Equity Research September 2000

Indian Shipping Sector

Contents Investment Summary

Investment Summary i § Shipping is today witnessing an unprecedented boom,
unparalleled in last 3 decades
Market Analysis
Economy output ii § The “Clarksea Index” compiled by Clarksons Research
Seaborne trade iii Studies Shipping Intelligence Weekly, which captures
The shipping markets iv the average earnings across Tanker, Bulk Carriers,
Linkages between economy, trade and shipping vi Containership and Gas markets touched the highest
The financial markets respond viii point since 1973 and is still rising

Company Analysis § Net Profit of all Indian shipping firms is expected to

rise considerably with rising freight rates.
Shipping Corporation ix
Great Eastern Shipping xi
§ Scrips of these companies are trading at substantial
Essar Shipping xiii
discount to Net Asset Value, providing an unmatched
Varun Shipping xv investment opportunity

Shipping Corporation Hold

Great Eastern Shipping Strong Buy

Essar Shipping Switch

Varun Shipping Buy

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Economic output - the welcome resurgence
Global economic forecasts § The global economy has recovered strongly from economic
(in percentage) meltdown that was triggered by the Asian crisis in the middle of
forecasts 1997 and spread to Brazil and Russia in 1998. The emerging
1997 1998 1999 2000 2001
economies in Asia have, for the most part, staged a strong V-
shaped recovery, the Latin American countries are gradually
World output 4.1 2.5 3.3 4.2 3.9
stabilising, the impressive growth in United States is now the
Advanced economies 3.3 2.4 3.1 3.6 3.0
longest on record and the outlook has also improved for Europe
- USA 4.2 4.3 4.2 4.4 3.0
and Japan.
- Japan 1.6 -2.5 0.6 0.9 1.8
- EU area 2.6 2.7 2.3 3.2 3.0 § World output growth is estimated to have accelerated to 2.6%
Developing countries 5.8 3.2 3.8 5.4 5.3 in 1999 and expected to grow by 4.2% in the current year. IMF
- China 8.8 7.8 7.1 7.0 6.5 expects world economy to grow by 3.9% in 2001.
- India 5.8 4.7 6.8 6.3 6.1 § Growth in developing countries increased to 3.8% in 1999
- Asean -- -9.5 2.5 4.0 4.4 from 3.2% in 1998 and expected to touch 5.4% in 2000. Amongst
developed countries, Japan grew by 0.3% in 1999 and expected
Source: IMF
to grow by 0.9% this year, against a contraction of 2.5% in 1998.
Overall developed economies grew by 3.1% in 1999 against 2.4%
5% GDP growth in World GDP growth Shipping freight 140 in 1998.
percentage index: 1990 = 100
§ Growth in industrial production in OECD countries, an important
4% lead indicator for world seaborne trade, is expected to accelerate
to 2.9% in 2000 against 0.8% in 1999.
3% 100 § Crude steel production, an important indicator of economic
performance, grew by 1.1% in 1999 after a fall of 3.9% in the
2% Strong lagged impact previous year. It is expected to grow by a record 10.9% this year.
of GDP on shipping Increased crude steel production has led to rise in iron ore and
1% 60
coking coal trade.
1991 1993 1995 1997 1999
World GDP growth Aframax freight index Handymax freight index § The remarkable turnaround in economic conditions has been
caused primarily by the strength of the US economy where
burgeoning domestic demand provided a market for products of
crisis hit countries. Further, the relatively easy monetary policies
followed in Europe and Japan has led to acceleration in growth
5% OECD Industrial production in the former and reversal of recessionary trend in latter. Finally,
the stabilisation policies and reform processes implemented in
4% the crisis-hit countries have also been largely successful. Fears of
global recession of intensity equivalent to the Great Depression of
3% 1930 proved unfounded and most developmental economists agree
that the world is strongly back on the growth path.
2%
§ Apprehensions on possible destabilisation remain. Incomplete
1% corporate and financial sector restructuring in East Asia, rising oil
prices and possible slowdown in American economy & renewed
0.5%
1994 1995 1996 1997 1998 1999 2000 contraction in Japan could undo any recovery achieved in the last
OECD Industrial Production
Global seaborne Trade few months.
Global shipping tonnage (grt)
§ The Indian economy has however shown fall in the growth from
6.8% in FY1998-99 to 5.9% in FY1999-2000. The fall mainly
reflects a slow down in agricultural production after previous year’s
bumper harvest. However, activities in the industrial and services
Crude steel production (volume)
sector strengthened during the year, buoyed by a revival of exports
15%
and the pick up in domestic demand. Thus, the growth in GDP
from the industrial sector accelerated to 6.9% from 4.0% in the
10% previous year, while services grew at last year’s level of 8.2%.
§ IMF expects India and China to grow by 6.1% and 6.9% in 2001
5% respectively. Crude steel production is expected to grow by 14.4% in
2000, one of the highest growth rates amongst major steel producers
0% § Last December, World Bank had forecasted that World economy
1989 1991 1993 1995 1997 1999
would grow by 3.1% over the next decade while developing
-5% economies by 4.5%. South Asia is expected to grow by a healthy
Global India Iron ore exports from India (volume)
5.2% over the next decade while Asean countries are expected to
lead by growing at 6.2% over the next decade.
ii
Seaborne trade - victory over gravity § The revival in global economic output has been accompanied (and
aided) by increased trade. IMF has forecasted an increase in global
150 Growth in world trade 25%
trade by 8.2% (in USD terms) in the year 2000, after an increase of
20% only 3.3% in 1999 and a fall of 2.2% in 1998. Trade growth is expected
Shipping index

Acceleration in 15% to further accelerate to 8.5% in 2001.

trade has lead the
revival in shipping
markets 10%
§ While a certain portion of this increase in trade can be attributed to
5% increased commodity prices, there has also been a significant increase
0% in trade volumes, especially seaborne trade.
50 -5%
1993 1995 1997 1999 2001 § Total volume of seaborne dry trade is expected to grow by 3.5% in
Aframex freight Handymax freight World trade
2000 to reach 3.3 billion tonnes, after two years of stagnation.

§ Iron ore and coking coal trade, the main drivers of Capesize and
Panamax markets, are expected to increase by nearly 6% this year,
after continuos decline in last 2 years. This is a result of strong growth
Trade in bulk commodities in crude steel production. Iron ore exports from India have increased by
120
12% whopping 124% in the first half of current year.
revival in growth
in trade of bulk
8% commodities 100
§ Growth in volume of other dry commodities, including minor bulks,
Capesize index

4%
80 the main driver of smaller sized Handymax and Handysize vessels, is
expected to accelerate to 3% this year from 1.5% for the last two years.
0%
1991 1993 1995 1997 1999
60
-4% § Crude oil trade volumes, the main driver of large size tanker markets,
is expected to grow by 2%, after a fall by same amount last year. Crude
-8% 40 and product inventories in the largest three importers - Europe, USA
Iron ore Coal Capesize freight
and Japan, are down by 5% and 20% respectively over last year’s level.
This is expected to lead to increased demand in coming months, aided
partially by the upcoming winter.

§ However long-haul crude oil movement, comprising around 40% of

Growth in Indian trade (measured in USD) total trade, is expected to grow strongly by 6%. Thus trade measured in
30% tonne-miles is expected to be much higher and hence would have a
20% stronger impact on tanker markets.

10% § Product trade are however expected to contract by nearly 4% as im-

porters like USA and India increase domestic production and China
0%
continues to ban import of products to aid domestic refinery industry.
1994
1990

1992

1996

1998

2000

-10%
§ Both OECD and IMF in their recently released reports on economic
-20% Exports Imports Growth in Indian tonnage outlook have forecasted a continued strong growth in global trade in
2001.

§ India’s trade has grown strongly in FY1999-2000. Measured in US

dollars, both imports and exports have grown by nearly 8% in contrast
to a 3.7% fall in exports and stagnation in imports in the period 1998-99.
Traffic handled by major ports in India
11%
8% growth in § Cargo handled by major ports touched a record 271 million tonne in
cargo handled
9% in 1999-2000 1999-2000, a growth of 7% against stagnation in previous year. In the
7% first half of current year, all ports have recorded stronger growth trends.

5% § In value terms, the first quarter of FY2000-2001 has seen both exports
3% and imports increasing by 27% to USD10.2 billion and USD13.2 billion
respectively. While rise in imports was largely due to increased POL
1% 1991-92 1993-94 1995-96 1997-98 1999-2000
prices, exports have risen due to increased volumes.
-1%

iii
The shipping markets - from nadir towards zenith
§ Bullishness across all shipping segments as freight rates and
vessel prices rise in response to improved performance in the
economy and trade front and hence rising demand for shipping
services. A large number of vessels built in the mid 70s and
constituting a significant portion of world tonnage, crossed 25
years and are getting scrapped under pressure from
environmentalists and regulators. This has further skewed the
demand-supply scenario.

§ The “Clarksea Index” which captures the average earnings across

the Tanker, Bulk Carriers, Containership and Gas markets and
calculated by leading ship brokers Clarkson; touched the highest
point since 1973 and is still rising.

Tanker markets
§ Tanker markets, which reached 10-year lows in December 1999,
30 Freight rates in tankers markets have subsequently witnessed freight rates rising across every
sub-sector by 40-75%. Present freight rates in Aframax and
25 70% gain since Suezmax markets, which constitute a significant portion of the
Dec - 1999
(USD '000s/day)

20
fleet of top three Indian shipping companies, are higher than last
25 years’ averages. Vessel prices in all three sub-sectors have
15 appreciated by almost 50% in the same time period.

10 § The price-income ratios for tankers, calculated by dividing the

40% gain since
Dec - 1999 price of the ship by its annualised time charter income, are quite
5
Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 low today indicating large scope for further price appreciation.
Suezmax Aframax Products
§ Lack of availability of shipyard capacity, filled with containership
orders, means that new deliveries are not expected for some
time. Despite slowdown in demolition (as shipowners find attractive
trading opportunities and hence delay scrapping), tanker tonnage
Price-income ratio of tankers is expected to grow by only 2.3% this year and 0.6% next year.
Suezmax
8 Avg. P-I ratio:5.6 Aframax
Much of the growth would be confined to VLCCs while Suezmax
7
P-I ratio today:4.4 Avg.P-I ratio:5.1 and Aframax would grow much slower than the above rates. This
P-I ratio today:4.6 implies that the present bullishness is expected to continue
6 till sometime in future.
5
§ Environmental concerns, especially after the now infamous Erika
4 incident, will continue to affect rates with modern tonnage at a
Product carrier
3 Avg.P-I ratio:4.3 Large scope for
premium over older ones.
P-I ratio today:3.6 price appreciation
2 § Recent regulatory changes leading to shift from “cost-plus formula
1977 1980 1983 1986 1989 1992 1995 1998 Aug 00
“ to market related rates for Indian crude shipment, is expected to
benefit shipowners due to rising markets. Products imports is
expected to fall exponentially, raising concerns about future
deployability of Indian product tankers due to limited expertise
Freight rates in tanker markets of most Indian shipowners in international cross trades.
As on August 2000
20
§ Nearly 8% of Indian tanker tonnage has already reached 25 years
(USD '000s/days)

Aframax and another 12% expected to do so by end 2001. Strict IMO

As on August 2000 norms, calling for costly modifications or involving hydrostatic
loading which implies a loss in cargo space, become applicable to
10 vessels crossing 25 years.
Product § While new refineries like Reliance are using large-sized VLCCs
for transportation of crude to capitalise on economies of scale,
0
existing refineries are expected to continue with Aframaxes and
1973 1978 1983 1988 1993 1998 Suezmaxes due to draft restrictions in unloading ports.

§ Although government has expressed intentions to divest its stake

in various oil companies, we believe that this would take some
time and hence cargo support to Indian tanker owners is likely to
continue.
iv
 Dry bulk markets
Freight rates in dry bulk markets
§ Dry bulk markets have been rising since May of 1999 after touching
9
10-year lows. Handymax and Handysize vessels, which together
constitute more than 90% of Indian dry bulk fleet, have seen
(USD '000s/days)

8
Handymax stabilization
freight rates rising by nearly 40-50% since then.
7

6 § Since the last 3-4 months, rates have leveled in Handymax markets
Handysize
due to a combination of softening of demand and huge deliveries
5
in recent past and in the offing. The global Handymax fleet is set
4 to expand 2.2% this year and 5.3% in 2001. Similar expansion in

May-00
Sep-98

Dec-99
Nov-97

Feb-99

Jul-99
Jun-97

Apr-98
Jan-97

Panamax and Capesize markets, which are expected to expand

by 6% this year each, and 8% & 3.5% in 2001 respectively, has
also played a role in softening of rates. We expect the Handymax
rates to continue to hover at these levels for the next few months
and subsequently fall as supply exceeds demand.
Freight rates in dry bulk markets
12
Handymax
§ Handysize markets are expected to contract by 1.5% this year
and another 1.7% in 2001. (This is partly due to large scale
(USD '000s/days)

9 As on August 2000 scrapping. The Handysize fleet is the oldest of all bulk fleets with
more than 40% of tonnage above 20 years.) As a result, the slow
As on August 2000
6
growth of minor bulk trade is not expected to lead to fall in freight
rates.
Handysize

3 § The P-I ratios in case of both Handymax and Handysize are quite
1977

1982

1987

1992

1997

close to their 25-year averages. While this implies limited scope

for further price appreciation, Handysize prices might still rise due
to large scale scrapping.

Price-income ratio of bulkers Other Markets

7 Handymax
§ Freight rates in LPG market have risen by 15-20% over the last
Average P-I ratio:5.2 one year. In container markets, freight rates have risen by
6 P-I ratio today 4.9
25-60% across various sub-segments.
5
§ In offshore markets, freight rates of supply vessels of size below
4 Handysize
Average P-I ratio:4.4 2000 dwt, which constitute a large portion of offshore fleet of SCI
P-I ratio today 4.5
3 and Great Eastern Shipping Company, have nearly doubled over
Limited scope for
further price appreciation last year’s levels in response to increase in oil prices.
2
1977 1980 1983 1986 1989 1992 1995 1998 Aug 00

Freight index
180

140

100
LPG Carrier
(22/24,000 cbm)
Index:Base 1992=100
60
1992 1994 1996 1998 2000

v
Linkages between economy, trade and shipping
§ A strong interdependence exists between economic growth and
World economic gr
trade. International trade economists have long established that a
liberal and outward-oriented trade regime increases welfare and
income through the following channels.
Global trade
§ The first channel for the impact of trade on growth is “investment”.
Openness can affect both the level and the efficiency of investment
Demand

and growth in several ways. First an open trade regime can

Global shipping ton increase market size and hence lead to investment in industries
with increasing returns that would not have been viable in a closed
smaller market. Openness further leads to increased investment
Supply

by allowing domestic players access to capital goods that were

unavailable previously or were available at too high a cost.
New Building Existing flee
§ The second channel is “productivity channel”. To the extent that

Economy, trade and shipping 12

High correlation
High correlation
4.5 between economy

% age change (World trade)

between economy 10
and trade
and trade

3.5 8
% age change

6
2.5 lagged impact

4
1.5 Lagged impact of
trade growth in 1994
on shipping in 1996 2
lagged impact
0.5 0
1992 1993 1994 1995 1996 1997 1998 1999

World output World fleet (dwt) World trade (volume)

open trade regimes lead to greater exposure to world stock of

productivity enhancing knowledge, thus openness leads to greater
growth. A third channel for the impact of trade on growth is the
government policy. If and to the extent that trade openness
creates incentives to policy makers to pursue virtuous
macroeconomic and regulatory policies, then it can lead to higher
growth.

§ Economic growth determines the level of competition and

investment in an economy. Rising income of people and
investments by firms lead to a greater demand for goods and
services. As industries relocate according to competitive advantage
(for example shipbreaking - a relatively unskilled labor intensive
activity shifted from developed countries to developing countries
where unskilled labor are abundantly present), such rising
consumption levels would lead to greater flow of goods to meet
such demand.
vi
 § The Asean countries provide an example of such linkages
between economic growth and trade. Structural imbalances caused
a meltdown in the economy leading to lower investments in
infrastructure and industries. This in turn led to lower imports of
raw materials and other goods. In the recovery phase, increased
competitiveness of the currencies (as a result of depreciation)
promoted exports, leading to accumulation of foreign exchange
reserves and build up of investor’s confidence. This led to renewed
investments and hence economic growth

Linkages in Indian context

§ The relation between the economy, trade and shipping
10% 40% demand is strong but it is very difficult to fit them in simple and
direct models. The growth in the economy of the world may hide
different aspects of the requirement of shipping. As different
5% economies move from one phase of development to other, the

Trade Growth
consumption pattern changes. An economy with rapid
industrialisation will be having more manufactured and value added
0% goods as its exports and thus an increased need for liner
1991 1993 1995 1997 1999 and container vessels for its exports. One of the major changes
that have taken place in the world trade is the reducing share of
-5% -20%
coal and crude oil. As the energy requirement is increasingly met
GRT GDP Trade
by new sources like natural gas, solar and nuclear energy, the
need for coal and crude oil has been increasing at a much lower
pace. This shift in the world trade has affected the shipping demand
for coal and crude oil. These structural changes need to be studied
in determining the shipping demand. Trends like these take shape
over a long period of time but have a strong influence on the
shipping demand.

§ The world trade in goods determines the extent to which

transportation is required, which in turn determines the demand
for shipping services.

§ The demand for the shipping services is mainly depended

upon how much trade takes place between the various nations in
the world. The demand is not only on the quantity of the service,
i.e. total tonnage required in moving the cargo but also the distance
that the cargo needs to be moved. The nature of the cargo, its
value and the distance that it needs to be moved influence the
size and the kind of vessel required.

§ The world fleet development has a remarkable phase lag in

comparison to the world trade. This is typical of the shipping
industry whose prospects keep on changing dramatically. When
the demand is high the freight rates start to zoom up. With the
expectations of high returns, huge orders are placed to build up
tonnage and the laid up tonnage is put into use. The demand for
new tonnage cannot be met overnight. The time for building a
new ship varies from one to two years. This again depends on the
existing order book of the shipyards worldwide and their capacities.
The tonnage build up leads to an oversupply of tonnage in the
market thereby leading to a crash in the freight rates. Given that
the standing costs are high, ship owners generally keep their
ships in operation even if the freight rates are low. The ships are
kept in operation till the variable costs are recovered. Decreasing
returns lead to removal of the excess tonnage through ship
scrapping.

vii
The financial markets respond
§ Internationally all pure tanker companies have witnessed Tanker companies
considerable improvements in their bottomlines.
Company Country P/E Price/ 52 week Market cap.
Book price change (USD mn)
§ The adjacent table shows that equity scrip prices of tanker Awilco ASA Norway 11.3 1.0 25.9% 67.0
companies have increased by 10-70% in the last 1 year. Benor Tankers Norway n.a. 0.8 30.6% 71.0
Bergesen D.Y. Norway 34.5 1.4 n.a. 1434.0
BT Shipping US n.a. 0.8 71.4% 27.0
§ Scrips of Teekay Shipping and Concordia Maritime, two Concordia SS n.a. 0.8 65.2% n.a.
Frontline Norway n.a. 1.4 354.5% 758.0
large tanker owners with around 4 million dwt under I.M. Skaugen Norway n.a. 0.6 16.6% 48.0
command, are trading at their net asset values (NAV). Mosvold Shipping Norway n.a. 0.7 59.8% 26.0
On the other hand, Frontline Shipping, one of the largest Odfjell Norway 18.9 0.9 11.1% 325.0
tanker owners in the world with around 10 million dwt Teekay US 9.0 2.0 185.5% 1611.0

under command is presently trading at discount of 80%.

Dry bulk companies
§ The “Clarkson Tanker Share Price Index” reflecting the
Company Country P/E Price/ 52 week Market cap.
share prices of leading global tanker owners, has doubled Book price change (USD mn)
since December 1999.
Chowgule
Steamship India n.a. 0.7 49.0% 4.0
Precious Shipping Thailand n.a. n.a. 2.5% 15.0
§ There are not many pure dry bulk companies globally.
Tolani Bulk Carriers India 4.4 0.4 3.5% 2.3
Shipping companies that have restricted themselves only
Tordenskjold AS Norway 11.5 0.6 (16.6%) 19.0
to dry bulk market have witnessed an appreciation in
share price (August 2000) in comparison to previous year
(August 1999).
The top 4 Indian shipowners
Company Country P/E Price/ 52 week Market cap.
§ Out of top four shipowners in India, two have witnessed Book price change (USD mn)
a decline in share price over previous year. In case of The Shipping Corporation
Great Eastern, share prices were trading below last year’s of India Limited India 3.5 0.3 (36.0%) 97.0
level even till July 2000. The entire share price The Great Eastern
Shipping Company Limited India 4.6 0.6 (9.0%) 103.0
appreciation of 12% shown in the table has come in the
Essar Shipping
last few days. Limited India 2.4 0.1 (20.2%) 20.0
Varun Shipping
Company Limited India 4.8 0.3 11.0% 10.0
§ Indian shipping firms share prices have not responded to
the changes in the share prices of shipping firms’ world Note: Prices of Indian shipowners is as on September 5, 2000 while for
international shipowners it is as on end-July, 2000
over. This represents the gap of information flow between
the commercial market and financial market.

viii
 The Shipping Corporation of India Limited
Recommendation: Hold The strong points

§ Only Indian shipowner with a fleet of international size

§ Fleet is diversified: encompasses almost every sub-sector and size -
Price (as September 5, 2000) Rs. 18.5
focussed on shipping
Book value (as on March 31, 2000) Rs. 64.2
§ Joint venture to give exposure in specialized area of LNG shipping
Net asset value * Rs. 139.0
P/E (x) 3.5
The weak points
Average age of fleet 15.8 years
Tonnage under command 5.0 mndwt § Having worked in a protected environment in the past; deregulation
Debt-equity ratio 0.99 and removal of price and cargo support could pose various challenges
*
For calculation of NAV, latest fleet profile has been taken, but § Lack of autonomy in decision making - however recent move for
other assets as per Annual Report, 1998-99 divestment by government could provide much needed flexibility
§ Deployment of large product tonnage would be deeply affected by
Forecasts recent trends of falling product imports in India
1999-2000 2000-01
§ Around 25% of crude and product tanker tonnage have reached 25
TCE earning from shipping (Rs. mn) 20,612 21,000 years or expected to reach in next few months
Net profit (Rs. mn) 1,616 2,316 § Privatization process may not be effected in near future
EPS (Rs.) 5.7 8.2
§ Low level of liquidity in secondary market
Expected price (Rs.) at P/E (x) of:
- 2.5 14 21
Prognosis
- 5.0 29 41
§ Due to continuing losses from general cargo liner operations, SCI is
- 10.0 57 82
planning to reduce its exposure in this segment. Income from products
- 15.0 86 123 trade is also expected to fall with the company planning to sell off its
aged tankers. As a result, we do not expect TCE earnings from
shipping to cross Rs. 21,000 million for the company. Further, except
Adjusted share price (in Rs.) Price Movement Freight index for a single Handymax vessel, other new vessels are not expected
150 175 for delivery in near future.
130
150
(Time charter earnings (TCE) have been calculated by subtracting bunker
110
and port dues from Income from operations. This reflects the true income
90 125 of shipping company)
70 100 § However, net profits are expected to rise because of two factors;
50 profit from sale of vessels and reduced losses in general cargo trade.
75 The company wants to sell off most of its general cargo vessels. We
30
Index Base 1994=100
expect annual losses of around Rs. 500 million from general cargo
10
1994 1996 1998 2000
50 operations to atleast halve in FY2000-2001. Further large one-time
SCI Handymax freight index Aframex freight index profits are expected from sale of vessels given the buoyancy in both
second-hand and shipbreaking markets.

§ Absence of central and strong governing consciousness and

Price / Price / Net government’s dithering on privatization of the firm, creates a
Book value asset value very uncertain future for SCI. Inspite of best NAV and profitability
August, 2000 0.29 0.13 amongst the shipping companies, i-maritime would advise
June, 1998 0.69 0.52 investors to hold on before deciding to buy.
June, 1995 1.26 0.51 PWC, consultants to SCI, have recommended restructuring the company
into three separate companies in conjunction with offshore, liner & container
and bulk carriers. This could lead to greater volatility in profitability.
(Rs. mn) (Rs. mn)
1999-00 1998-99 1997-98 1996-97 st
as on 31 March 2000 1999 1998 1997
TCE earnings from shipping 20,612 18,700 16,050 14,865 Paid up equity 2,823 2,823 2,823 2,823
Profit from sale of ship - 26 192 433
Net worth - 18,121 16,584 14,744
Total turnover 26,148 25,823 25,215 24,420
PBDIT 5,499 6,043 6,379 7,121 Loan funds - 17,881 19,014 19,418
Interest 724 1,004 865 1,998
Net block of fleet - 30,713 29,662 29,012
Net profit 1,616 2,013 2,462 2,333
Cash profits 4,364 4,603 4,960 4,690 Net current assets - 4,151 5,225 4,637
ix
 Till 1998, the company’s profitability and scrip price showed limited
Price movement of SCI
310 correlation with shipping markets as the company operated in protected
environment in a cost-plus mechanism. Since the last 2 years, with
260
gradual liberalization and lower cargo support, the scenario has changed
210 to a large extent.

160 A substantial change in fleet profile is also expected in the near future.
Sensex
The company is gradually exiting from general cargo liner operations
110
where it has been operating more out of national obligations than
60 commercial reasons. The present market represents one of the most
Index:Base 1993=100 SCI ideal time to exit because of high prices in the second hand markets for
10 ships as well as in the ship breaking market. The company can
1993 1995 1997 1999
restructure its tanker fleet, by selling of those, which are above 25 years.

The company has placed orders for 4 Aframaxes with Hyundai and 1
with Cochin Shipyard, all of which are due for delivery by 2002 and a
30
P/E Ratio of SCI Handymax with Hindustan Shipyard, which is due for delivery in near
future.
25
The company in joint venture with Mitsui OSK of Japan and Enron would
20
provide LNG shipping services for Enron’s power project in Dabhol.
15 This venture would provide the company an entry into a highly lucrative
business in shipping. The company has also bided for the Petronet
10 LNG shipping deal.

5 Various multinational companies like Canadian Pacific Lines, Contship

3x Shipping Lines and Mitsui etc. have evinced interest to government’s
0
1993 1994 1995 1996 1997 1998 1999 2000 call for divestment of 40-50% stake in the company. Great Eastern
Shipping and Reliance have also shown interest for the same. However,
there is no clear-cut deadline for completion of the privatization process.
Distribution of equity shareholdings
(as on April 12,1998) Shipping Corporation of India during the quarter ended June 30, 2000
witnessed a decrease in income from operations by around 5% and in
Category % share holding effective time charter earnings by around 8% as compared to quarter
I. Foreign holdings 5.42 ending June 30, 1999. Net profits have however fallen by around 43%,
to Rs. 190 million from Rs. 330 million last year.
II. Govt./Govt. sponsored Financial Institutions 88.10
III. Corporate bodies (not covered under I & II) 6.32
IV. Directors & their relatives 0.00 Fleet profile of SCI
V. Top 50 shareholders (not covered above) 0.10 Type of vessels No. of DWT(‘000)
VI. Others 0.07 vessels
Total 100.00 Dry cargo Liner 25 427.6
Dry bulk cargo carrier 24 987.2
Tanker (crude oil) 28 2,569.8
Tanker (product carrier) 16 540.0
Cellular container 3 86.8
Ore Oil bulk carrier 2 246.9
Acid carrier 3 93.0
LPG carrier 2 35.2
Passenger-cum-cargo 2 5.4
OSV’s 10 17.9
Total 115 5,009.9

x
The Great Eastern Shipping Company Limited The strong points
Recommendation: Strong Buy
§ 53 years of experience in shipping
§ Actively involved in international cross trade. A large product tanker
fleet could be easily deployed despite fall in India-related shipping re-
Price (as on September 5, 2000) Rs. 24.5 quirements
Book value (as on March 31, 2000) Rs. 43.6 § AAA rating from CRISIL
Net asset value Rs. 52.3 § Have hived off unrelated businesses like real estate. Substantially re-
P/E (x) 4.6 duced exposure in commodity trading
Average age of fleet 14.3 years § A young and diversified fleet; helps in reducing volatility in earnings
Tonnage under command 1.6 mn dwt
§ A professional management team. However, at the board level the
Debt-equity ratio 0.89
company is managed by the Sheth family

§ High level of transparency in annual reports ever since incorporation

Forecasts § Secondary market for Great Eastern Shipping is liquid
1999-2000 2000-01
The weak points
TCE earning from shipping (Rs. mn) 5,413 6,090
Net profit (Rs. mn) 1,105 1,782 § Management has been quite less aggressive in tonnage acquisition in
EPS (Rs.) 4.3 6.9 last few years relative to past track record
Expected price (Rs.) at P/E (x) of: § Board of Directors is not broad based
- 2.5 11 17
- 5.0 21 34 Prognosis
- 10.0 43 69 § The effective weighted average time charter earnings of Great Eastern’s
- 15.0 64 103 fleet is expected to jump by 25% in FY2000-2001. We have assumed
that 50% of the fleet would benefit from this rise while the remaining
50% would continue to be deployed by contracts entered into last year
and hence at last year’s freight levels. As a result of cost restructuring
Adjusted share price (in Rs.) Price Movement Freight index exercise recommended by Anderson Consulting, the company is ex-
pected to generate substantial savings in administrative and other ex-
90 175
penses.
150
70 § i-maritime believes that Great Eastern is the strongest buy amongst
125
all the listed Indian shipping companies. Discounting the projected
50 EPS of FY2000-2001 by P/E multiple of 10 to 15, indicates a share
100 price range of Rs. 69 to Rs. 103.
30 The company has since inception in 1948, always been exposed to market
75

Index Base 1994=100

forces. Today around 30% of shipping income is through deployment of
10 50 vessels in international cross trades. As a result, profitability and scrip prices
1994 1996 1998 2000
GESCO Handymax freight index Aframex freight index have fluctuated with global shipping markets.

In 1999-2000, the company acquired only 1 product tanker 2 Handymaxes,

2 tugs and 1 AHTS vessel. This is despite the suitable conditions in both
Price / Price / Net financial and shipping markets. The company enjoys an AAA rating from
Book value asset value
CRISIL and has a low debt equity ratio implying large scope of fund raising
August, 2000 0.56 0.46 – an opportunity that was not used to acquire tonnage or paper in depressed
June, 1998 0.94 0.61 market conditions.
June, 1995 1.34 1.06

(Rs. mn) (Rs. mn)

1999-00 1998-99 1997-98 1996-97 as on 31st March 2000 1999 1998 1997
TCE earnings from shipping 5,413 5,914 5,672 4,995 Paid up equity 2,588 2,876 2,876 2,876
Profit from sale of ship 480 5 340 96
Net worth 11,281 12,109 11,990 11,586
Total turnover 9,945 9,808 9,640 8,781
PBDIT 3,684 3,768 4,121 3,529 Loan funds 10,053 9,347 8,318 8,357
Interest 608 578 650 691
Net block of fleet 15,867 15,439 13,429 13,367
Net profit 1,105 1,264 1,642 1,364
Cash profits 2,916 2,910 3,200 2,589 Net current assets 3,259 3,223 4,249 4,290
xi
 300
The company has tied up with public sector oil major, Indian Oil Corporation,
Price movement of GESCO
and SK Shipping of South Korea for LNG transportation. The firm has placed
250 order for 2 Aframax tankers with foreign yards. However, the first vessel is
due for delivery only by April 2002 and second by April 2003 and hence will
200
not affect company financials in near future. The company is also considering
150 Sensex to place an order for another new built Aframax tanker, which would be
delivered only by October 2003.
100

50 GESCO The company has over the years built up considerable expertise in
recognizing shipping tops and bottoms and accordingly taking purchase &
Index:Base 1992=100
0
1992 1994 1996 1998 2000
sale and chartering decisions. However, over the last few years it has missed
numerous opportunities in acquiring vessels. Further, the company has been
increasingly deploying its vessels on long-term time charter to avoid market
18 P/E Ratio of GESCO
fluctuations; loosing opportunities to profit from short term market
movements.
14
Still, we consider Great Eastern a “world class” company on such parameters
10
as expertise in shipping, financial strength, transparency of accounts, etc.

Income from operation for the quarter ending June 30, 2000 increased by
6
around 14% as compared to quarter ending June 30, 1999. Net profit also
4.6x witnessed an increase of around 206% during the same period, mainly due
2 to sale of vessels and rising freight rates.
1993 1994 1995 1996 1997 1998 1999 2000

Fleet profile of Great Eastern (incl. subsidiary)

Distribution of equity shareholdings Type of vessels No. of DWT (‘000)

(as on August 28,1998)
vessels
Category % share holding Bulk carriers 17 681.4
I. Foreign holdings 37.11 Mini bulk carriers 4 8.6
II. Govt./Govt. sponsored Financial Institutions 17.99 Tanker (crude oil) 3 355.0
III. Corporate bodies (not covered under I & II) 6.37 Tanker (product carrier) 13 489.0
IV. Directors & their relatives 7.76 LPG 1 28.0
V. Top 50 shareholders (not covered above) 1.84 Offshore vessels 26 29.0
VI. Others 28.93 Total 64 1,592.0
Total 100.00

xii
Essar Shipping Limited The strong points
Recommendation: Switch
§ A young fleet of 6 Suezmax tankers.

Price (as on September 5, 2000) Rs. 6.7 The weak points

Book value (as on March 31, 2000) Rs. 54.3 § Returns from investment in Vadinar project dependent upon Essar Oil’s
Net asset value Rs. 95.8 refinery project, which has been considerably delayed and not expected
P/E (x) 2.4 to commissioned soon. Management expects the refinery to be
Average age of fleet 11.9 years commissioned by end-2001. However, industry sources quote a much
Tonnage under command 1.3 mn dwt latter date
Debt-equity ratio 1.8
§ Non-convertible debenture issue rated C by Crisil, indicating substan-
1.Terminal project, with an investment of around Rs. 15 billion, is tial risk of default
not expected to generate returns in the immediate future
2.Expenditure during construction of terminal which have been § Most of the Suezmaxes would continue to be deployed at low freight
capitalized have been taken into account for calculation of NAV rates under contracts entered last year
Forecasts
§ High debt-equity ratio
1999-2000 2000-01
TCE earning from shipping (Rs. mn) 3,330 3,497
Prognosis
Net profit (Rs. mn) 484 651
EPS (Rs.) 2.5 3.3 § The effective weighted average time charter earnings of Essar‘s fleet
Expected price (Rs.) at P/E (x) of: is not expected to show significant rise in FY2000-2001. This is be-
- 2.5 6 8 cause most of the Suezmaxes are presently deployed under contracts
- 5.0 12 17 entered last year and hence unable to ride the boom.
- 10.0 25 33
§ Uncertainty regarding investments in Vadinar port project and in
- 15.0 37 50
group companies, lack of transparency, high gearing and above
all incoherent business strategy, points towards a switch in in-
Adjusted share price (in Rs.) Price Movement Freight index
100 175 vestment from Essar to other shipping stocks.

80 150 One should consider the nature of assets in Essar’s books. The company
acquired the Vadinar Terminal project from group company Essar Oil which
60 125 has a total project outlay of Rs. 15 billion. Returns from the project could be
realized only after implementation of Essar Oil’s refinery, which is not ex-
40 100 pected in near future. The company’s investments, to the tune of Rs. 3,800
million and almost entirely in-group companies, have been pledged with
20 75 banks and financial institutions and hence are illiquid.
Index:Base 1994=100
0 50 The company recently acquired two Capsize vessels aged 17 and 21 years
1994 1996 1998 2000
Essar Shipping Handymax freight index Aframax freight index
respectively. However, they are facing problem in getting customs clear-
ance; a reflection of certain grey areas in the regulatory framework. Apart
from the above vessels, the company did not make any substantial ton-
Price / Price / Net nage acquisition during the last 2 years. Further, due to high debt equity
Book value asset value ratio and negligible internal free funds, we do not expect the company to be
August, 2000 0.12 0.07 able to achieve much tonnage growth in near future.
June, 1998 0.22 0.13
June, 1995 1.29 0.92
(Rs. mn) (Rs. mn)

1999-00 1998-99 1997-98 1996-97 st

as on 31 March 2000 1999 1998 1997
(12 months) (12 months) (6 months) (18 months) (30 Sept)
TCE earnings from shipping 3,330 4,018 2,077 6,485 Paid up equity 1,967 1,967 1,967 1,967
Profit from sale of ship 237 — 221 61
Net worth 10,677 10,256 9,839 9,565
Total turnover 4,697 4,400 2,526 8,050
Loan funds 19,372 16,431 6,679 6,089
PBDIT 2,059 2,003 1,376 3,630
Net block of fleet 7,457 5,528 7,486 8,059
Interest 761 753 503 1,259
Net profit 484 480 451 974 WIP of port project 11,095 12,239 - -
Cash profits 1,243 1,200 819 2,244 Net current assets 1,651 717 548 2,234
xiii
 Essar Shipping has one of the youngest fleet in India. The modern tanker
300 Price Movement of Essar
fleet is expected to benefit substantially because regulation and
environmental norms have lowered the preference for hiring older tonnage.

200 The company is planning to hive off the terminal as a separate company
and subsequently look for strategic partner in the terminal company.

Sensex The default of FRN issue by Essar Steel, a group company will have the
100
spillovers on Essar Shipping Limited also. The company raised around USD
116 million from GE Capital Corporation, USA and Boeing Capital
Index:Base 1992=100 Essar Corporation, USA at a fixed rate of around 10% and duration of 12 years.
0
1992 1994 1996 1998 2000

Income from operations for the quarter ending June 30, 2000 reduced by
around 5%, as compared to quarter ending June 30, 1999. However net
P/E Ratio of Essar
profits have risen by around 65% during the same period.
12

Fleet profile of Essar Shipping

8

Type of vessels No. of DWT (‘000)

vessels
4
2.5x Bulk carriers* 6 209.8
Tanker (crude oil) 6 919.0
0
1993 1994 1995 1996 1997 1998 1999 2000
Tanker (product carrier) 4 76.2
Distribution of equity shareholdings Mini bulk carriers** 11 24.2
(as on March 31,2000) Offshore vessels 7 6.9
Others*** 40 104.2
Category % share holding Total 74 1,340.3
I. Foreign holdings 27.83
II. Financial Institutions/banks/insurance 15.47 * one of the bulk carrier is under BBCD contract
III. Public 28.04 ** all of them are under BBCD contract
IV. Corporate bodies and others 28.66 *** inclusive of 39 dumb barges
Total 100.00

xiv
Varun Shipping Company Limited The strong points
Recommendation: Buy
§ A+ rating from ICRA (Investment Information and Credit Rating Agency)

§ Experience of 27 years in shipping industry

Price (as on September 5, 2000) Rs. 13.0
§ A continuous dividend track record for 16 years
Book value (as on March 31, 2000) Rs. 40.6
Net asset value Rs.40.0★ The weak points
P/E (x) 4.8
§ A small and aged fleet. However, fleet is diversified and hence less
Average age of fleet 19.7 years
volatility in earnings
Tonnage under command 0.28 mn dwt
Debt-equity ratio 2.0★★ § A high debt equity ratio
★
Preference equity treated as debt funds in NAV calculation
Management expect NAV to be around Rs. 50 § We are not sure whether the company could generate around Rs. 500
★★
Preference capital treated as debt million as contribution for 26% stake in LNG venture for Petronet

Forecasts § Board of Directors is not broad-based

1999-2000 2000-01
TCE earning from shipping (Rs. mn) 1,617 1,779 § Liquidity in stock markets quite low
Net profit (Rs. mn) 89 251
§ In the past, a large quantum of profits resulted from sale and lease
EPS (Rs.) 1.8 6.3
back arrangement of vessels, with subsidiary companies. These trans-
Expected price (Rs.) at P/E (x) of:
actions were carried out to provide equity for further vessel acquisi-
- 2.5 5 16 tions
- 5.0 9 31
- 10.0 18 63 Prognosis
- 15.0 27 94
§ The effective weighted average time charter earnings of Varun‘s fleet
is expected to jump by 20% in FY2000-2001. We have assumed that
50% of the fleet would benefit from this rise while the remaining 50%
Adjusted share price (in Rs.) Freight Index would continue to be deployed under contracts entered last year and
Price Movement
40 175
hence at last year’s freight levels.
150
30 § Focus on shipping and research-based tonnage acquisition,
125 justifies a P/E multiple of 5 to 7, indicating a share price of
20 Rs. 31 to Rs. 44.
100
The company did not acquire a single vessel last fiscal despite low asset
10 75
values, except for a small tanker whose ownership transferred after end of
BBCD contract. Due to high debt equity ratio, chances for further expan-
0 50
1994 1996 1998 2000 sion of fleet by the company seems low. However, the company is presently
Varun Shipping Handymax freight index Aframax freight index planning a Rs. 360 million right issue comprising convertible debentures, to
fund further acquisitions of LPG and Crude tankers.

The company has tied up with Examar Shipping and Hanjin Shipping to bid
Price / Price / Net for the LNG shipping contract of Petronet LNG deal.
Book value asset value
August, 2000 0.32 0.32
June, 1998 0.31 0.25
June, 1995 0.97 0.69

(Rs. mn) (Rs. mn)

1999-00 1998-99 1997-98 1996-97 as on 31st March 2000 1999 1998 1997
TCE earnings from shipping 1,617 1,629 1,42 1,353 Paid up equity 363 363 359 359
Profit from sale of ship — — 198 122
Total turnover 1,848 1,829 1,777 1,593 Net worth 1,472 1,611 1,600 1,438
PBDIT 792 844 869 722 Loan funds 2,825 2,966 2,417 2,096
Interest 302 322 276 235
Net block of fleet 3,890 4,036 3,353 3,024
Net profit 89 75 261 216
Cash profits 479 513 563 455 Net current assets 311 458 496 350
xv
 Income from operations of Varun Shipping, for the quarter ending June 30,
300 Price movement of varun
2000 increased marginally by around 10% as compared to quarter ending
Sensex
June 30, 1999.

200 Net profit after tax increased by around 185% vis-a-vis last year’s levels
and stands at Rs. 14.3 million.

100 Varun
Fleet profile of Varun Shipping

0
Index:Base 1992=100 Type of vessels No. of DWT (‘000)
1992 1994 1996 1998 2000 vessels

Product tanker 3 97.2

10 P/E Ratio of Varun
Add carrier * 3 21.7
LPG carrier 3 74.5
8 Bulk carrier 2 85.2
AHTS ** 2 2.2
6 Total 13 280.8

4 * One acid carrier belongs to Tarun Shipping

3.6x in which VSL has 49.9% stake
2 **Both AHTS belong to VSC International
and are under BBCD contract with VSL
0
1993 1994 1995 1996 1997 1998 1999 2000

Distribution of equity shareholdings

(as on September 30, 1999)

Category % share holding

I. Promoter group 34.68
II. Directors & their relatives 1.00
III. Financial Institutions / banks / mutual funds 13.62
IV. IFC (Washington) 4.83
V. Non-Residents 2.08
VI. Public 43.79
Total 100.00

xvi