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

Good afternoon, ladies and gentlemen. Thank you for joining us today for the investor call for the Q2 FY '21 results of The Great Eastern Shipping Company Limited. The results were announced on the exchange and disseminated to all of you sometime ago. I hope all of you have got a copy of the same. For today's proceedings, we have with us our Deputy Chairman and MD, Mr. Bharat Sheth; and our Executive Director and CFO, Mr. G. Shivakumar. Mr. Shivakumar will first take us through a short presentation. And thereafter, he, along with our Deputy Chairman and MD, will answer the questions that you may have. [Operator Instructions] Thank you for your attention. And now over to you, Mr. Shivakumar, for the presentation.

Thank you, Anjali, and thank you to all the participants for joining us today for the conference call for the Q2 and H1 FY '21 results. I'll take you through a presentation. In the interest of keeping more time for the Q&A and interactions, I'm making a slightly condensed form of the presentation that we have uploaded on the website. So that presentation has a lot more of the usual data, but I'll take you through the main points of the presentation. So let's start. First, let's go through the results before that the normal forward-looking statement. So there are uncertainties involved in all markets. Please keep that in mind when you have a discussion with us and take our comments in that light. So first, looking at the financial results. These are the reported numbers. And those of you who have joined us before on these calls know that we refer to something called reported results and something called normalized results. So we have a reported net profit for the quarter. Sorry, I'm having an echo from something. I'm getting an echo from something. Yes. So we have a reported net profit on a consolidated basis of INR 225 crores for the quarter. Let's look at the normalized after stripping out the currency and MTM impacts. So the normalized consolidated net profit is lower than the reported. This is because the MTM on the swaps improved and the rupee appreciated against the dollar. And again, you would be aware that when the rupee appreciates against the dollar, we get a benefit in our P&L account, and vice versa when it depreciates against the dollar. So our normalized consolidated profit for the quarter is INR 134 crores. And again, then we have the debt amounts. We have the consolidated -- the normalized debt, which is a little higher than the reported debt because of the way that we think our swaps should be accounted for. Again, this is data. The repayments over the next 5 years are given here. Generally in the region of below $80 million. We try to keep it at around $60 million to $80 million on average to be more or less matching with the depreciation. This doesn't include the recent funds which have been raised and will be raised shortly for our CapEx, for the ships that we have acquired. Sale and purchase activities during Q2, we contracted to sell our '96 built VLGC Jag Vidhi. We delivered that to the buyers last week. And coincidentally, on the same day, we took delivery of our 2002 built VLGC, which we have renamed as Jag Vishnu. Subsequent -- so in the month of October, we have contracted to buy secondhand LR2 product tanker built in 2012, and that is expected to join the fleet within November itself. Looking at the shipping market, first the asset values. We've had -- well, we've had some drop in asset values in the tanker sector. Not so much in line with the drop in freight rates, but in the same direction. So freight rates have dropped significantly over the last 6 months, and prices have dropped as well, though not as much as the freight rates have dropped. At the same time, we have had LPG, the LPG market doing well. And therefore, that market -- those asset prices have remained fairly firm. Dry bulk has been -- also been reasonably strong. The freight rates have been reasonably strong in the last 3 to 4 months. And therefore, asset prices have held reasonably firm. Looking at the supply side. Over the long term, and we've mentioned this before, over the longer term, so not very long-term over the next few years, the order book that we have is very low, which gives us some hope that the supply overhang is not much. So it is at the lowest level in the last 20 years. In a few of the sectors, it's below the lowest level of the last 20 years. In LPG, it's about the same as the lowest level in the last -- well, seen in the last 20 years. This takes away that overhang, which is always a worry that there are too many ships going to join the fleet. Along with that, we have an aging fleet. And again, I'm talking about the global fleet, the assets about 15 years could be defined as vulnerable to very weak markets, but let's take about 20 years. So crude tankers about 20 years constitute about 4% of the fleet. Product tankers about 20 years constitute almost 6% of the fleet and bulk carriers constitute about 5% of the fleet. These ships are vulnerable to a market -- to a prolonged market downturn and will need to be removed at some point, if the market remains weak. And which also gives us some comfort about the supply situation going forward. This is, again, a repeat from the previous quarter, and we've been -- we keep looking at the data, and we keep putting it in. However, though the supply over the longer-term is not an issue, there is a supply overhang in the short-term in terms of the floating storage of oil. You all know that the floating storage oil peaked sometime in May when the contango was extremely high. So the -- after having peaked then, some of the ships which were in storage have come off. However, we still have about 7% of the crude tanker fleet still in storage. And you can see from the chart that 1-year ago, this was around 3%, 3.5%. So potentially, that could come back into the market and weaken it further. Again, the crude tanker market is extremely weak today, and this would only make it worse. But this could -- if it gets much weaker, this could also lead to quicker scrapping of older candidates. Similarly, for product tankers, though it's come down much more from the peak to only about 3% now, it's still more than 2% above the normal level of -- which we saw a year ago. And that, too, could come back into the trading fleet and, therefore, depress rates further. And I must state here that for both product tankers and crude tankers, the freight rates currently are at very low levels, only around OpEx for both of them. The other thing which happened -- and dry bulk and LPG have been significantly better than product and crude tankers in terms of the freight markets. And it was because a large part of the fleet was tied up due to congestion. This was congestion typically at discharge ports and a lot of it in China. And therefore, it absorbed a lot of the capacity. And therefore, the market strengthened a little bit in the last 3 months for bulk carriers. For LPG, 7% to 10% of the VLGC fleet was tied up due to congestion during the quarter. This is at discharge ports in India, China and in the other ports in the Far East. And also to cross -- waiting to cross the Panama Canal. So as a result of that, there was a significant market tightness, which would otherwise not have been there. VLGCs are currently earning somewhere around $40,000 a day in the spot market, which is a very healthy number. Looking at the demand side, the demand side picture has been terrible. We know that demand -- with all the lockdowns and the slower economic activity, demand for oil -- for crude oil has been very much lower than in the previous year. So the change in the crude trade from a year ago and for July, August, September, is somewhere around the 9% to 10% mark. So to put it in perspective, we have not seen a minus 10% demand degrowth any time in the last 20 years. Even in the global financial crisis, it may have been 3%, 4%, but not a minus 10% degrowth in demand. So that is a huge impact, which is there in the markets. And again, all this depends on how the recovery from coronavirus, whenever it happens, plays out. Similarly, for product tankers, the last quarter saw about a 10% to 11% drop in the refined products trade. And therefore, the market is at abysmal levels now. Coming to the dry bulk market, it's not seen that shattering loss, which we had seen in the tanker sector. The trade has been down in the last 9 months, about 2.5% on average. But China strangely has been very strong. Iron ore imports into China has been very strong in these 9 months, and that trade has grown more than 10% in the 9 months year-on-year. However, the rest of the world has had negative contribution to, say, the iron ore trade and to the other commodities as well, resulting in the minus 2.5% degrowth in the dry bulk trade in this 9-month period. LPG, again, the last 3 months have been very poor in terms of the absolute quantum of trade. So we are looking at between 15% and 20% on average degrowth in trade in Q2 FY '21. Despite this, we have rates of around $40,000 per day, which is somewhat surprising based on the headline demand disruption that we've had. However, the congestion, which has kept some part of the fleet tied up and also the higher ton-mile demand for our LPG carriers or VLGCs because a lot of the ships were being routed -- instead of being routed through the Panama Canal were being routed around the Cape of Good Hope that is coming around Africa to the Far East, which is a longer voyage and therefore, uses more ships. That seems to have kept the VLGC market quite buoyant, though the headline demand has collapsed during the quarter. Coming to the offshore business. First, let's look at the coverage. So the jack-up rigs are covered to the extent of 90% after days in the second half. The anchor handlers are covered to the extent of only about 64%, and the MPSSVs are only about 50%. While the PSVs have about a 90% cover for the second half of FY '21. Offshore E&P spending, and this is again a chart that we've shown on many occasions. The numbers are a little different to what we had shown before because the source has revised the offshore E&P spending. But it doesn't change the conclusion. There has been a dramatic drop off from the peak of 2013/'14, and we are now down to only about 35% of the demand that we had 7 or 8 years ago. The key points on offshore is that we thought we had a recovery taking place early this year, but the fall in oil price due to COVID has stalled the recovery. There have been some early terminations in -- across the world. We have not had that issue. But rates have come under pressure. In terms of fleet growth, nobody is really ordering vessels or rigs because of the market being so terrible. But the fleet has reduced slowly. The fleet is reducing. You can see that between 4% and 5% reduction in the competitive fleet, which is actually there in the market trying to get business. So that's one positive. At least we are reducing the surplus to some extent. Global fleet utilizations are estimated to be between 60% and 70% for jack-up rigs and 40% to 50% for vessels. This is again the picture of what scrapping potential is there, and we've been displaying this data for a few quarters. You're familiar with it. There are a lot of old assets, especially so in the jack-up rig sector, where almost 40% of the fleet is over 30 years of age. And at some point, it may have to be removed from active competition. These are the details of the vessels and rigs which are coming up for repricing. So in H2 FY '21, we have 1 rig and 4 vessels, which need to be repriced, which are coming off contract. In H1 FY '22, we have another rig and 4 vessels coming off contract, and so on and so forth. So in the next 12 months, we have 2 rigs to be repriced, most of which will have to be done within the next -- both of them have to be done within the next 6 months. And we have 8 vessels which will come off contract as well. Though that situation doesn't look very good for the business, Great Ship debt repayment scheduled over the next few years gives a reasonable amount of comfort. The company has $130 plus million of cash. And the repayments all the way up to March '23, that's the next 2.5 years, are only about $65 million. Roughly, and we looked at this the last time. There are a couple of valuation metrics that we look at, price to consolidated NAV. I forgot to mention the NAV, which was somewhere around INR 455, INR 456 stand-alone last quarter, that's in June, is down to INR 445 as a result of the fleet value dropping by about 3% and also the rupee appreciating versus the dollar. The consolidated NAV is somewhere between INR 470 and INR 520 per share. So we are trading currently, the stock is trading at a little below 0.5% consolidated NAV. This is the other slide that we had shown the last time. The market cap as compared to the cash balance. The group has cash of about INR 4,000 crores. The market cap is somewhere around a little less than INR 3,500 crores. Just to summarize the case, the market positives are a historically low order book and a high scrapping potential for all sectors, except gas. The market negatives are a short-term supply overhang and a weak fundamental demand for the commodities. The market negative for offshore is that E&P spending has been significantly reduced. And the company positives are a deleveraged balance sheet as a result of the markets that we've been through and paying down significant amount of debt and collecting cash, our proven ability to manage shipping cycles and the fact that we have capital available for future buying opportunities. So with that, I come to the end of my presentation. And we can open the floor to questions. Unless Mr. Bharat Sheth, would like to make any further comments before the Q&A.

Thank you, Mr. Shiv. Really you explained that or most of it. Just recapping of what we said last quarter that the way we disciplined ourselves on capital seems to be working and in spite of correction in asset values, based with the investments we've done in the last 4 years, we are still generating on mark-to-market basis and internal unleveraged return of just [ under 30 ], so that obviously shows that basically a sustained [indiscernible] to maintain to very high standards, so we're able to trade all over the world without any challenges. And we've been sensible in the way we fix ships. We've taken cover at appropriate times, which has clearly helped us in quarter 2, and hopefully, will also help us in quarter 3. And all in all, whilst there's always this big debate that are we better served long-term with a good market or a bad market? And I'm convinced we are better served long-term with bad markets for a period of time because that's when you get your opportunities to buy ships, you can buy quality ships at price points, which will serve us well in the long term. And that's what we've been doing now. So we've taken some advantage of the bad market, and we will continue to do so. So all that really happens is that what you lose on revenue, you make it up on capital [indiscernible]. So really, it's fine. Okay. Can we move on to some questions, if people have understood on that.

Yes, Anjali?

[Operator Instructions]

Hello?

Yes.

Yes. Am I audible sir?

Yes. Thank you.

Yes. Sir, my question is -- I mean, we are seeing another round of disruptions in terms of lockdowns in Europe and even the increasing number of cases in the U.S. So you think this disruption can again, like what we saw in March and April, can have a positive ruboff in the crude market, especially where you can again see some contango? I mean just your thoughts. I mean again, it's a difficult prediction, but just your thoughts on this event?

Yes, sure. So I think there will -- if, let's say, we again go into a global lockdown, the contango will pick up. I don't believe the contango will be as steep as we saw it in March, April, May. Because what triggered the steepness of the contango with was a spat between Saudi Arabia and Russia, which meant that both the countries were pumping oil as best they could. And now with a little more discipline from OPEC and OPEC+ which includes Russia, obviously, I don't see the contango being as steep. Will it lead to a contango? The answer is yes, it would. But I don't think it will be as steep. And therefore, I don't see the same extent of benefit that we saw of the contango in the months of March and April and May. Of course, what the CFO said that same story. And maybe there's continuing storage. So if that happens, that will clearly improve the market [indiscernible]. We don't think to the same extent.

Sir, the next caller is also from somebody on the phone. [Operator Instructions]

Hello, can you hear me?

[Operator Instructions]

My name is [ Raja Kumar ]. I'm an individual shareholder. Yes. Sir, I have a few questions. So first of all, I want to know -- I mean, I see that the dry bulk index is kind of at its peak. Just wanted to know, did GE managed to cash in order because I think somewhat, I heard that you have already hedged your fleet for a year. So I just want to know some color on did we completely hedge our vessel for the bulk market? Or do we still have something more on the books? And the second question is on the buyback. Yes, please go ahead, sir.

Yes, so sorry. So basically, as far as dry bulk is concerned, we have one of our vessels, which is our Capesize bulk carrier covered until December of -- to the very end of December of 2020. We have a significant percentage of the Kamsarmax fleet all fixed until end December or early January, end December 2020 towards January '21, again, all at profitable levels. And the smaller ships, which is the Supramaxes, they trade in the spot market.

Sir, my question is did we book when the market was at its peak? Or did we kind of hedged it too early, that is...

No, no, no. We didn't hedge it early at all. We went into fixed prices at good levels. I would not say at the peak because your ship has to be open at the peak, right, to book it at the peak. So -- but I would say that you could put it in the top quartile, in the 75th plus quartile.

Okay. Okay. Sir, you have given -- the update given by Mr. Shivakumar, I see that in terms of the segment that will contribute to the bottom line for the coming quarters, I think the gas and the dry bulk are where the company will make some decent bottom line with the pressure from the other 2 segments. So I mean, I don't -- I know that you don't give any forward-looking numbers. So I just want to know is it fair to expect that the subsequent quarters will be -- whether you can see a positive bottom line despite the pressures from the crude and the gas market?

Yes. So as the CFO mentioned, the gas market, we are into fixed income on the gas market, everything is covered. So that's not a cause of concern. The dry bulk, we've just discussed. On the crude, we have a reasonable amount covered. We, of course, have some ships which are open and some more will come for repricing sometime in the second half of December. But all in all, we have a reasonable amount of cover. The product segment is where we have the least covered and obviously, that market is as the CFO mentioned is just covering operating costs. But I think I mentioned at the beginning that what's important for us is there are 2 things. One is if the markets for a sustained period of time, keep earning operating costs, it means we should be able to deploy higher capital, incremental capital at cheaper rates or cheaper asset [Audio Gap]. We must remember that the [Audio Gap]

Sir, sorry to interrupt, I think your voice is getting gobbled.

Sir, your voice is breaking, sir.

That in a [indiscernible] market can go up [indiscernible]. And we've seen this happen in multiple years when -- because [indiscernible] is relevant. It's -- our business is much more determined by events. We saw it in March, April. We've seen it again. Okay. Can you hear it now?

Yes, much better.

I don't know why. What should I do? Is there something I need to do? Can you hear it now? Is it a little better?

No, I think it's fine now.

Hello?

Yes, that's -- yes, it's absolutely fine now. Please, go ahead.

Because there's a time lag...

Yes, it's absolutely fine now.

between what I'm saying and [indiscernible]. So can you hear it now?

Yes, maybe I can hear it loud and clear now, sir.

Yes. So I think the point I was making is that on the product tanker segment, we would have liked a little more cover. I think we don't have adequate cover, but that's partly also driven by the fact that we have lots, many more over critical ships that -- which are difficult to fix on [indiscernible] fix it too cheaply. Because as [indiscernible] was mentioning and if you just take data over multiple years, it doesn't take a lot for this market to go up and [indiscernible] by 300%, 400%, 500%. And as I was explaining [indiscernible] much, much [indiscernible] it could be bad weather, it could be congestion building up, it could be old age, it could be contango. There are so many events that will eventually determine the market. And so as I have just said, if the market remains weak for multiple months, we will take benefit on the capital account. And if it doesn't, and the market spikes, we will get benefit on the revenue account. So one way or the other, we will clearly benefit, irrespective of what the market does.

Okay. Sir, the second question is on the buyback. I think the last time we did the buyback was in November '19, it got closed. So you're going to do one more buyback will be open from November '20 onwards. So just want to know given the high cash level that you have on the balance sheet, would it be more prudent to consider one more buyback and also improve the valuation? And just an extended question on the -- one of the metrics which Shiva mentioned, that cash to market cap, I'm just wondering how -- why we are looking at that metric? Because I can understand from an NAV perspective, market cap NAV makes sense. But market cap to cash, cash is a dynamic number that can keep changing depending on your operating and CapEx requirements. So just want to -- I was just wondering why we are tracking that metric, sir?

Yes. So I mean it's just a data point. It's not [indiscernible] we are been tracking any of these things. But let me come to the buyback thing. On buyback, as you rightly pointed out, our window will open in November 2020. We will, at that stage, assess whether it makes more sense -- because we don't know what asset values also will do. We need to modernize the fleet. We want to grow the fleet. So we will see at the point of time when we really come with multiple choices that are the shareholders better served in us investing in steel? Are they better served in buying back paper? And we will put the options available to us to the core group and then take an informed decision to wherever we see on a sustained basis, where we think value will be created.

So there currently there is nothing on the table [indiscernible]

And also if I can just add that, unfortunately, with tax coming up on buyback, it's made a little less attractive than it used to be previously.

Sorry, sir, I'm not able to understand what is the tax on buyback, there is no tax on buyback, right, sir?

That is -- sorry, I can. Yes. There is a tax to be paid. So last year because reportedly, the buyback was a way to -- that some companies were using to avoid paying tax on dividends. So there was a tax introduced on buybacks, where on the amount of buyback, you effectively pay a 23% tax. The company pays a 23% tax. So that's the tax, which is there. And that -- though the tax -- dividend, dividend distribution tax has gone, this tax has stayed for some reason. And that adds to the cost of a buyback.

So Mr. Shiva, I thought even [indiscernible]

May I please -- [ Mr. Raja Kumar ], may I please request you to come back in queue because there are many other people waiting for their chance to ask questions. [Operator Instructions] So I'd like to call now Vaibhav Badjatya now to ask his question.

Yes. Can you hear me?

Yes, loud and clear.

So I was referring to the slide that you have presented that how many vessels and rigs are coming up for repricing. And as we can see, a lot of things are coming up for repricing in the next 1 year, which could probably not be a very good market, as of now it seems like that. And if it just turned out to be like that, and given that we have a policy of putting our assets to use rather than idling it. And given the third factor that in the offshore market, we don't have any handle on the tenure in which we can -- tenure of the contract. How do you see these 3 things playing together? And would you like to idle your asset for some time? And then probably wait for the market to recover because once we contract it, it will be gone for the whole tenure and the whole cycle that can come up.

Is it for me or for the CFO?

Yes, I can answer. So the -- see we'll decide based on the rates that we think can happen. There are levels at which we may decide to idle. It's a tactical decision which will be taken based on the market at that time. Our preference is not to idle our assets. We would like to keep them working. But if it is -- if it turns out that the rate is so poor that it doesn't make sense, then we are okay with idling also. However, our preference -- our strong preference is to take employment so that we will get the contribution from it. And as you pointed out correctly, we don't have a choice to say that I want to do a 6-month contract or a 5-year contract. Whatever is a contract available, tenure which is available, that is the one that we have to do.

Got it. So that, that pricing -- I just wanted to understand, would that pricing will be a breakeven even if you get it with a cash breakeven, you will just go ahead and do the contract in an idle asset?

Vaibhav, let me stop you there. We are not going to discuss our pricing strategy on this call.

Okay. No problem. And secondly, this new policy of the government of India that most order, the tenders below INR 200 crores will be -- there will be no global tenders. I'm not sure whether it has any impact on our operation positively? Or it doesn't have an impact on our operations?

Shiva, would you like to take that?

Yes, yes. So at the moment, there is some confusion on how the policy will play out. We have made representations to the -- our own ministry because currently, the oil companies haven't yet incorporated this clause in their tenders. And I think there is an internal debate going on between the Petroleum Ministry and the Shipping Ministry on how applicable this clause is for the Petroleum Ministry. We are, of course, pushing for the clause. So it will benefit the ship owning and the oil and gas -- the service providers if this clause is operated. But just at the moment, it is not.

Right. And lastly, there has also been -- recently, there have been a strong push somehow due to having a regulator for the shipping industry because particularly more on the container side because there are little sharp spike in freight rates recently. So I'm not sure whether the bulk vessels are also included there or what's the talks going on? If you can just throw some more light on that front?

Yes, there is -- it's, at the moment, limited to containers, the Commerce Ministry has taken it up with the Shipping Ministry. Because as you rightly pointed out, a significant spike in the per TEU rate, it is not applicable for the bulk sector.

Sir, as of now the talks that are going on, the bulk ship are still not be included in that?

No. No.

May I now ask Himanshu to ask his question, please.

Sir, I have 3 questions. First is on the PPT. When we see the asset prices historical, are they similar in terms of adjustment for scrubber and ballast water treatment equipment on ship, means the secondhand 5-year old fleet shows, are those adjusted for this thing?

No, not for scrubbers, not for scrubbers. Ballast water treatment would not get adjusted because it doesn't offer a value necessarily. It's a cost, item, but they're not adjusted for scrubbers.

These are nonscrubber issues.

Okay. So what we are saying is these are without like-to-like?

Yes, that's right.

Without scrubber and without...

No, there will be with -- no, no, no, see, the ballast water is a requirement. So they have to have it in any case.

So let's say, the 2016/'17, the presentation shows the bottom in a crude, okay?

Yes.

Asset prices.

Yes.

So at that point of time, was this cost already there in the ship or it was not there? Both these 2 [indiscernible].

It would not -- the scrubber -- see, scrubber is an option. You have decided to put something that you want to make some money from. Ballast water is not an option. It is the cost of continuing to operate. So 2016 ship without ballast water is equivalent to 2020 ship with ballast water for treatment system.

Okay. So like-to-like, the prices have -- the fall is higher only we will see?

Yes, no, no, no.

We are more nearer to 2017 prices because...

No, no, no.

No, not yet.

Shiv, Shiv, Shiv that's not.

Yes.

Today, values are not where they were in '16 and '17. If you see the ships were cheaper in '16 and '17 than they are today. We have seen the first bit of the correction, right? Now ballast water at the moment is only required if you wish to trade your assets into the United States. The ballast water will become mandatory between '22 and '23, when no vessel we'll be able to trade globally without the ballast water. So until then, all of us have an option on whether to install a ballast water or not install a ballast water. But by '22/'23, we will have to install ballast water.

Okay. So it's a correct presentation of -- let us assume the ground for...

Yes, this is an apple-for-apple comparison.

Okay. So this was the first question. The second question was, we have the lowest order book, decent size of fleet of scraping, getting scraped, asset prices are low and on downward trend. But the issue remains -- we are in a continuing slowdown in global economy. I don't know when the demand will recover, and how much will be the demand. In such a scenario, how are you looking at capital allocation, mean we have a strong balance sheet in everything, that's a [indiscernible] But the demand side is very, very uncertain or unclear. And where we are buying generally 10-year-old ship, okay, sir, if 3 years remain bad, a significant value goes away. So how are you thinking? Because...

So we are already factoring in whenever we allocate capital, we -- on our current thinking, we think over the next 3, 4 years, maybe global GDP will be somewhere, I don't know, somewhere between 1%, 2%, somewhere in that region, right? So we are being very, very cautious on what we believe will be demand. But as I was explaining, right, this business is so much more dependent on events. And we've just seen the LPG example or even the dry bulk example. In LPG, we've seen a disruption in demand and particularly ton-mile, but yet we have seen a big spike in the market. And the moment you see a spike in the market, asset values obviously follow. So whilst we are cognizant of the fact that demand is very uncertain, demand has always been uncertain. We do believe that the destruction that we've seen in demand this year is not sustainable for multiple years, obviously. But even if it were, what will happen is that in any commoditized business, people start scrapping ships earlier than later. And therefore, it all tends to rebalance. Now the rebalancing may take a year, rebalancing may take 6 months. That's difficult to say. So everything will hinge on how people perceive a revival post the pandemic. And so the way we now look at capital allocation is factoring in low levels of demand. And then you get these sudden surprises on congestion, et cetera, which is welcome news. I mean that's how in spite of facing 6 or 9 months now of the pandemic on our invested capital post '16, we've got an unlevered dollar return of 13%. I mean that is a very, very solid performance.

Okay. Okay. And the third and last one. Today, we see all 3 large asset classes of shipping dry, product and crude are on downward trend in asset prices and other sectors also. Would we be more focused on what we get in market means order to purchase certain segments where we think revival will be faster or it would be just asset prices, which is cheaper and hence, we'd like to play into the market? Because generally, what happened or what we have seen is product has fallen in crude and after 1 year, you find dry bulk also going down. But yet we are seeing all the 3 classes or large classes going down. So how would you look at it? And if it is a segment which you think you want to play, then what would be the segments you think will recover first after this pandemic and why?

So we don't try to determine which sector will recover first. I think I have mentioned it even in the previous quarter's meeting that we -- we just don't know which or where the demand will kick-in first. It's really, very tough. And again, I repeat that because it's all event-based, like what happened in March, April. So we are looking for 2 things. We've obviously got a plan on which are the sectors we would like to grow our business in, and we would like to grow it clearly in all the sectors we are currently invested in. We would like to modernize the fleet. We want to possibly go into the more volatile assets simply because if you are good at playing volatility, you might as well invest in sectors where more meaningfully can benefit through that volatility. So we are agnostic to whether we get an opportunity in dry bulk or in crude or in clean or in gas. All we are looking for is certain price points. And obviously, the quality of the asset has got to be top notch. And that's where our focus is.

Okay. And more volatility -- so LR2 what we have acquired, would that be something like larger asset classes which are volatile hence we are going for larger assets and product tankers?

Yes. That's right. So as you know, we have only one LR2. We have multiple smaller MRs. So the way I look at it in a few years from now, we would have a better balance between LR2s and MRs. Because the LR2s are clearly much more volatile.

The next questions can come from the line of [ Mr. Venkatraman ].

I have one small question. This is regarding the buyback. I believe that if you do a buyback to the tender rule, we will not have to pay any tax on the hands of the investors. It is only when you do a buyback in the open market as we did last time, that will be a double tax, one in the hands of the company and one in the hands of the investor. So I'll request you to keep it in mind that when you do this buyback. That is only from my side. And second question is the way the discount with the NAV which is happening now, are we not better off if we dispose off some of the assets and do a buyback? That will be better capital allocation, it will be better if you do that.

Yes. So as we have seen, asset values have come off a lot. And at these price points, we are buyers of assets and not necessarily sellers. Unless the asset is coming to the end of trading life or we think the assets are technically challenged. And let me tell you why. At these numbers, where asset -- and as you can see, we have now begun to invest our -- some of our capital. Because at these price points, we think that we should be able to achieve our targeted dollar returns on unlevered capital. And as you can then appreciate, due to the leverage that is inherent in our business, it gives you a mid-teens return on equity, which are very strong returns in any business. And these are in dollar returns. So it's always a challenge when we have to balance the 2. And why would you sell in order -- and let me give you another example. So in March, April of this year on an asset that was worth $10 million then, we achieved for the -- for 60 days, a return in excess of 50%. Okay, 50% is annualized. So if you just take absolutely less. But those are the kind of sudden returns you can get into this. And what is your downside risk on a $10 million asset? Maybe $1 million? And what is your upside? $4 million? So look at the risk/reward ratio. And as I've said earlier, these markets turn on a time. And we've seen this in multiple years, the difference between in one month and the other months, and the market could be up 300%, 400%, 500%. And then on the older ships, those are your real cash cows. Because most ships are depreciated. They don't have any interest liability. There's no repayment. You just need to earn your operating costs. So it would not necessarily be the wisest of moves.

One more question from my side. Right now when we look at the very benign state rates and the increase in the scrap prices, are we seeing any increase in the full scrappage in the last quarter?

No. We -- so actually, scrap prices have not increased. They have come down. So let's say, about a year ago, you would scrap ships in excess of $450 to $500. That's now down to the mid $300s. So that's one data point. Secondly, we haven't yet seen any accelerated level of scrapping. And it's interesting, the last big crude oil tanker that's scrapped, scrapped a little over a year ago. So nothing has scrapped in a little over a year. Now all that this means is that a lot of scrapping is likely to happen in the next, I would say, maximum 2 years. And maybe earlier but not later because as the CFO mentioned, earnings are not much more than operating costs. The older ships -- whenever the markets are bad, there is clearly a preference for more modern tonnage compared to the older tonnage. So the older tonnage do get discriminated against. And therefore, we think, and we are pretty convinced on this one that the later the scrapping you do, the more will be the requirement in a very, very short span of time. And then you would get a massive spike in freight rates.

The next question is from the line of [ Mr. Samraj ]

Yes. Can you hear me?

Yes.

Sir, my first question is, could you please give us the TCEs spot dollar a day, which are coming into July and second half of quarter 2 for Suez, Afra, LR2, VLGC, bulkers and OSVs? And what is the FFA indicating for the fourth quarter, sir?

Shiv, do you...

Sorry, because I don't have any of that.

Yes. I didn't quite understand.

I'm asking about that TCEs spot dollar per day, which as we entered into this quarter, July, August? And what is it currently?

This is -- okay. The spot rate, basically, you want to know what the spot rates were?

Correct.

Okay. So the spot rates for July must have been for Suezmax are probably in the mid-teens. And we probably ended the quarter somewhere in the 5,000 to 10,000 range. But -- okay, we'll -- okay, I don't want to give wrong numbers. So let's take that off-line, and we'll give you the information. And it will be available somewhere. We will send it to you.

Okay. Approx for the Kamsars and the Suezs, Supras approx?

Yes, like Kamsar and Supras are up between beginning of July and, say, end of September, they are up slightly. But again, these things are...

I'd say the Kamsars are possibly up somewhere between 60% to 70%. The Supras may be up 30%, 40%. But that's just random number. But honestly, you shouldn't waste time on all this. Because what we tell you right now can change by tomorrow morning.

Okay. So approximately, could we take it that the figure was about, say, $10,000 per day, sir, approx?

So the Kamsars in the earlier part, let's call it May, June would have possibly been somewhere between the 7 to 10 number. And it, again, depends what trade route you do, right? So right, Latin America is different. Atlantic is different, Pacific is different. Is your Kamsarmax in China? Is it in Japan? Is it in Australia, et cetera, et cetera. So there's no one number. So really, my strong advice is not to go down this path because it is of no value to anyone.

So right now, the bulkers are earning that keeps per -- dollars per day. Right now, they're doing...

Yes. The bulkers are currently profitable.

That means they are more than the cash breakeven dollars per day, right?

Yes, that's right. That's right.

Okay. And sir -- yes, and sir, this question, which, of course, is your favorite. Since GE is really mastering the volatility or trying to master the work volatility in charter's management, et cetera. So sir, do you think that -- which you just touched upon another gentleman's question about the product, do you think the products would outperform the other segments, and you expect a super cycle between '22 to '27 indicatively or what [indiscernible]?

So it's impossible -- yes, so let me answer that. Again, I think I've just said to someone else that we are not in the business of trying to second-guess which sector will do better than the other. We don't know. We truly don't know. We just are -- what are we focusing on. We are operating in 4 sectors, right? And if we are successfully able to raise dollars, which we have been, in the region of 3%, 4%, and we can deploy that capital at somewhere between 10% and 15%, we are creating a big spread over multiple years. And if we handle the volatility well, that is not only in buying ships sensibly, but also trading them sensibly because remember, that's equally important because of the volatility of the day-to-day spot market. If we do this well, and we can successfully regularly create 10% spreads or 7% spreads or 9% spreads, over sustainable periods of time that will just generate lots and lots of cash for the business.

Okay. So taking into consideration...

But at the moment, the more you generate, the worse the market cap. So I don't know whether we are better off not generating cash.

Right. We are [indiscernible]. Sir, taking into consideration that most of the refineries on the coast of U.S. and especially Europe, getting aged and getting shut down. Most of the ton-mileage would -- and export would come out from the China seas moving across to Europe and states. So do you expect the ton-mileage to really pick up for products, LR2s and all going ahead between '22 to '27?

So the ton-miles in the product trade not the crude trade but the product trade is purely arbitrage-driven. And different refineries have a different surplus of products at a point in time, right? So again, just rewind back to March. So in March, we ourselves fixed one of our LR2s. We only had one at that time, and now we've contracted for one more. We fixed her at somewhere between $16,000 and $20,000 a day, 60 days. And remember, when you fix a ship, you typically tend to fix it for somewhere between 30 to 50 days. Right? That's roughly. Now within that period of time, the market went from $16,000 and $18,000 a day to $100,000 a day.

Correct.

So -- and if you are just fixed, right? You are committed for the next 30, 50 days. And therefore, you could miss this opportunity of earning these kind of numbers. Obviously, it works the other way around. You can be fixed for $100,000, and then the market drops, and you will still be earning $100,000 for the next 30 days. So that is one of the reasons why we mentioned that we really need ideally in whatever asset class we own, we need a stack of ships. So some will do well. Some may not do so well. Some are positioned well. Some may not be positioned so well. But overall, so long as we buy sensibly and we understand our business reasonably well. We just look at sort of overall trying to create a delta over market returns. That's the best we can do.

So would we expect a reduction in MRs and an increase in LR2s going forward, sir?

I suspect so. Yes.

Okay. And my last -- my very last question is, we find that, sir, this quarter we've still got the services about -- service costs, about 25% down compared to last quarter, though the crude derivatives have been increased, I think, on an average about 25%. So could, Shiv, sort of just give us a color on that, sir?

Sorry, I didn't understand the -- what is the service cost?

Yes, service cost, the cost of operating, that is, I'm talking about the fuel cost, basically the fuel and water cost. We've gone down about 25% compared to last quarter. I think from 99% to around 75%, if I'm not mistaken. And though the crude derivatives, I suspect we have [indiscernible] gone up 25% compared to March ending. So how do we -- how have we done this, sir?

No, there's a lag in some of these. So 2, 3 things which affected it to. One is, I mean, if you're now -- if you're on a time charter, you don't have to buy the fuel. And that doesn't show up in our cost. The second is that there is a lag between the purchase and the use. So let's say, in March, it was -- and just as an example, you fill up your tanks at -- or in February, you filled up your tanks at $45 per barrel or $50 a barrel, effective equivalent, okay? That's being used all the way up to April and, say, May. And then in April, May you filled up at $20 a barrel. That's being used all the way up to July and -- if you fill it up again at $30 in May. You may use it in July, August also. So there is no great secret to -- it's not that we have done something that we have -- that we have got something very different.

We thought that you had hedged it and you sort of bought forward for about [ 3 months ] or so.

No, no, no.

Can I request Mr. Anuj Sharma to ask his question now.

Yes. I have 2 questions. One is just a hygiene-related question. Of the committed CapEx, what is the outstanding CapEx in terms of existing ships?

Currently, we have to take delivery of just one ship. So I think on that, the CapEx is...

We don't [indiscernible].

Yes. Somewhere in the mid-20s, something like that.

All right. No. No, I was asking more in terms of the scrubbers and others in terms of...

No, scrubbers we are now done with. So the last ship, we complete actually later tonight. So that's now done. We have no further scrubber fitments. Ballast water, we do have but again, to put a number on that is a [indiscernible] because it will depend on what ships we keep, what we sell, what new investments we do. So the ships that we have bought recently, 2 of the ships, both the gas carrier and now the LR2 have come scrubber fitted. So we will not need to put any scrubber on those 2 ships.

No ballast water you meant, ballast water?

Not scrubber fitted, my fault. Ballast water fitted.

Okay. Okay. So in the existing infrastructure, scrubbers is almost done, there's no further cash outflow expected. In terms of ballast, you will see in terms of churning of ships as to how...

That's right.

All right.

Scrubber, the last one is completing tonight.

All right, all right. And my second question was, generally on the competition we have seen over the years that a number of PE-funded companies had come up. Now it's a general question. But do you think the range of competition has come down and/or the volatility would have also helped competitors to survive longer? So just some outlook on how the competition has behaved. Do you see lesser number of companies competing in the shipping? Just your thoughts on that.

So basically, we are a very fragmented industry. And by and large, I would say that, that remains the case of being very fragmented. So -- and we live in a business where competition is global and not India-centric. But what we are seeing is that capital, especially from the banks -- and when I say capital, let me qualify by saying competitive capital, right? Because you can draw capital at exorbitant rates of interest also. But competitive capital is now only really for Tier 1 players, and I guess we would qualify in that Tier 1. But I think for Tier 2 and Tier 3 players, capital will be a challenge. And consequently, it means that on the margin, there might be people who will faced a difficult to go out and necessarily expand. But having said that, it all depends on the state of the market at a point of time. If once again, shipping does well over a sustainable period of time, capital will refind itself again. So I don't think that there is an answer that is necessarily true for multiple years. But as we speak today, more and more of the Tier 2 and Tier 3 owners ask and to get, I repeat, competitive capital.

[Operator Instructions] So I think that concludes the session for today. Thank you, everybody, for joining, and we will try and keep a transcript of this call today in a few days on our website. Thank you, everybody, for joining. And thank you, Mr. Sheth and Mr. Shivakumar for taking all the questions.

Thank you. Thank you all. Thank you very much.

Thank you.

Thank you. Bye-bye.