Shipping Industry

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%)

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 Crude Oil Demand
Crude oil demand has reported a CAGR growth of 0.2%
over the last five years
 Coal Demand
Global coal demand has grown at a CAGR of 3.5%
over the last five years
 Global steel production
Global 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.
 Critical Success Factors

• “On time delivery of goods “

• “Safe delivery “
• “Customer service”
• “Advanced fleet”

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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 a
Premium.

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
 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.
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 Nature of the industry in India
Today 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.
 Players in Indian shipping industry
• Shipping Corporation of India (SCI).
• Essar Shipping.
• Great Eastern Shipping.
• Varun Shipping.
• SKS logistics .
• Shreyas shipping.

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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.
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.

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 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
 Sales 2009-2010
sales turn over(Cr)
4500
4000
3500
3000
2500
2000 sales turn over(Cr)
1500
1000
500
0
SCI Essar GE Varun Shreyas
SCI has 30.8% of market share in 2009-10
 Financial Performance
Return On Capital Employed(%)

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10
27.42 23.77 19.04 17.58 8.73
SCI
21.28 19.71 20.67 15.79 7.87
GE Shipping
Essar 4.58 6.42 7.49 1.96 3.07
Shipping
12.56 12.77 11.16 6.88 9.81
SKS
16.05 8.29 12.29 6.20 1.56
Varun
19.77 9.34 5.10 -0.63 -4.96
Shreyas

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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

GE Shipping 12.84

Essar Shipping 45.04

16.32

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.

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Strategies
 SCI Growth Strategies
1.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 strategies
1.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 Strategies
1. 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 involved
Eg : 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 comparison
SCI GE ESSAR VARUN
Tankers:
Crude oil 17 10 4 3
Product 16 16 - -
chemicals 3 - - -
Gas 3 1 - 10
Bulk 18 6 17
carriers:
Liners: 8 - - -
Offshore: 11 4 6 7
Passenger: 2 - - -
Total 77 37 27 20
 Division wise comparison
Bulk carriers Tankers Liners Areas covered
apart from
India
SCI Iron ore, coal, Crude oil, Cargos, South-east
coke, chemicals, LNG Passenger asia, Middle-
fertilizers, ships east , Europe,
steel. North America
GE Coal, steel Crude oil, LNG - China,
UK,Singapore,
Mauritius,Sharj
ah
ESSAR Dry bulk cargo Crude oil, - Asia,
petroleum Africa,Europe,
products 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
Thank You