The Great Eastern Shipping Company Limited (500620) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. Thank you for standing by. Welcome to The GE Shipping Earnings Call on Declarations of its Financial Results for the Quarter ended December 31, 2019. [Operator Instructions] I now hand the conference over to Ms. Anjali Kumar, Head of Corporate Communications at The Great Eastern Shipping Company to start the proceedings. Thank you, and over to you.

Thank you. Good afternoon, friends. And welcome to the results conference call for our Q3 results. I hope all of you have managed to get hand of the results that we've announced a couple of hours ago. As you can see from the results, there has been a good improvement in the numbers, largely due to the improvement in the tanker markets, which in Q3 of FY '20, was at very strong levels, and product rates, too, have firmed up. As you can see in our press release, the average TCYs, which we earned were substantially better in the crude segment. In fact, in the crude segment, we earned $38,800-plus on an average compared to $16,500 in the previous quarter. Product tanker TCYs, too, were up to about $18,555 compared to $14,900 in the previous quarter. LPG carriers were also up to average, up above $22,800, up from the $19,800 in the previous quarter. On the dry side, market was a little softer, and average at a TCY of about $12,900. Coming to asset values, tanker ship values were up approximately 10%, while the dry bulk asset values were marginally down. On the whole, market value of our fleet was up approximately 7% in dollar terms. As a result of this and the rupee depreciation, the stand-alone NAV has moved up to INR 450, up from the last quarter of INR 393. The consolidated NAV that we announced has moved up from the range of -- from the previous range of INR 447 to INR 472, it has moved up to INR 512 to INR 532. In the offshore segment, broker valuations have been flat, and the -- at least, the declining trend seems to have now halted. Coming to the specific segments. For the crude market, freight rates in the crude tanker market has improved substantially during the quarter. And like most of us by now, know the reasons for it were a couple of the main ones. Firstly, the fact that the U.S. had put a sanction on a couple of the COSCO subsidiaries. This had impacted 26 VLCCs. There was additionally about 29 vessels, which were storing the VLSFO at Singapore. This was done ahead of the IMO 2020 implementation. So this was done through the last few weeks of the quarter. And of course, there was an entire fleet of the Iranian vessels, which were impacted due to the sanctions. So in total, roughly about 92 VLCCs, which approximately is about 11% of the VLCC fleet, and about 6% to 7% of the total crude fleet, which was impacted. So all of these put together had a tremendous positive improvement on rates. And this is despite the fact that 6% Y-o-Y growth in the crude tanker fleet. Now coming to the product market. After remaining very weak for most part of the year, product tanker freight rate also doubled sequentially during the quarter. We saw growth in products -- core products demand mainly driven by the middle distillates. Product trade is estimated to have risen by about 500,000 to 600,000 barrels per day during the quarter. MR trade, in particular, doubled sequentially, mainly led by higher intra-Asian trade. However, in the LR segment, we saw a -- the trade fall by about 4%. Fleet growth in this segment has been about 4.5% in the quarter. Post the December quarter, of course, the tanker rate, as you all know, has come off quite significantly. The effect of the coronavirus on the oil demand and the fact that the ban on the COSCO ships has been lifted, these have been the two main short-term headwinds that have impacted freight rates. Further, there have been some ramp cuts and a lower demand will have had an impact on the product tanker freight rates negatively, too. But one important point to note for the medium-term is that the outstanding order book is below 20% in both crude and product. This is at a multiyear low now. So this is an important point to note for the medium term. In -- coming to the LPG markets, this has been strong, due to mainly the U.S. LPG production growth. In fact, as -- the U.S.-Asia LPG trade arbitrage also remained at very healthy levels during the quarter. Imports -- LPG imports into India also has increased almost 22% Y-o-Y during the quarter. And the order book in this segment stands -- currently stands at 14%. Next, we come to the dry bulk segment. And the dry bulk segment has been very weak through the quarter. Couple of main reasons is that -- the biggest reason, of course, is the fact that iron ore supply was impacted by the Vale's loss of production. And in fact, just recently, they've announced the results and this production issue continues even in the current quarter. There has also been a negative growth in the global coal trade, which is led largely by the Chinese government's policy to curtail imports. And of course, there has also been degrowth in the Indian coal imports. This is largely because of negative power -- negative growth in the power generation, fired by coal plants. The supply side situation also has not offered much of a respite as the deliveries continue to increase. This quarter, that is -- the last quarter -- the September -- the October-December quarter has seen the highest delivery since Q4 of FY '17, roughly almost 4% growth. The excessive rainfall in Brazil has -- in the month of Jan as well, has hindered exports of iron ore. And the Vale's -- therefore, Vale's production issues have continued, like I mentioned, in this quarter also. And in Jan alone, in fact, Brazilian iron ore exports are down 10 million tonnes after having declined by 7 million tonnes in December. This has obviously severely impacted the demand for capesizes due to lost of ton-miles. And extended Chinese New Year, amidst the virus backdrop, is also having a huge impact on demand, which is now over and above the seasonal weakness that normally comes at this time of the year. The order book in dry bulk stands at about 9.1% today. One point on the IMO transition to the VLSFO fuel. It has now been almost 6 weeks, things seem to have settled down by now. By the end of December, we saw approximately 29 VLCCs stored with VLSFO of Singapore, as we spoke earlier. This ensured that there was adequate supply of the new fuel. Initially, we did see the price of VLSFO jump up, in fact, the sulfur spreads went up to almost $400, but now they have settled down, and now they are just a little over $200. The initial price distortion of VLSFO was also mainly due to the unavailability of barges rather than just the -- just any lack of supply. So it was just a very short-term sort of thing, and that now seems to have settled down. Coming to the offshore segment. The OSV sector -- OSVs continued its gradual recovery in utilization but, of course, from a very low base. Utilizations in the OSV segment has increased marginally from about low-40s in the -- at the start of the year, calendar year, to about almost 50% at the end of the year. And charter rates has seen some improvement in certain geographies. Especially in the Indian market, charter rates have -- for PSVs, have inched up by roughly about 10% recently. But overall market does still seem to remain a little oversupplied. But the one silver lining is that scrapping has exceeded new deliveries here so that, in turn, has been reducing the overall delivered fleet. We have also seen some improvement in market sentiment due to the fact that some of the modern cold spec vessels were reactivated in the year that which led to increased -- increase in the marketable fleet. And currently, order book for the fleet stood at 5% at the end of the year. On the rig segment, the utilization has improved quite substantially. It was 61% at the start of the year -- calendar year, and now it's at about 70%. And if you take just the modern rigs, then the utilization is close to about 80%. As a result of this, charter rates have seen a substantial improvement in this segment. Based on the outstanding tenders and the activity of -- in the rig market, especially in the Middle East and Southeast Asian markets, the outlook for the sector looks promising. And it's also supported by the fact that the fleet age profile, which still consists of close to 40% rigs that are greater than 25 years old. With that, I will now throw the floor open to questions. And please feel free to ask.

[Operator Instructions] The first question is from the line of Nirav Shah from GeeCee Holdings.

Yes, and congrats on a blowout quarter. I have three questions. First question is I mean there were many vessels, which were supposed to go for dry docking for scrubber installation in the first half of this calendar year, and we've had some disruptions in China. And I believe there will be many dock yards, which would have been utilized for this -- sorry, scrubber facilities. So how do you see that event, I mean, impacting the vessel supply? And maybe on the pricing front, can it give some support to the pricing in the current challenging environment?

I will hand over to our CFO, Mr. Shivakumar, to answer that.

I don't know if you were referring to our own ships, which are going or generally about?

Generally.

Yes. So yes, a lot of ships were supposed to go for dry docking in China. It is in fact, we ourselves were intending to go for our scrubber installations on a couple of our vessels in March, April. However, given the situation at the yards, these have been postponed. So we will look for alternatives. There are ships, which are already coming to the supply and how it can disrupt. There are ships, which are already stuck in China doing -- in dry dock, doing scrubber installations or generally, in dry dock itself, which is sort of preventing them from joining the market, so -- which is a small positive for the market. Also, there are ships, which are not able to go in and discharge for various reasons, where they're carrying cargo into China. So that is very few and far between. So -- but broadly, in the dry docks, there are ships, which are stuck there because the workforce is not available to complete the project. And secondly, yes, there are very few people who are going into China currently, given that -- for the dry docks, given that the yards don't have their manpower.

Okay. Got it. So it can lend some support, I mean...

No. See, these ships are trading still, it is not that they can't trade. So the ships are trading or they will find a dry dock in Singapore or in the Middle East. Except that their scrubber is sitting in China, then it's difficult to transport it out of there. So that is a separate problem.

Any indication of how much supply I mean would be going to China for the installation of scrubbers are?

No. Actually, no. See, if they're not yet gone in, you can continue to trade. It's not a -- or you can go into a dry dock in Singapore or in Malaysia, or the Middle East.

Got it. Got it, sir. Sir, the second question is on the dry bulk segment. I believe the current rates are -- the way they are quoting, I mean there'll be big cash losses, at least on the spot basis for capesizing and everything. So -- and we've also reduced our exposure to that segment from 16 vessels in March '18 to current 13. So what is our view in terms of, again, scaling up in this segment? And how do you see the demand impacting because is it a demand issue that will prevent this particular segment from reaching, again, the levels of -- which were 2 months or 3 months back? So how do you look at this segment in terms of even scaling up your own operations in this dry bulk?

Yes. So a couple of things. One is, of course, it's a seasonal lull. First, there was seasonal lull, which normally comes in the month of December, Jan. That's one. Second is that you have this virus issue, the coronavirus issue, which is obviously affected the economic activity in China, and therefore, reduced their requirement for imports. And therefore, taken demand out of the market. We also have the Vale issue, where they are having lesser exports, due to excessive rainfall in one of their exporting areas. So a lot of it depends on what happens, how this virus develops. And the parallel to this is when we had SARS in 2002, '03, that went off in about 6 to 8 months' time. That was -- that blew over, that's it. Obviously, today, China is much more -- is much bigger as a share of the world economy, as a share of world commodity movement, and therefore, has a much bigger impact. However, last time after the SARS event, everything rebounded very quickly. In fact, the dry bulk market stayed strong throughout that because China was growing so rapidly in 2003. So you could well have that there is a base level of demand, which is not being met currently. And we have already seen talk over stimulus in China. And when it comes in, again, it will just rebound very quickly. This -- we saw this happen with -- in June last year. All the exports that were lost from Vale suddenly they came back. And then, it's like a coiled spring, suddenly, it bounces back.

But just your initial feedback, whatever is the research coming that now things are gradually on the recovering front.

On -- really on virus, we just have no idea what's -- it's going to depend how that virus plays out.

Got it. And sir, another question is, have the vessel prices -- how have they moved? Have they moved in line with the way the rates have moved? Or because it's a very short-term phenomena, supposedly rates are pretty steady for across segments?

Yes. Vessel prices are a little soft. Obviously, that confidence in ...

Actually, vessel prices move with a bit of a lag to the rate.

They are a little soft. It softened a little bit, but not a huge amount.

Got it. Sir, this is the last question. Just bookkeeping. I mean I just want to reconcile on that net debt front on a stand-alone basis in September quarter that debt was around INR 1,800 crores. And as on date, it's around INR 1,576 crores. Our cashflows are pretty, pretty strong this quarter, plus we sold one Suezmax, the gains we have booked, but the principle cost would also, we have received. So just want to check why the net debt number has only been down by around INR 225 crores, despite -- is the cash profit of around INR 430 crores plus the principal value of the Suezmax?

So you have -- no, we did have CapEx as well. We have been spending money on some equipment. So we have drawn down some debt during the quarter to -- not to buy ships, but to do CapEx on equipment for paying installments on scrubbers and other equipment. We also have, as part of the debt, the derivatives that we have on the MCDs, that is also requires to be paid off. We had a big maturity of an MCD in the last quarter. When that is paid off -- and when that is paid off, you have to pay off the derivative MTM as well. So that was about INR 100 crores.

Sir, MTM itself was INR 100 crores?

That's correct. It was a INR 200 crore MCD, which was done in 2009, '10.

This was the high cost MCD that you were mentioning last quarter?

Correct.

And just I mean I am looking at this gap -- just continuing with this thing so...

[Operator Instructions] The next question is from the line of Bhavin Gandhi from B&K Securities.

Sir, just it seems -- if I look at the headline numbers, although the numbers have been spectacular, but it seems that the headline numbers are weaker than what the market rates are indicating, given that we were on -- mostly on spot as far as crude tankers are concerned. So any particular reason why those are not reflecting in the charter rates?

Yes. See the -- there's always a lag, right? So your earnings are basically the fixtures of September, October, November. You haven't got more than 1, 1.5 months of a strong market in this. So typically, there will be a 1 to 1.5-month lag between the fixing and the TCY in the quarter.

Okay. So will it be fair to assume that some sort of the strength that we saw in the spot rates will also be reflected in the 4Q numbers?

Yes because the fixing of December will be -- would have been executed in January and part of February. So yes. So you'd always take a lag. So if you want to forecast the TCY of any quarter, just start with one month before the start of that quarter, just on a very thumb rule kind of thing.

Got it. Got it, sir. And also on the offshore side, so where -- when does the repricing hit the P&L? We've not seen any sequential change in numbers there as well.

Yes. Yes. Nothing yet. So the next repricing will happen in the -- in March.

In March, okay. Got it.

[indiscernible] in March.

Got it, sir. And sir, on the IMO itself, how does -- I mean are the higher fuel costs getting compensated through higher charter rate for scrubber installed vessel? How is the equation? How will we see that change playing out for the P&L going forward?

Yes. They don't get higher charter rates, they get the same freight rate, and their cost base is lower. So that's on the spot market. In the time charter market, yes, they get higher charter rates. But you're definitely not getting 100% of the gain. If you want 100% of the scrubber savings, you have to run it in the spot market. So in the time -- let's say that a ship -- a particular type of ship will give you $3,000 per day improvement. In the spot market, you will be able to capture that, assuming you get that spread and you have that consumption. In the time charter market, you will not be offered $3,000 extra.

Okay. Okay. Got it. And sir, how are we looking at our exposure in each of the markets individually now going forward? Would you like to kind of keep the exposure to the same levels that we are seeing right now? Or would you like to cover some of it?

We are -- okay. So in gas, we have fixed a couple of ships. In fact, we have fixed -- yes, we've done 2 fixtures in the last 3 to 4 months for the VLGCs, both of which came off contract. We have one more gas carrier coming off contract shortly. We'll have to decide whether to fix or to run on the spot market because the spot market there is quite strong. It's still in the $40,000-plus range. In crude tankers, not really. We have 2 Aframaxes which are on time charter but the rest, we are running on spot. You saw that we sold one of our 2000 build Suezmaxes and delivered it in December. So the option to sell is always there. But yes, we are not really there to fix because, again, on -- the 4 modern Suezmaxes, which are the only ones we can really fix on time charter, we are scheduled to have scrubber installation. So we can't go into a time charter and take the ship out then for a dry dock in the middle of the charter. It's a complicated thing. So we are not likely -- we are not seeing any great opportunity to go into much more time charters. Product tankers, maybe one here or there. Currently, we have very little cover in the product tanker side as well. Out of our 17, we probably have 2 or 3 fixed. So not really looking at doing anything. Again, the market now is not -- it's not really giving very tempting time charter rates. Maybe the next time the opportunity comes along. And in dry bulk there is no question of [indiscernible] in this market.

Sure. And sir, finally, on the payout side, how should we look at payouts given that we don't have meaningful CapEx lined up?

Yes. So -- even last year, when we had no profit, there was a dividend payout. So the intention of the company is always to pay a dividend. Now the Board will decide eventually on what -- if your question is -- if your point is that you have -- we have a lot of affordability? Yes, you're absolutely right. We certainly have a lot of -- not a lot of cash, we have significant amount of cash build up, and we are fairly light on repayments in the coming year. And as you said, no Capex. So yes, we have the capability to pay a dividend, but the Board will take that call. But yes, we do have the capability. We have cash, free cash.

Got it. And sir, this DDT dividend, the distribution tax going out, will it have any implications as far as payouts are concerned?

Not really. Not really, I don't see why it should.

The next question is from the line of [ N Samraj ] from Dwarka Wealth Managers.

Sir, just wanted to ask you, given the spreads, as you have said, is around $200 between VLSFO and high sulfur oil bunkers. How is the economics now currently working, sir, and all are in different segments and tankers and bulk carriers. And all, given the spreads and the current freight rates, are we having a comfortable margin, sir?

So we have only committed to put scrubbers on some tankers. On none of the bulkers are we putting any scrubbers. So yes, those projects are still going to achieve their payback. It's -- obviously it's a little lower than one would have expected currently, but certainly, they will meet their payback period target, which is -- we only did it on the vessels, which would have a payback of under 2.5 years because there was always a worry that the spreads would not be as wide as forecast. So there is a margin of safety there. And so while the returns currently don't look great, they will make back their investment, certainly.

No. What I was just asking is now, just using the VLSFO without the scrubbers, okay? How are the -- how is the economics working then now? And are we having a margin, given the current softened rates in the different segments?

So your question is, considering that the fuel cost has gone up...

Yes, given the [indiscernible]

Are we still able to make money? It depends on which market it is. The tankers sector, we are making money still. The gas carriers are earning $40,000 a day in the spot market. The crude tankers are still earning $20,000 plus, and product tankers are okay, somewhere in the teens. So they're still making a reasonable amount of money. In dry bulk because the market is so bad, they are making much less money.

Okay. But we are breaking even on the running cost per day?

Breaking even, meaning what?

Sir, I mean, we are making up the running costs, variable costs, and...

No. No. See, there is -- this is not a lab where all other factors can be kept constant and only one factor changes, which is of cost of fuel. We can't control the environment. The environment is a very weak pricing environment for dry bulk. And therefore, the rates have dropped off very significantly just because the demand for dry bulk ships is very poor. So therefore, the cost burden is falling on the shipowner in the dry bulk market. In the tanker market, if it has been in the old cheaper fuel, they would have been earning $5,000, $8,000 more in a crude tanker. And in this, they happen -- they are making a little bit less. There's no -- I keep getting asked this question is, who is bearing the cost? It's always part of our cost, which we try to pass on to the customer. And the ability to pass on is based on how tight the market is. The gas carrier market is tight, so the rates remain at $40,000. The dry bulk market is oversupplied, so the rates are down below $10,000.

I see. Sir, there was a morning report from Morgan Stanley, and they were -- they are predicting that the second -- the following quarter, given the China coronavirus environment, it will be -- that they -- as you were saying, there will be -- there could be a spring back. So they're forecasting a spring back in the following quarter. So what do you anticipate the -- will we be the, say, halfway through this particular rate on the crude tankers and what we earned in the first quarter?

It's impossible to tell without a crystal ball because we don't know what the rates will be tomorrow morning, frankly.

Okay. But do you expect it to be comfortable in the next coming quarter?

Again, I don't know what the rates can be tomorrow morning. So ships which are running $25,000 today in the spot market, tomorrow morning will be priced at $5,000. The one thing which we have in history is SARS. When it got over, there was a big drop in jet fuel demand in -- during the time of SARS because travel became less. When the problem was over, which was in July 2003, the demand bounced back completely, which is what I suppose the report you are alluding to has spoken about.

Sir, and during -- yes, just last question. During our course of our research, sir, we found out this Shipping Corporation of India, sir, the real estate value itself is about double the current price of the spread. And the fleet value is also almost twice the current value. So I think this question was asked you by ET Now also, whether GE Shipping, given its very light balance sheet and asset-light model, would you be going in for this, given that including the marine academy, you have a lot of synergies, except the liner segment?

Yes. So it's too early to tell anything. We have no idea what it is. So -- what the transaction is. So it's just too early to tell.

Got you. Because there's a sheer value in this...

So I know all the points which are there, but it's just too early to tell because we have no idea what the transaction is.

Okay. So you will be waiting for the expression of interest and all?

Like everybody, we are interested in knowing what it is.

And sir, what is the -- I missed the first part, sir. What is the current broker value of a fleet, sir?

You mean the net asset value?

Yes. The NAV, sir.