Shipping Industry

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Introduction

• Shipping industry is global - handles 80% of world trade.• Freight rates and earnings act as a function of demand and

supply in the market. Trade Growth (Demand Drivers): World GDP Oil demand and supply Steel production• Minor contributor in marine environmental pollution(<10%)

Crude Oil DemandCrude oil demand has reported a CAGR growth of 0.2%

over the last five years

Coal DemandGlobal coal demand has grown at a CAGR of 3.5%

over the last five years

Global steel productionGlobal steel production has grown at a CAGR of 2.7%

over the last five years

Nature of the Industry

• Shipping industry is cyclical in nature.• Currently the industry is in the mature phase.• Big players as well as small players in this industry.• After 2008 the industry suffered due to recession but it

is slowly coming back to normal again.• With a great demand of oil, coal, minerals, cement etc.

worldwide, shipping industry has become a backbone of global trade.

• The shipping sector offers a cheap mode of transportation, helping to open up larger markets.

Risks for shipping companies• Over optimistic approach to build extra capacity in the hope of

increasing future demand.• Increasing operating cost and declining profits have led to several

cancellations or delays in delivery of ships, resulting in credit crunch.

Eg: The oil tankers are not able to earn enough to cover their operating cost and are running on 60 to 70% of their capacities.

• Vessels are exposed to pirate attacks, which could potentially disrupt operations as well as harm business in various ways.

• Rising fuel prices and other unexpected expenses may adversely affect profitability.

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Critical Success Factors

• “On time delivery of goods “ • “Safe delivery “ • “Customer service” • “Advanced fleet”

GROWTH PROJECTIONS

•Shipping demand is reaching short term peak•Global seaborne trade is growing at the rate of 4%

GLOBAL SHIPBUILDING ORDER BOOK AND DELIVERIES (IN MN GT)

Porter’s 5 forces

Entry barriers:• Economies of scale• Capital requirement• Long gestation period• Threat of new entrants: low

Bargaining power of buyers: High• High bargaining power as competition is high

Bargaining power of suppliers: Low• Diminishing with gradual increase in fleet supply and

intense global competition

Intensity of competition:Competition is price based.However companies with younger fleet command aPremium.

Substitutes: • Rail- Goods trains offer convenient transport of dry and

bulk commodities including fuels like coal• Road- Trucks provide cheap and point to point delivery• Air- Expensive but quickest

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Shipping Industry in India

• India – 20th rank in shipping.• Consists of about 616 ships.• Capacity of 6.62 million tons GRT.• About 55 shipping companies in the sector. >19 deal exclusively in coastal trade. >29 are engaged in overseas trade. >rest operate in both types of trade.• Indian shipping industry increased from 180 mn tons in 1993-94

to 723 mn tons in 2007-08 with a growth of nearly 9.5%.• It is expected to grow at a rate of 10.96% during 2007-08 to

2011-12.

Nature of the industry in IndiaToday the nature of the shipping industry is in maturity phase.

The growth pattern since independence can be divided into three eras:•Era of slow growth or introduction (1947 to1960)•Era of rapid growth (1960 to 1985)•Era of maturity (1985 to till date)

• The annualized growth is highest in this period because of a low base i.e., very small shipping tonnage at the time of independence. However, in absolute terms, the period represented low levels of tonnage acquisition and hence classed as an era of slow growth.

• However, the second era especially the period between 1965 to 1980, represented tremendous achievement for the Indian shipping industry in building up a large merchant fleet.

• Crisis at a global level triggered by OPEC oil price hike, a regulatory framework in India that increasingly proved to be restrictive enough, even though it had supported the growth in the earlier era and a natural phenomenon of cyclical boom and bust witnessed in all industrial and business sectors, led to gradual stagnation in the Indian shipping industry since 1980s.

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Players in Indian shipping industry

• Shipping Corporation of India (SCI).• Essar Shipping.• Great Eastern Shipping.• Varun Shipping.• SKS logistics .• Shreyas shipping.

SCI Divisions

Segmental Revenues

Future Views in different segments• Tanker rates have shown signs of recovery from Q3FY10 onwards.

Although the recovery will be gradual, the phasing out of single hull tankers by 2010 would lend support to the freight rates.

• In the case of dry-bulk we expect the rates to remain depressed for a

longer period of time with order book as percentage of existing fleet still hanging around 47%.

• The liner business was the most affected by the slowdown in global

demand as shipments from Asia to Europe and the US dropped for the first time in history.

• In the container segment the situation has improved over the last one

year partly due to the fact that that the container markets are much more consolidated than the bulk operations world wide.This along with a moderate recovery in the container trade helped recover the rates.

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Key Strengths of SCI

• It has an established brand being the largest bulk carrier as well as tanker operator with approximately 31% market share in the Indian flagged tonnage.

• The Company is bestowed with “Navratna” status- enhanced

autonomy and delegation of powers to the Company.

• Improved and optimized fleet mix through acquisition of newly built vessels.

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SWOT Analysis of SCI Strengths:1. Established brand name and reputation: India’s leading shipping companies with 35% market

share in Indian flag tonnage, with a long established reputation and strong customer relationships

2. Diversified fleet: Variety of modern and technologically advanced

vessels, allows it to enter into chartering arrangements of varying duration with different types of customers.

3. Tactical joint ventures: Entered into six strategic JV’s which provide access to

new markets boosting the company’s prospects in terms of certainty of cash flows on a long-term basis.

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Weaknesses:1. Dependence on Demand for Energy Products & International Trade.2. Lack of Flexibility on Contracts for deployment of vessels:• SCI’s long-term contracts for the deployment of vessels are on

a fixed day rate basis.• Limited ability to adjust rates. 3. Credit risks:• Exposed to the credit risks of its customers and certain other

third parties.• Non payment, non-performance or insolvency could adversely

affect its financial condition and results of operations.

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Opportunities:• The demand for oil is expected to grow at a moderate pace as

other energy forms such as LNG and nuclear power are likely to increase their market shares.

• Increased oil imports enhanced usage of VLCCs and thus an opportunity for acquisition of more VLCC units, enhancing exports of products from India.

• The company intends to expand and develop their break-bulk business by entering into new joint service agreements with vessel owners to operate in trade lanes that they believe present areas for diversification and growth such as Europe to the Middle East, the East Coast of the US to Europe and Southeast to Far East Asia.

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Threats:• Changing Government Regulations and Duty structures can

affect imports and exports of dry cargoes to a great extent.

• Large iron ore exports from Brazil to China can reduce demand for Indian iron ore, of which SCI is a major player.

• On the fleet side it is expected that delivery slippage of container vessels would reduce to around 33% of scheduled deliveries in 2010 and 2011.

External Risks

• Growth depends upon continued growth in demand for shipping services.

• An over-supply of vessels may lead to increased competition and reductions in the demand for the vessels.

• Vessels are exposed to pirate attacks, which could potentially disrupt operations as well as harm business in various ways.

• Rising fuel prices and other unexpected expenses may adversely affect profitability.

Comparison between SCI and competitors

Capex plans

• SCI has already committed capex spend to acquire 31 new vessels over the next two years. It will help the company to replace its ageing fleet. The orders have already been placed and construction of new vessels is under way at various yards in India and abroad.

• Essar Shipping is also incurring significant capex to build capacities for its various operating segments. The company is acquiring two jack-up rigs. It would be expanding its port capacity at Vadinar and Hazira in addition to setting up new ports at Salaya and Paradip.

• GE Shipping would be incurring the capex to mainly expand its offshore fleet of vessels along with expansion of dry bulk and tanker fleet

0500

10001500200025003000350040004500

SCI Essar GE Varun Shreyas

sales turn over(Cr)

sales turn over(Cr)

Sales 2009-2010

SCI has 30.8% of market share in 2009-10

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Return On Capital Employed(%)

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

SCI27.42 23.77 19.04 17.58 8.73

GE Shipping21.28 19.71 20.67 15.79 7.87

Essar Shipping

4.58 6.42 7.49 1.96 3.07

SKS12.56 12.77 11.16 6.88 9.81

Varun16.05 8.29 12.29 6.20 1.56

Shreyas19.77 9.34 5.10 -0.63 -4.96

Financial Performance

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• Decrease of profitability as Operating profit margin decreased from 47.7 in Mar-06 to 26% in Mar-10 . The factors being change in freight rates , repair and maintenance expenses on account of new fleet addition.

• In the case of Essar, the operating margin is also expected to stabilise at higher level as the contribution from the port and terminal business, which is a high margin business, increases.

• ROCE has increased by around 30 % indicating high investments and profitability. Encouraging results due to rise in the EBITDA and operating margin.

• Delay in delivery of jack-up rigs could impact the earnings of the company. The share is expected to increase to 50% in FY12.

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• Varun shipping - downturn in shipping industry and the revenues due to global recession adversely affecting the profitability of the Company.

• The company earnings will suffer due to its inability to lock up long term charter on the higher end offshore vessels.

• In the case of SKS logistics, profit decreased by 21.5% in FY10 due to the loss on sale of vessel MV royal Pisces.

• Shreyas shipping incurred a heavy loss due to rising fuel prices and lower charter hire rates and freight rates, thereby reducing profitability.

• In GE shipping, operating profit decreased low TCY (Time Charter Yields)realizations and low fleet capacity.

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P/E ratio

P/E Ratio Industry P/E

SCI 9.18

16.32

GE Shipping 12.84

Essar Shipping 45.04

SKS ******

Varun 23.52

Shreyas ******

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Conclusion on P/E Ratio comparison

SCI has a very low P/E ratio because it’s in the mature industry

where further growth level is very low.

When comparable players like GE Shipping is trading at 12.84 P/E, while Essar Shipping is trading at a high P/E multiple of 45. But Shipping Corporation is a much bigger player in the sector, at almost double the size of GE and thrice the size of Essar.

Strategies

SCI Growth Strategies1.Aggressive expansion of fleet• Currently, 22% of SCI’s fleet is more than 25 years old and

plans to order an additional 20 vessels in Fiscal Year 2011.• This would enable SCI to command higher freight rates and

also reduce dry docking expenses.

Acquisition of More VLCCs and LR tankers due to:• Increased oil imports of 2 million barrel parcels.• Paradeep-Haldia pipeline for imports of crude on East Coast of

India (ECI).• proposed expansion of Reliance Industries Limited (RIL)

refinery.• coming on stream of Essar refinery would result in enhanced

exports.

2.Technology Absorption:• Installation of Water ingress detection system.• Implemented Installation of Ship-Security Alert system.• New designs of critical ship's systems have been adopted to

minimize/eliminate risk of oil pollution.

Corporate Level strategies1.Diversification: Shipbuilding Consultancy This department provides ‘Technical Consultancy’ assistance to

various organizations for their ‘Tonnage Acquisition Programme’.

2.Joint Ventures:(a) Irano Hind Shipping Company (IHSC) :• SCI has entered into a memorandum of agreement (“Irano-Hind

MoA”) to develop and strengthen economic relations between India and

Iran in the field of shipping.• The total aggregate income received, from Irano-Hind for Fiscal

Years 2008,09 and 10 was Rs. 19.3 mn, Rs. 20.9 mn, and Rs. 23.2 mn, or less than 0.10% of the Company’s total income in each such year.

(b) LNG Transport :• SCI formed 3 Joint Venture Companies -India LNG Transport Co’s.

for the construction, ownership and operation of two LNG tankers.

• Both the ships are chartered on a long-term 25 year Time Charter.

• This tanker will supply an additional 2.5 million metric tons of LNG per year to the Dahej Terminal of M/s Petronet LNG Limited.

(c) SAIL SCI Shipping Pvt. Ltd (SSSPL) :• The primary objective of the JVC is to provide various shipping

related services to SAIL for importing coking coal and other bulk material from various countries to feed its steel plants located in India.

• Going ahead it is projected that SSSPL may spread its wings in other marine activities like coastal shipping, ports etc.

Future Strategies• The company also continues to explore possible areas for diversification -

Coastal and Feeder Services, Total Logistics, Container Freight Stations (CFSs), Terminal Development/ Management, Shipbuilding, Dredging, etc.

• As part of their service routes, they plan to extend their reach into Southeast Asia, Southern Africa and North America.

• Also reviewing ways in which they can connect their services to ports in East Africa as they believe that India is emerging as the biggest exporter of goods and project cargo to this region.

• They intend to enter into joint ventures with reputable logistics providers for end to end logistical operations for projects in the area of power, oil and gas and infrastructure.

Essar Growth Strategies1. Refinery expansion project:• Capacity increased from 14 MMTPA to 18 MMTPA• Increased GRMs as the refinery was able to process nearly

90 percent heavy and ultra-heavy crude.• Provided additional business opportunities for third party

cargo handling for ESPLL.

2. Strategic port locations:• Close proximity of port terminals provided cost advantages to

the clients.• Favourable port locations near industrial zones provide an

added business opportunity to ESPLL to serve third party clients.

3. Long-term third party contracts provide added comfort and a very effective risk mitigation strategy.

4. Assured business from Essar Group Essar group companies contribute 45% of the revenues of

ESPLL and hence assured revenue flows from its captive clients i.e. Essar group companies is of prime importance to set up new capital intensive projects like the ports and terminal business.

Corporate Level Strategies

1.Diversification:• Presence in various segments like steel, energy, power,

communications ,construction and mining businesses.• Since these businesses require import of large quantities of

raw materials there is an assured revenue flow for Essar Shipping.

• This helps the company to de-risk itself from volatility in freight rates.

GE Growth Strategies

• Emphasis on cost cutting through enhanced productivity, reduction in energy costs and logistics expenses

• Improving the efficiency in the operating parameters• Training given top most priority to enable the company to

operate with optimum man power• Equity infusion and debt reduction to bolstered the financial

position of the company• Long term arrangements with competitors

Future Strategies

• Consolidation- because of fragmentation and very capital intensiveness resulting in low margin and intense competition

• Optimization- because of emission regulations and sliding revenues

• Use of logistics model- integration of operations and customization on the basis of market and needs

Varun Growth Strategies

• Expansion of Fleet by continuous expansion and modernization of fleet to reduce the operating costs, obtain economies of scale, higher bargaining power and to benefit from the expected growth in demand for hydrocarbon transportation.

• Strengthening relationships with charterers: To provide efficient, economical, maritime and logistical

solutions to the end users by integrating their shipping activities with the overall maritime and logistic requirements of their charterers.

Expansion strategy in various business sectors:

(a) Niche market sectors• characterized by few charterers and owners• vessel requirements and designs specific to the trade involvedEg : LPG sector, off-shore sector.

(b)General market sectors• comprise sectors with a large base of charterers, and owners • vessel requirements and designs have evolved into standard

designs and sizes.Eg : dry bulk, crude oil, petroleum products.

Strategies that might backfire

• Aggressive expansion of fleet:Unnecessary cost during industry downturn.

• M&A:Builder’s Icarus Paradox.

Value Creation

Company Increasing value Reducing cost

Shipping Corporation of India

Essar Shipping

Great Eastern Shipping

Varun Shipping

Fleet comparisonSCI GE ESSAR VARUN

Tankers:

Crude oil 17 10 4 3

Product 16 16 - -

chemicals 3 - - -

Gas 3 1 - 10

Bulk carriers:

18 6 17

Liners: 8 - - -

Offshore: 11 4 6 7

Passenger: 2 - - -

Total 77 37 27 20

Division wise comparisonBulk carriers Tankers Liners Areas covered

apart from India

SCI Iron ore, coal, coke, fertilizers, steel.

Crude oil, chemicals, LNG

Cargos, Passenger ships

South-east asia, Middle-east , Europe, North America

GE Coal, steel Crude oil, LNG - China, UK,Singapore,Mauritius,Sharjah

ESSAR Dry bulk cargo Crude oil, petroleum products

- Asia, Africa,Europe,America

VARUN coal hydrocarbons - Brazil, Mexico, OPEC .

Competitive advantage of SCI

• As far as size of the shipping industry is concerned SCI has a very high competitive advantage over it’s competitors. It’s twice the size of GE and thrice that of ESSAR.

• SCI has a competitive advantage because it has more services compared to that of it’s competitors i.e. the Liners service.

• SCI’s bulk carriers is into more operations compared to that of it’s competitors.

• Because of the mergers and acquisition it has been able to reach customers throughout the World.

• Economies of scale.

Why is SCI better..?• ‘Navratna’ status• Has a vessel fleet of 77 vessels ordered additional 20 in 2012 • They have efficient ships which are fast and advanced.• Significant Use Of Information Technology.• Is committed to environmental protection and has adopted new designs of

critical ship's systems to eliminate risk of oil pollution.• Explores possibilities of setting up Joint Venture Companies and forgoing

alliances.• It has it’s own ship building industry and has signed a contract with

Hyundai Heavy Industries Co. of South Korea for the construction and delivery of one 29,999 dwt product carrier.

• Set up the first Global Maritime Distress Safety System (GMDSS) laboratory in the country.

References

• ICICI direct.com• IDBI capital market space Ltd• Firstcall research• imaritime.com• Moneycontrol.com• Valuenotes.com• Careratings.com• Justtrade.in

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