) (21.8)Provision for leave encashment (0.5) (0.5) (0.5)Other Provisions 0.0 0.0 0.0Working capital 13.3 95.5 125.7Miscellaneous expenses 1.7 0.9 0.0Capital deployed 479.8 666.7 1,870.5

Assumptions:• MRPL order is worth Rs945mn as 4.2 million tons of crude oil will be transported at the rate

of 5$/tonne in a period of 8 months starting August 2003• Revenues from MRPL contract are expected to be generated evenly throughout the period

The IOC order is worth Rs575mn (approximately) as 2 Aframax tankers are deployed withIOC for the order at the rate of UD$17,500/day for a period of 12 months starting October2003.

• Revenues from IOC contract are expected to be generated evenly throughout the period• Conversion rate of Rs45:UD$1 is assumed for calculations



India Steamship Company Limited

One of the smaller companies in the shipping industry, which is expected to benefit from theshipping cycle upswing, is India Steamship. After making losses for the last few years, thecompany is now on a turnaround. The stock is trading at a P/E of 6x FY04E earnings.

Acquisition of shipsOn April 1, 2003 the company acquired a 1987 built 89960dwt Aframax oil tanker at a cost ofUS$13.3mn. The acquisition was part financed through a foreign currency loan from ICICIBank. This acquisition has taken the company’s fleet tally to two tankers. This has enabled thecompany to turnaround its business by reporting a net profit of Rs56.8mn on a turnover ofRs393.7mn for the six-month period ended September 30, 2003.A fleet of atleast 2 Aframax tankers is generally required in order to bid for contracts of oilcompanies. The company is planning to acquire one more Aframax. According to industrysources, the company has already inspected 15 Aframax vessels and has short-listed a couple ofvessels. The company is expected to finalize the acquisition in a few days.

Cost containment and efficiency improvementCost containment and efficiency improvement measures are being pursued by the company likeheightened ship maintenance, VRS for excess manpower, retirement of interest bearing debts.

Planned diversificationThe company is planning to diversify in LPG- Ammonia Carrier for transportation of ammoniaimports and chemical tanker for transportation of Phosphoric acid imports which arerequirements of group companies. Thus the company might be able to get a captive customerfor its vessels.

ManagementThe company belongs to the Birla Group of companies, one of the oldest business houses in thecountry. Currently the company is lead under the superior management capabilities of ShriAshok Kak who is responsible for the turnaround of the company.Shri. Ashok Kak joined as the Managing Director on May 10, 2002 for a tenure of three years.Shri Ashok Kak is a senior executive with over 40 years of operating experience. Hisbackground includes multi-discipline /multi-functional assignments in diverse companies likeEssco-Hindustan Petroleum, Associated Cement Companies and Eastman Kodak, where he wasespecially challenged in the areas of new business development, profitability improvement andturnaround situations. Immediately prior to his joining India Steamship Company, he was self-employed for a number of years, based in the United States of America.Shri. Kak is an experience-based strategic thinker, with strong operating and marketing skills,international capabilities and hands-on experience in new business development, internationalcontracting and diversification. He is a key resource for the turnaround of the company.



Company backgroundIndia Steamship Company Limited belongs to the K K Birla Group of companies. The companywas experiencing years of declining sales/profitability and sometime back, with the approval ofthe government of India, completed a scheme for one-time settlement of its outstanding debts.

FleetCurrently the company has a total capacity of 150,685dwt. The company plans to expand anddiversify into other vessels in the future.Type Name Capacity (DWT) Age DeploymentAframax Tanker Ratna Shalini 89960 16 GE Shipping Co. LimitedPanamax Tanker Ratna Abha 60725 21 A petroleum Co. in Middle-EastTotal 150685

Capital HistoryFrom To Paid-up Shares (No's) Reason Face Value (Rs) Paid-up Capital (Rs mn)

1928 1946 500307 10 51946 1948 2250000 Rights issue 10 22.51948 1958 1250307 10 12.51958 1974 2475000 Bonus equity 10 24.751974 1975 4950000 Bonus equity 10 49.51989 1990 9905347 Rights issue 10 99.051990 1991 18532852 Rights issue 10 185.331991 1994 18533102 10 185.331994 1995 18533102 10 185.331995 2000 18533102 10 185.332000 2003 47533102 Issued Pref. Shares to Zuari

investments10 475.33

Latest results (Q2FY04 Results)Period to 09/03 09/02 Growth 09/03 09/02 GrowthRs mn (3) (3) % (6) (6) %Net sales 169 65 158 394 170 132Expenditure (125) (83) 51 (279) (206) 35Operating profit 44 (17) 352 115 (36) (422)Other income 31 0 7,600 34 2 1,378Interest (13) (3) 310 (28) (6) 336Depreciation (16) (10) 65 (33) (22) 48PBT 45 (30) 252 88 (62) (242)Tax (15) 0 - (31) 0 -PAT 31 (30) 202 57 (62) (191)Extraordinary items 0 0 - 0 108 -APAT 31 (30) 202 57 45 25OPM (%) 25.8 (26.5) - 29.2 (21.1) -Equity 475 475 - 475 475 -EPS (Rs) 2.6 (2.5) - 1.6 1.3 -



In Company registered a 158% increase in sales to Rs169mn in Q2FY04 as compared toRs65mn in Q2FY03. The operating margins of the company improved drastically form anegative 30% to positive 31%. The cost cutting measures of the company has started paying off.The company recorded profits of Rs31mn in Q2FY04. For the first half of FY04, the annualizedEPS of the company stood at Rs1.6.

OutlookIndia Steamship is expected to be a major beneficiary of the shipping cycle upswing. With goodmanagement, asset acquisitions and corporate restructuring, the company is well placed for aturnaround. The stock is trading at a P/E of 6x FY04E earnings.

Projected Financial HighlightsYear to (Rs mn) 03/02 03/03 03/04EOperating Income 509 290 780% yoy (42.9) 168.7Net profit (78) 11.8 102% yoy (115.3) 761.7EPS (1.6) 0.2 2.1% yoy (115.3) 761.7Equity 475 475.3 475Capital employed 1,156 1,782.4 2,107PBIDT/Income (%) (7.4) 8.7 23.0RONW (%) (7.3) 1.1 9.6Debt-Equity (x) 0.1 0.7 1.0Book NAV (Rs) 22.3 22.3 22.3

Projected Income StatementYear to (Rs mn) 03/02 03/03 03/04EFreight, charter hire 509 290 780Income from Operations 509 290 780Other income 23 7 68Profit/(loss) on sale of ships 43 107 0Total income 574 404 848Wages of floating staff (81) (44) (70)Repairs & maintenance - fleet (96) (40) (70)Other operating expenses (355) (203) (395)Other expenses (62) (75) (50)Cost of sales (594) (362) (585)PBIDT (20) 42 263Interest (13) (14) (73)PBDT (33) 28 190Depreciation (53) (26) (74)Profit before Tax (86) 2 116Provision for tax 8 10 (14)Profit after tax (78) 12 102Adjusted PAT (78) 12 102Dividend payout 0 0 0



Projected Balance SheetYear to (Rs mn) 03/02 03/03 03/04EEquity capital 475 475 475Preference Share Capital 213 213 213Profit & loss/general reserve 0 0 0Other reserves 370 370 370Net worth 1,058 1,058 1,058Secured loans 22 477 727Unsecured loans 76 248 323Total debt 98 725 1,050Deferred Taxation 0 0 0Capital employed 1,156 1,782 2,107

Gross Block 800 562 987Accumulated depreciation (747) (549) (623)Net block 53 13 364Capital WIP 0 0 0Total fixed assets 53 13 364Investments 0 0 0Sundry debtors 38 37 94Cash & bank 70 69 128Loans & advances 125 751 925Other current assets 64 25 49Sundry creditors (226) (188) (390)Other liabilities (11) (5) (12)Provision for tax 0 0 (14)Provision for dividend 0 0 0Provision for leave encashment (2) (2) (2)Other Provisions (16) (15) (15)Working capital 42 672 762Miscellaneous expenses 34 74 74Deferred Taxation 363 372 358Profit and loss (Debit) 698 725 623Capital deployed 1,156 1,782 2,107



Industry Terms

Baltic Freight Index (BFI) [Base: 1985 = 1,000] is the barometer of freight rates for dry bulksegment. It is a weighted average of the actual freight rates of Panamax and Capesize vessels atany point of time on 11 specific routes, which represent important trade routes.

BunkersAll kinds of fuel consumed by the machinery on board a ship in order to operate.

CargoGoods, merchandise or commodities of any description, which may be carried aboard a vessel,in consideration of the freight, charged; does not include provisions and stores for use on board.

ContractAn agreement recognized and enforced by the law

Deadweight/Deadweight Tonnage (DWT)The lifting or carrying capacity of a ship when fully loaded. It includes cargo, bunkers, water,(potable, boiler, ballast), stores, passengers and crew.

DemurrageCompensation payable by the shipper or receiver or charterer to the carrier due to the excesstime taken for loading or unloading a vessel. Demurrage refers only to situations in which thecharterer or shipper or receiver (not the vessel's operator) is at fault.

FreightMoney charged by the carrier for transporting goods. The reward payable to the carrier for thecarriage and arrival of the goods in a merchantable condition, ready to be delivered to themerchant.

Gross Registered Tonnage (GRT)The volume of each vessel's enclosed area

Gross weightThe full weight of a shipment, including goods and packaging.

Net Registered Tonnage (NRT)The internal capacity of a vessel measured in units of 100 cubic feet less the space occupied byboilers, engines, shaft alleys, chain lockers, officer's and crew quarters and other spaces notavailable for carrying passengers or freight. Net registered tonnage is usually referred to asregistered tonnage or net tonnage.



IIL Shipping Index

The IIL Shipping Index consists of 4 stocks, viz, SCI, Great Eastern Shipping Company, EssarShipping Limited and Varun Shipping Limited based on their relative market capitalization.Return in the Index is calculated taking April 1 2003 as the base.

This report is for information purposes only and does not construe to be any investment, legal or taxation advice. It isnot intended as an offer or solicitation for the purchase and sale of any financial instrument. Any action taken by youon the basis of the information contained herein is your responsibility alone and India Infoline Ltd (hereinafter referredas IIL) and its subsidiaries or its employees or directors, associates will not be liable in any manner for theconsequences of such action taken by you. We have exercised due diligence in checking the correctness andauthenticity of the information contained herein, but do not represent that it is accurate or complete. IIL or any of itssubsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise toany person from any inadvertent error in the information contained in this publication. The recipients of this reportshould rely on their own investigations. IIL and/or its subsidiaries and/or directors, employees or associates may haveinterests or positions, financial or otherwise in the securities mentioned in this report.

Shipping in India

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