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

Ladies and gentlemen, good evening, and thank you for standing by. Welcome to GE Shipping earnings call on declaration of its financial results for the quarter ended December 31, 2020. [Operator Instructions] We have with us today on the call Mr. Bharat Sheth, Deputy Chairman and Managing Director; and Mr. G. Shivakumar, Executive Director and CFO. I now hand over the proceedings to Mr. G. Shivakumar. Thank you, and over to you, sir.

Thank you. Thank you, everyone. Good afternoon, and thank you for joining us for the quarterly conference call to discuss the results for Q3 and the 9 months of -- first 9 months of FY '21. I assume that you have seen the results, but we'll go through them briefly. But we will try to focus more on what's going into these results and what's happening in the market currently and how we are seeing the markets. So first of all, we will be discussing markets and what we think of is happening and what we think is possibly going to happen. Remember that we don't have the ability to forecast shipping markets. We don't have the ability to forecast even 1 week ahead. These markets always surprise us. So keep that in mind when you look at any forward statement. Going through the financial results. These are the reported financial highlights. On a consolidated basis, we have an EBITDA of INR 1,600 crores and a net profit of INR 870 crores. You know that we have been gently nudging you to look at what we call normalized results rather than reported results. So let's go to the normalized results. On a normalized basis, we have -- for the 9 months on a consolidated basis, we have an EBITDA of INR 1,400 crores -- INR 1,408 crores, and we have a net profit of INR 670 crores. This, of course, is lower than the reported because -- mainly because the rupee has appreciated versus the dollar. In the 9-month period, you will remember that we were at INR 76 plus in March, and now we ended December at just over INR 73, which has resulted in a boost to our P&L. After stripping out that boost to the P&L, we still have an EBITDA -- consolidated EBITDA of INR 1,400 crores and a net profit of INR 670 crores. On a stand-alone basis, the net profit is INR 725 crores for the 9-month period. The NAV per share continues to be around INR 450 per share for the stand-alone NAV, which takes the investment in Greatship at cost. On a consolidated basis, it is between INR 475 and INR 525 per share broadly based on the valuations that we have got from brokers. Again, I must emphasize here that offshore valuations are quite tricky. The markets are very illiquid. And therefore, we need to take a wide range for these valuations. Fleet development. We've had an active period, active 3 months in the -- on the sale and purchase front. We sold our 2 oldest Suezmax vessels, both of them 20 years plus. One of them was delivered in December, the other one has been delivered just this week to the buyers. We bought an LR2 vessel built in 2012. This is -- we took delivery of it in the last quarter, The Jag Lara. In dry bulk, we have contracted to sell one of our oldest bulk carriers, a Supramax bulk carrier called Jag Roopa. We will deliver her most likely in the month of March. We have contracted to buy a Capesize vessel, which is a 7-year old Capesize ship. The delivery of that ship is expected in the coming week -- early in the coming weeks. On the LPG side, we did a sale and a purchase. We sold our oldest VLGC. And in an effort to modernize the fleet, we bought a 2002 built, a 6-year younger VLGC. So these are the activities that we had in the last quarter. Let's look at what happened in the shipping markets and what's been happening over the 9 months of the financial year. First, the tanker markets. And the headline news is that freight rates are around operating costs. And you can compare it with the previous year. So FY '21, Q3, which is what we finished. Again, these are market averages. These are not our average earnings, these are market averages. So the average Suezmax earnings in the spot market in Q3 FY '21 was only about $6,500 per day. In -- and therefore, on a YTD basis, the Suezmax has earned significantly lower than the previous year on a market basis. The MRs are not very different, also around $6,500 per day in Q3 FY '21. January seems to be more of the same. Our -- the average earnings of vessels in the spot market are still around the $6,000 to $7,000, around these numbers. Our earnings are higher than this because we had a significant amount of contract coverage. We had a COA, which was done a little before the market went down. So our earnings in -- and we have some time charters on the MRs. So our earnings are a little higher than this. Now what's led to these poor earnings? Basically, the demand for fuel has dropped off. You can see the refinery runs. Year-on-year, you have a drop of close to 10 million barrels a day. That was up to August, September, which has improved a bit, but still a very big negative number. And for those of you who have been following us for some time, you know that all it takes is 1 million or 2 million barrels a day to make a big difference in the shipping market. This 7 million barrels per day drop in refinery runs is a massive shrinkage in demand. And therefore, it's no surprise that earnings have been so poor. Again, the -- though there is an expectation that Cal '21 will see a rebound in demand, that's mainly because the base is so low. And the positive of Cal '21 -- and these are different agencies which make these focus. The positive of Cal '21 will still not be able to make up for the negative demand growth that we had in calendar 2020. So we are unlikely to reach pre-COVID levels until '22 and maybe not even there. But let's see how that goes. This is the floating storage picture. It peaked in May, and that's when rates were very high, when 10% of the crude tanker fleet was stuck in floating storage. It's come down, releasing ships into the market, which adds to the weakness in the markets. It is still at about 2% higher than the year ago number. So if you see it in crude tankers, about 4.5% to 5% of the fleet is in storage. Similarly, for -- versus about 3% at the same time last year. for product tankers, it's about 2.5% versus about 0.5% same time last year. So this is still an overhang for the freight rates. Because these ships can come back into the trading market when they are released from the storage activities. And therefore, until the floating storage clears and demand revives, the trade is likely to remain depressed. So one is that a lot of supply -- fuel, crude oil will be supplied from ships which have already carried them to the destinations and are just waiting there. And therefore, it does not have to be transported again. Second, you need a real big revival in demand for the trade to grow. And we've seen a negative 9% growth in trade in the 9 months of this financial year. So we need demand to revive in a big way. We need all the storage overhang to be cleared as well before the trade itself picks up and has positive growth. It's a similar story for products. We've had minus 12%, though it's showing an improving trend. So you've got -- it's from a deep negative, it's come down to less of a negative, but it's still a significant negative number. We needed to go back into positive territory, and we need those ships which are in storage to finish up with the storage and remove that overhang of the supply. Coming to the dry bulk market. Earnings have softened across the asset classes versus the previous year, but the story has been a little bit more cheerful. So I had mentioned this earlier. In Q1 of this financial year, when tankers were extremely strong, that is crude and product tankers, dry bulk and LPG were quite weak. And you can see it here. Capesizes were earning $10,000 a day, Panamaxs were earning $6,000 a day. That's the time when we were making a lot of money on the tankers in the spot market. And now that tankers have weakened, we have reasonably good earnings on the bulk carriers, and we have good earnings, of course, on the LPG ships as well. So this is where having exposure to different sectors helps because you get one or the other sector firing at some point. Again, these markets are weaker than the previous year. And you can see that in the YTD numbers as well. So you're about 20% to 25% weaker than previous year. Trade growth, which was in negative, it did not drop off the way oil demand dropped off. So it went down to a 4% negative trade growth in Q1. It became less than 2% negative. And in Q3, it actually turned positive. So -- and therefore, giving a little bit of strength to the market. Let's see if that continues. Coming to LPG. Despite rates being nominally lower than the previous year on a YTD basis, they are still extremely strong rates. $47,000 is a very, very strong market. So while optically lower than previous year, it's still a rate, which is highly profitable. The reason for the strength in this market is not just a trade growth, which was strong in Q3, but also the Panama Canal transit issues. The LNG market has been strong. The container market has been strong, and you would have seen that in news reports. That's led to congestion in the Panama Canal, which meant that the LPG ships were having to wait for a long time or they chose to take a long route to come to Asia around Africa. So as a result of which voyage times increased. You know that we talk about tonne miles as a big driver of our demand. Well, these are the same tonnes that were coming through the Panama Canal, but they came all the way around. And that's why the miles increased and, therefore, resulted in effectively a supply crunch for LPG ships. The market spiked -- freight rates spiked to about $100,000 a day -- close to $100,000 a day in December. They're back down now to somewhere in the $30,000 to $40,000 range. But this is what happens in our market. This was an unexpected spike in the market. And this is how the markets take you by surprise. Of course, we don't have an exposure in the spot market in the LPG sector. All 5 of our LPG ships are on time charter. So we don't have a spot market exposure currently. Coming to asset price movements. And this is over the last 5 years and indexed, so we started 5 years ago at 100. Crude tankers, which is at top left-hand corner, are down significantly from the peaks of early 2016. They're down about 25% on a point-to-point basis. And in this year itself, they are probably down close to 20%, between 15% and 20%. MR tankers also down of right-hand corner of product tankers. Bulk carriers, though they are better than in early 2016, which was the lowest we had seen in about 20 years, they are still down from their peaks -- recent peaks, which were seen in 2018. And LPG, as a result of the strength, they have been moving up. And after we bought a ship in October, the prices have moved up, so they've been moving up and though they have not yet hit the highs of Jan 2016. All this, net-net, our fleet value on a like-for-like basis has gone down by about 2% in the quarter. Coming to the longer term, and this is something that we have emphasized in the past, we have one of the lowest order book to fleet ratios for tankers and bulk carriers, not for LPG, for crude tankers, product tankers and bulk carriers. For product tankers and bulk carriers, this is actually the lowest order book since January 1996, where we don't have the data beyond Jan '96. So it is the lowest of the recorded data that we have. In crude tankers, we saw slightly lower numbers than this in December 2013. But it's still a very low number. And again, you have to look at the order book in the context of what is the age profile of the ships. And this is what we have. And again, we've shown this to you before. What is the scrapping potential of the existing fleet of tankers and bulk carriers. And here, we have taken a cutoff of 20 years. All ships about 20 years of age, we take that as vulnerable to scrapping, especially in weak freight markets. And 9% of the crude tanker fleet is about 20 years of age. And between 7% and 8% of the product tanker and dry bulk fleet is about 20 years away. Typically, product tankers and bulk carriers tend to trade a little longer than crude tankers. So you'll have to keep that also in mind, but crude tankers are the most vulnerable. Also, I'd like to point out that scrap prices have been going up. With steel prices going up and iron ore prices going up, scrap prices also have gone up. We are at multiyear highs currently. And that's a further little incentive for somebody who's looking to scrap a ship. Coming to Greatship, the offshore business. Offshore E&P spending, you know the picture, it peaked in 2013, '14, and it's come down 2/3 after that. 2020s estimates which were made a few months ago, we haven't had offshore E&P spending. And we haven't had updates to this, but the estimate is that it has dropped off further in 2020. Important factors to keep in mind in offshore also is that there is potential for removal of a significant part of the fleet. The current fleet of jack up rigs is 520 rigs, the order book is 39. Some of those rigs may or may not be delivered because they've been in the yard for a long time. The important number to look at is cold stacked more than 3 years. So when you cold stack it, basically, what you're doing is you park it in one place, and you just walk away, and you don't do any maintenance on the asset at all. And basically, you're taking a call that whenever I needed -- need to reactivate it for some work, I will go there and spend whatever it takes, but I want to save on costs in the meantime. Because typically, when you cold stack it, it may cost you $1,000 a day. But if you warm stack it, which is that you keep some equipment going, that will probably cost you at least $5,000 per day more. And drilling companies, which are otherwise bleeding cash, cannot afford to do that, and they take a call to cold stack. Now what happens when you cold stack it? It's going to take a lot of money to bring these rigs back into operation. And therefore, to justify spending that kind of money, which may be $20 million to $30 million for a jackup, you need to have a contract, a long-term contract of at least 3 years and preferably 5 years at a very strong rate, which is not available today. So unless markets come back to pretty strong levels, you will not see these rigs really coming back into the active fleet, which means that effectively, your supply has been crunched already. And therefore, the surplus is not as much as it seems from the headlines. Similarly, for vessels, PSVs and AHTSVs, there's 18% of the fleet is cold stacked at 6,500 out of -- 650 out of 3,500. And the order book, of course, is very low because nobody has been ordering these assets in the last few years. Looking at what they have coming up for repricing. We have 1 rig, which is coming up for repricing shortly. She comes off contract within the next month or so. We have 1 vessel, which is idle currently, she came off contract last quarter, and she has not got her next contract. We have 2 more vessels coming off contract by March. We have another rig coming off contract in April, and we have 5 vessels coming out in -- during the course of the first half of next financial year. And then we have all the other assets as well. So we have bid into tenders, both of our rigs, Greatdrill Chetna and Greatdrill Chaaya have both been bid into tenders in India. We await the outcome of that, that was fairly recent. We will await the outcome of that and see if we win that business. Let's take a quick look at the valuation metrics. So we'd like to look at a couple of these numbers every time. This is what we've done. So in 2017, '18, we did a lot of CapEx, and this is the shipping business. We did a lot of CapEx. We saw opportunities to buy bulk carriers -- first bulk carriers, then crude tankers, product tankers, and finally, in 2018, we bought LPG ships. So we levered up significantly. And then we have, by virtue of the market performing as it has, the leverage has come back down close to where it was when we started off. This gives us the capacity to buy more. And that's what we look for opportunities to buy. You've seen that we've already been buying some modern assets. We bought a gas carrier, we bought a Capesize bulk carrier, we bought an LR2 product tanker. So we are in investment mode where we can get assets at cheap prices. And we have the capability to do it as well as we have shown over the last 5 years. Coming to the last slide. This is, again, the stock price to consolidated NAV. And you can see the red bar is the stand-alone NAV, which was at about INR 320 a share, which is now at about INR 450 per share, which reflects how shipping has performed in the last 5 years and also how our new investments have performed, all the investments we made in this period have performed. The consolidated NAV has also gone up a little bit. In the meantime, of course, the stock price has come down very significantly. We trade at INR 250 to INR 260 versus the NAV -- consolidate NAV, which is at the midpoint of the range, about INR 500 per share. So we are trading at about INR 0.5 price to NAV. Another thing I'd like to point out here is -- and that is always a concern, which is expressed that this is a cyclical business and it's tough to forecast. We were looking at some numbers recently. The consolidated normalized EBITDA. So after stripping out the effect of this currency, et cetera, the consolidated normalized EBITDA of the group over the last 5 years has been approximately INR 1,700 crores. That is the average annual normalized EBITDA on a consolidated basis. To put it in perspective, the EV as of today stands at about INR 5,500 crores or maybe a little less than INR 5,500 crores as well. So it's a very telling number, this year's EBITDA for the first 9 months on a consolidated basis, normalized, is about INR 1,400 crores. That is for 3 quarters. Still maintaining that same run rate in where you can achieve a INR 1,700 crore kind of annual EBITDA. This is not a forecast for Q4. I'm just saying that the run rate is fine. And that seems really cheap because you've got an EV, which is less than 3.5x of the average EBITDA of the last 5 years. And the reason why we look at average of the last 5 years is that you have seen cycles. You've seen offshore go through a really bad phase. We have seen shipping go through a couple of bad years, including a year when we declared our first loss in over 35 years. Despite that, we have had a consolidated EBITDA of an average of INR 1,700 crores. That's something that I'd like to leave you with because EV/EBITDA number of 3, 3.5 looks a little low to us, and we can discuss that anytime. So that brings me to the end of my presentation. Thank you very much. Now if Mr. Bharat Sheth has anything else to add, otherwise, we can throw the floor open to questions.

[Operator Instructions] Our first question is from the line of Abhishek Shah from Valcore Capital. [Operator Instructions] There seems to be no response. We'll have our team speak with Mr. Shah separately. We'll take our next question from the line of Vaibhav Badjatya.

Yes. Hello. Can you hear me?

Yes, we can hear you.

Yes.

Yes. So just have a question related to the depreciation policy that we have. So in the annual report, we have given the estimated useful life of various assets, crude oil tanker 20 years, product tanker 23 years and so on. So is this a realistic estimate? Or we think that our assets can be -- can have longer life than these estimates? Just to assess the accuracy of the depreciation that you provide for.

We think it is an accurate estimate. Again, see, there are markets in which if you get lucky, if you have a very strong market -- for instance, we just sold 2 crude tankers, which are 20 years old, more than 20 years old, okay? If you have very strong markets, you might be able to run them past that 20-year mark. But it's just a question of luck. We have seen crude tankers getting scrapped earlier also as the markets are extremely weak. So in our view, this is a reasonable estimate of the useful life of these assets. They are not overly conservative, and they're not overly aggressive as well. So again, there are a lot of companies all across the world take different and some companies take 25 years, and we have taken it as what we think is a practical number for assessing the useful life.

Got it. Got it. And sir, lastly, on the scrap prices, as you highlighted, we also read a couple of articles on that front. So apart from the steel prices, is there something else that can -- which really drives the scrap prices, some environment regulation or some other that can really push up the scrap prices? Is there something else?

Yes, Mr. Sheth, would you like to take that?

So yes, I think mainly the steel prices is the prime driver. But as you rightly pointed out on environment, there are more and more jurisdictions that are dissuading their people from running scrap yards or they are becoming very, very strict in the way scrap yards function. So what happens is because the scrap merchant now has to follow a very strict protocol on the checks and balances that they need to adhere to in order to scrap a ship. Obviously, there is a price correlation to what they are prepared to pay, right? So it's a function of steel, it's a function of environment. If the environment gets stricter and stricter, and there is what is known as the Hong Kong Convention. Then it is possible that less countries will afford the option to scrap tonnage. And therefore, there will be a limitation to scrapping capacity. Now that could have a way of driving down scrap prices. And then, of course, if there is a lot of demand, for the few people who will control the market, then they will be willing to pay up if there is an in-demand for the scrap. So yes. So we have seen scrap prices come up significantly, I think, driven by steel, driven by environment and driven by the fact recently that very, very little tonnage has found its way to the scrap yard during calendar 2020. We, of course, believe this is going to change and change quickly, possibly in the second half of '21, but certainly '22 and '23 because there are lots of new regulations that are coming in place. And I think we've mentioned this in one of our earlier calls that lots of people have delayed the decision to scrap. But as night follows day, scrapping is inevitable. So we think there will be lots of tonnage that will need to be scrapped sometime between, say, the second half of '21 and running to '23.

We'll take our next question from the line of Himanshu Page from PGIM.

Yes, I had a question on the issue what happened with our Capesize ship in China, okay, which was stuck for more than 6 months. Is that a one-off issue? Or it was only because of it was getting Australian coal and there were issues? Do you think being an Indian flag, we had certain issues?

No, no, no. Nothing to do with Indian flag. Yes, please. First finish your questions, then I'll answer it.

Yes. So -- and because in media, we have been reading various reports on the situation which is between the 2 countries and some or the other thing keeps on coming up, okay? And even our crew on the ship was not allowed to change through and all those things. What is the issue? And is it going to play any impact in our mindset? Because some of the ships, what we understand generally a large -- just your thoughts on that?

Yes, sure. The last bit of your question somehow, there's a link problem. But I've got the broad thrust of your question. So first, I don't think there was any targeting to Indian flag. Because we've had multiple Indian flagships go to China. And really, we've not had any problem in any length of delay, normal delays, et cetera. As far as crew change is concerned, again, China is not permitting any crew change for any nationality. So again, nothing to do with India. You could be any flag, any other nationality, crew change is simply not permitted in China. So that's the second bit. There has been some perception in the media that it was against India. I don't think that is true at all. Now why the delay took place is very difficult to say because as far as we were concerned, we had the ship on charter with one of the largest privately owned grain houses in the world. And so we were getting paid regularly. I think this became a humanitarian issue because, obviously, China was not permitting any crew change for any ship that was there, and we were not the only ship that got stuck in this problem. There were lots of ships similar. Of course, some got stuck for a little longer time, a majority got stuck for a shorter time, but lots of people got stuck at the same time. And we now obviously recognize that we need to be careful in terms of crew changes when we are going to China. But these are rules that are changing all the time, not only in China but in multiple parts of the world. And these are some of the risks you take in these pandemic times. So eventually, as you are aware, we had to go to Japan at our cost, do a crew change, which we did very successfully. And we are now on our way back to China because we still have an obligation to discharge the cargo to a Chinese team.

Okay. Okay. And finally, one more question. What is the spread between low sulfur and high sulfur fuel? And with crude prices coming back to normal, let's say, $50 and between $60 what we have generally stated, are the spreads making more sense for the fuel price?

Yes. The current spreads are $110, between $110 and $120 depending on where you pick up the fuel oil. This had dropped to -- so this started the year -- I mean this -- when I say the year, sorry, this is Cal 2020. So January, February 2020, it peaked at a little over $400. It then dropped to as low as $40 during the course of the year when oil prices collapsed. And now with oil in the mid-$50s, it's up to $110, between $110 and $120.

And if we believe this situation gets normalized, we have stated that we'd like to do CapEx only for larger ships, okay? So would we like -- would we think of doing CapEx for the younger -- I mean, smaller ships also? In the new ships, what we are getting like Capesize and all those, are they fitted with the things? Or we need to do CapEx on those ships, some idea on that?

Yes, sure. So the broad capital allocation will be for the larger assets. Because as the CFO mentioned, there is greater volatility there, and we think we are getting better at the way we trade volatility. And if we are going to get better at a game, then we may as well put in a bulk of our capital in those assets. So that will be the broad direction. That does not mean we lever by a smaller asset. If we get it at a cheap enough price point, we will, but that will not be priority #1. As far as the cape that we are due to acquire next week is concerned, she is not scrubber fitted. And we would not want to fit a scrubber at this point of time simply because the vessel is not due for her docking. As you know, she is 14 years old -- I mean, she is '14 built. So she is past her survey time. And she will not come up for survey in another 3 years, and we will assess it at that time whether we want to fit a scrubber or not. So as we speak, we are done with our scrubber program.

Our next question is from the line of Rajkumar V, an individual investor.

Am I audible?

Yes.

Just a couple of questions. Sir, in the last quarter conference call, I think you mentioned -- I mean, there was a question on the buyback. And you kind of said that the asset market condition is kind of lucrative and you would rather use the cash to buy more ships than go for a buyback. So I just want to know is the current market condition on the same lines as what we saw last quarter? And any thinking on the buyback?

So as we've shown on one of the slides, we are seeing a correction in steel prices, at least in the crude sector as well as the product sector. You are aware, we bought one large product tanker. We are there to look at more ships. If we get -- we have to get not only the ship at our price point, but we've got to get a high-quality ship. And just to let you know, we inspected 8 ships, which is, in these COVID times, not an easy thing to do because these were inspected worldwide. But we inspected 8 ships, and eventually, we successfully bought 3. So we will keep looking at steel. Obviously, if we come to a conclusion that we are not going to get steel at our price points or we want to get the right ships at our price point, then we could look at other options. But it's too early to debate that at this stage. And we'd also, I guess, wait to see whether some of these transactional costs, what happens on that. As you know, there is still a tax that needs to be paid on buyback, a pretty hefty tax.

Yes. That's correct. Sir, the second question is on the crude market per se, it looks like there will be some permanent drop in crude demand, given the way the COVID is evolving across geographies and also to the advent of the electric vehicles and so on. So given this, I just want to know -- I mean, this is going to have a long-term impact on the shipping market as well, right? So what is your thought process on this? Because this is going to have a long-term impact on the freight rates as well because unless the scrappage also happens in line with the reduction in demand, so you will see a permanent -- or you'll see a pressure on the freight rates as well the shipping is concerned?

So I mean, again, these things are difficult to tell how it will eventually pan out. But I think the point you've raised is very right that crude oil demand is obviously going to -- there is a debate where the crude oil demand has already peaked. Some people believe it has. There is a view that crude oil demand will peak in the next few years. But whichever way you look at it, clearly, it is if not peaked, it is very close to peaking. And I think there is no denying that. My own gut is that there will always remain demand for crude oil. And the volatility will not change because we've seen very often that these are events-linked businesses. And I think what will happen is that the average, which currently runs at close to 22 to 23 years, could come back to 18 years or 20 years for sure, but -- it even could be 18. And as you also know that shipyards globally are now getting rationalized. There's a big merger process going on in Japan, Korea and China, the 3 largest jurisdictions where ships get built. And with this rationalization of shipyards, I guess that shipbuilding prices may remain relatively high. And therefore, people will focus on the second-hand ships and they get scrapped, et cetera. And therefore, I think the commoditized bit of shipping, i.e., the volatility, will continue. So you'll get good markets, bad markets. And I think average earnings will still be fine. Because all that will happen. If markets remain, say, low for long, right, then you'll get cheaper entry price points. And that will then provide you the return.

Okay. Okay. Sir, lastly, on -- any comment on the continued shortage and the increase in freight rates reported by many companies? So why we are not seeing that in our company results where -- I don't know why they are kind of saying that the freight rates have gone up whereas all your charts are seeing the rates have come down?

Because if you see, we didn't show you a chart on containers, and the reason is we are not in that business. We have no exposure to the container market. And you are quite right that container rates have gone up dramatically in a very short period of time. I think all this has happened from maybe September, October to now. But the reason we didn't show you that chart is because we have no exposure there. And having 0 exposure didn't make sense to show that chart.

Our next question is from the line of Jeet Gala from Centra Advisors LLP.

Hello?

Yes, we can hear you.

Sir, my question is on the CapEx and the check writing capacity of the company. So what I've seen from the asset price movement chart, which is given on Slide 34, that asset prices have really dipped from 25% to 30% since the recent highs, but they are still like 10% to 20% above the 2016 lows. And like you said, you're expecting a correction in a few segments of ships, probably, say, 9 months or 12 months down the line. So considering the EBITDA run rate of, say, INR 1,700 crores a year, and I'm assuming that net debt of the company will probably become 0 over the course of next 12 months, can I -- I mean, I just want to understand what is the CapEx ability of the company, if you get the right asset and if you get it at right price? Can we look at doubling of the fleet size or it's just going to be like 2 ships, 5 ships, 7 ships a year? I'm just talking about the near term, 12 months to 15 months?

Yes. So let me -- if you ask me, can we double the fleets in the next 12, 18, 24 months? I don't think so. And I'll tell you why. It's not to do with our CapEx capability. It's to do with the fact that it's very, very, very difficult to buy high-quality ships at our price points, it's not easy. So to go from 46 ships to 92 through the secondhand market at price point is not going to be easy at all. I think our CapEx capability is a function of what we internalize as our net debt-to-equity that we are comfortable with. And currently, we define net debt, both to market value of the fleet as well as to net debt to equity, which is book equity. We have an internal discipline of 0.5. Now if prices get cheaper and cheaper and cheaper, there is nothing that stops us from going ahead on that net debt to equity, but we are unlikely to. It's just an internal discipline that has served us well over multiple years, decades actually, and we have come through pretty well across these black swan events. So the question then is if we keep generating the INR 1,600 crores -- first of all, you said that we are likely to go to net debt of 0 over the next 12, 24 months. That's not true. We will not. But having said that, again, it's very difficult to put a precise number to how many ships we could buy because it also depends on what kind of a ship you buy and what age of ship you buy. So if we just bought, let us say, 20-year-old ships, right, or 15-year-old ships, we could buy many more, correct, for the same capital. But if we buy more modern tonnage, then we'd have to buy fewer ships. So first of all, I would not look at how many ships we would be able to buy. The more important part to focus on is every asset that we buy, is it going to generate us enough of alpha versus the cost of borrowing. And our current cost of borrowing on an incremental basis is running long-term debt, let's call it, 8 to 10 years money in dollars is somewhere between 3.5%, give and take, right? And if we can then generate an alpha, our internal alpha is that we should be able to do about 10% more than our cost of borrowing on a sort of EBITDA plus MTM basis because you may not -- you may sell the ship, you may not sell the ship, right?

Right.

It's like your own equity portfolio. You'll have a mark-to-market gain, but you may not sell that stock, right?

Correct.

So that's why this NAV becomes important.

Right. Right. And secondly my question is on 2030 propulsion systems. So many reports we've read that people are really unclear what engine to buy today. So since GE is only active in the secondary market, do -- I mean, would you guys be really interested in buying something which is a 5-year-old today and which probably will have life post 2030? Or you're just looking at only 9 years of cash flow from now?

No, no. We don't mind buying a slightly younger vessel, like you said, a 5-year-old vessel. For us, the entire focus is price point. So what we do is when we look at a 10-year asset, we look at what is the technology on the ship and then determine our price point. When we look at a 5-year asset, we take into consideration that ship's fuel consumption, that ship's potential to make money, et cetera. So the price point for different asset classes depending on the vintage keeps getting assessed. And so far, if you look at all the acquisitions we have done from 16, including the 3 which we did at the end of last year, fingers crossed, all 19 ships have -- we have done very well on each of those 19 projects. So far, nothing has gone wrong on the buying side and also on the selling side so far.

Right. And sir, my last question is, I mean, is GE -- I mean, I mean, managing a 45 fleet company versus managing a 100 fleet company is going to be the same, right or is there any...

No, no, no. I think looking at our current infrastructure, I guess we could probably push this. Now we may be 48 ships, I'm not sure exactly. But we could possibly push ourselves, on our current infrastructure, possibly by another 10 ships. But if we went to another 20, 30 ships, we clearly need to recruit more people for running the business. I'm not talking about people on the ships, I'm talking more about various people within the organization. We clearly need to expand in a few of our departments. But on the current infrastructure, I guess, we could absorb close to another 10 ships -- 8 to 10.

Okay. Okay. And sir, continuing with this and just, I mean, do you have plans to double over the, if not 12 months, 24 months? Just -- I mean, over the next 3 to 4 years, if that is not a short period?

We don't look at it that way. We don't mind having so long having [Technical Difficulty], that's all. Eventually, our focus is what is likely to be a return on the capital that we have invested. That's the only criteria.

Okay.

So what's the point of doubling if we are not going to produce the return, right?

No. I'm just assuming if you get assets at your price points probably it can have...

If we get the assets at our prices, why not, then we will also be happy to leverage the balance sheet. You saw on one of the slides that we did not hesitate to leverage balance sheet when the timing was right. And rest assured, we would not hesitate again.

Right. So this is what I'm actually looking...

We won't go crazy. We obviously won't go crazy on the leverage because you get these black swan events, right? And this is the second -- I mean, so we always like to keep lots of cash. And the reason is we live in these -- first of all, ours is a very volatile business, number one. Number two, these are the black swan events. And number three, you don't know the extent of the runway you need to build for yourself.

Correct. Correct. Okay. All right. Understood, sir. What the fleet is probably missing out is the check writing capability? I mean, the company needs to do something with the cash, this is something which everyone is really waiting for, either you come up with a mega buyback or you really do go on an aggressive CapEx or something?

Yes. I mean, obviously, we too are waiting. Because we recognize. We, obviously, we recognize that sitting on this level of cash is -- but let me put it another way. So let's say, our dollar cash has earned us just under 0.5%, yes, in the month. But the purchasing part of that cash, right, has gone up closer to 15% in the last 12 months. So if earlier, I could buy an asset for INR 100, and now I can buy for INR 85, right? That INR 15 does effectively enhance my purchasing part. So really, what is my cash earned? It's on the interest because I preserve my capital, but I've also got an opportunity now not to buy at INR 100, but to buy at INR 85. So where it would be wrong is if we just sat on the cash and fail to acquire tonnage when the prices came down, that would be a disaster. Otherwise, sitting on cash has helped us over the previous 12 months.

We'll take our next question from the line of Chintan Sheth from Sameeksha Capital.

Am I audible?

Yes.

Yes, sir.

Yes. So part of that answer -- question I had has been answered. My question was, particularly, the 2 comments you made during the presentation that one; one the capability to buy ships, and one on the cheapness of our stock price. So in both metrics, I just wanted to check how should we look at capital allocation going forward, whether we will be aggressive in buying ships, that you answered a bit and whether we'll be aggressive on buyback. That also you partly answered. But if you can add anything if you want to?

No, that's really it. I think I have said we are continuously looking out to acquire ships. But what we don't want to compromise is on cost. So we don't want to be pressurized against using the cash, let me put it that way. Cash, as you know, liquidity is always a precious commodity. It's very easy for us to go and say, invest all of it tomorrow morning. And then when we don't produce the returns, people are going to question us. So we've got a responsibility here where we've got to make sure that we invest wisely and we make sure that whatever we invest, we produce enough of an alpha over the cost of debt. Obviously, we would fail in our duty, if we just add on the cash and did not seize the opportunities, be it through paper or be it through steel.

Right. Right. And secondly, on -- if you talk about the current market, as you mentioned, that they are still weak, and you do see the scrappage coming back. The one point I want to ask you was that you mentioned earlier that we kind of look at buying ship as buying steel basically. But the deals or the purchase we concluded recently were done at a very steep steel prices. So is there any correlation to that, whether we need to read through it? Or how should we look at it?

No. So the correlation to steel is when you are building new ships, right? So because that's the -- for a shipyard, that's the price that they have to pay today. This is steel that was constructed X number of years ago.

Okay.

And -- but just to let you know on the 3 ships we've acquired recently, all 3 have gone up in value.

Okay. Yes.

Yes, we can buy them today at the prices at which we acquired them a few months ago.

Sorry, just one point here. I think, Chintan, are you thinking that we are taking a call on the price of steel as a commodity itself?

No, no, no. Not at all. No.

Because when we refer to buying steel, we're just saying steel as in buying ships.

Correct. Correct. I understand it. I understand it. And lastly, on -- when we talk about balancing the balance sheet with dollar-denominated liability versus assets, I keep on looking at we are raising NCDs and then converting into the swap, I try to understand why not we directly take loan on the dollar debt rather than raising money in INR and then swap it in dollars?

No. So we are doing some in direct dollar debt. We've done a couple of the transactions recently, which -- out of the 3 ships that we've bought recently, or we are in the process of buying the third one, those are directly in dollars. One of them we've done in the bond. And so there are 2 reasons. One is that when you do it through the bond route, there's very -- there's 0 amortization, right, over multiple years. And also, if you look at some asset classes, sometimes we find it's easier to do it through the bond route rather than through the ECB route. But we have an open mind to both. So it's not that we favor one against the other.

Okay. So it is neutral to -- in terms of cost, it's neutral to us?

Yes. I mean, broadly -- so it's neutral in some aspects. In terms of cost, it's broadly neutral. But of course, when you do a bond, let's say that I have -- one of the ships we funded, let's say, does not have any amortization for 8 years, right? So that means a lot of the risk capital that we need to set aside, you have the luxury of not having to set it aside. So then you can leverage that much -- a little more than I normally could do because you're raising that bit of a risk capital.

We'll take our next question from the line of Sanjiv Pandya from Old Bridge Capital.

Can I be heard?

Yes.

Can I be heard, sir?

Yes, we can hear you.

Sir, if I try to imagine you over the last 4 to 5 -- or 3, 4 con calls that I've heard you, you seem to be more a student of volatility than of shipping. So if I imagine you as just playing volatility, then why stop at merely shipping only because you know that sector better? For example, let's take container freight. It's a fairly consolidated industry with, say, 65% of the ships actually being owned by just a few players, say, 5 or 7. And if you take what they are also chartering, I believe the number is closer to about 8. So it's a fairly consolidated volatile industry, which they are able to even modulate supply of containers and container ships. Wouldn't that be a good place to park your cash? In that context, how do I understand your expression of interest in SCI, which would be both an entry into VLCC and container freight?

So you've got multiple questions in that one question.

Right. Yes. I'm just trying to imagine that you've already said that you...

Yes, let me try and break it up for you. So first, you said, I'm more likely to be a student on volatility and not on shipping. I should not really be a student of shipping after so many years, right? So that's the first point. Volatility, I accept, but not of shipping. That's first. Secondly, on the container space, I think this is a double-edged sword, and because it is consolidated. So first, if you try and understand the structure of containers. Very few people control the decision on when to charter in and when to return your ship to you, right? Because what you say is absolutely, right? It's very, very consolidated. So then you are at the mercy of the big ones. And it's not -- there's not -- it's not a widespread market. So you have very, very few customers whom you can possibly deal with. So that itself has got its own inherent risks, number one. Number two, if you look at the very long-term returns in the container space, especially the chartering model, I'm not discussing the liners, right? Because liners just need vast sums of capital and have really produced very, very disappointing return on capital. But even if you take those who have been in the chartering space, the long-term return on capital is much less than it has been on tankers and drivers, right? Assuming you play all the volume, all the cycles as well, right? So what we are seeing today should not get you into -- get us excited because obviously, what we are seeing today is an extraordinary market. And it will just suck you into buying things expensively and then you might regret. So we just got to look at that by getting into this space, are we really -- other than, of course, there is value that you have diversified into one more sector. But will it produce a superior return to the sectors we already are in? I am not so convinced. And there is no data to support that, right? So that's -- I hope I've answered your question on the container as well. Then, what was your third question?

No. That an incidental asset, which I think you have in...

Sorry, you're getting -- I'm losing your every second, third word.

Incidental to being a good shipping company, you have to carry large amounts of cash on your balance sheet. So cash management seems to be one of the big constraints and getting a good yield on cash seems to be one of the big constraints of running a good shipping business. That, combined with volatility -- I find you use the word black swan very often. That, combined with volatility, wouldn't you get more opportunities in playing volatility and get a higher yield on your cash, which would convince the market that you're sustainable? The problem seems to be that the market cannot see what you can see. When you say that the ships that I haven't bought are actually being added, the drop in their prices are being added to the yield on my cash, that's not visible to the market. So that seems to be affecting market valuations of the company, and the market cannot sort of get predictability in this company.

No, I grant you that, that until you explain some of this, it's very difficult for the market to understand it. And you must remember that this is an industry that very, very few people truly understand the way it should be understood. Because, first of all, in -- if you look at it globally, only 25% to 30% of shipping globally is in the listed space, 70-odd percent is privately held. And I guess the only reason why it is privately held is because shipping has never enjoyed sort of proper valuation. It's an under researched, under understood industry. It's strong on cash flow. And if you get the asset timing right, it provides a very good long-term return on capital. And then if you can afford to leverage some, and therefore, you can get a delta on your equity. So that's the reason why 70% of shipping globally is kept in private hands. In India, of course, it's -- there are very, very few people in this space. And -- because it's not easy to play this volatility. And -- but the point you raise is absolutely correct, how does the market try and understand some of these issues, which we can discuss on a conference call like today? I honestly do not have an answer for that.

But I'd like to take these things privately with you, especially the cash management and the...

Yes. Cash management, I'll just quickly spend 2 minutes on cash management. Obviously, for us, we will not look at taking any risk on that. This is money that we are keeping for 2 reasons, one is for risk management and one is for having the ability to move quickly in the market. So we have discussed in previous investor calls that there have been times when this very ability to just quickly pay in cash has enabled the company to get some very, very lucrative deals. And you must remember also that just as we see the cash on the balance sheet, so do many sellers see the cash on the balance sheet. And therefore, there have been occasions when a seller who wants to quickly transact will tell his broker, first speak to Great Eastern because we know they have the capability of moving quickly. And I'm telling you that's absolutely factual that we have bought at least half a dozen ships in the last few years where we got the first bite of the cherry or the only bite of the cherry simply because we had the ability to move quickly. So that cash has really proved very useful to us. But other than that, we will not take any other risks on the cash.

Our next question is from the line of Manoj from the Hindu Business Line.

Sir, can you hear me?

Yes, clearly.

I have been hearing what you have just explained about capital expenditure and all that. This is basically for organic expansion for your own company. Now we have an opportunity or you have an opportunity on the horizon. I'm talking about Shipping Corporation of India. Have you taken a call to participate in the -- this investment process for SCI? Whether the Board today gave you an approval to look at it or file an expression of interest?

So Manoj, we are still waiting to collect certain data. We have got some unanswered questions at this stage. We've requested the -- we've got some people helping us understand some of these issues. So we really don't want to take any call until we've understood all the issues at stake.

But the thing is the disinvestment department has clearly said that, okay, those things, those information that potential bidders are seeking will be available only at the next stage of the bidding process.

So some information, we may be able to get prebidding, a lot of it will be post-bidding, you're quite right, but we are waiting to get some information prebidding, which we believe we will get.

I see. Okay. Because the date is also possibly...

We are going to try and get. We'll try and get. I'm not sure if we will get or not to get, I don't know.

Yes. Manoj it's a little early. We are -- yes, so we have still not made up our mind on this. We need more to think more about it.

We'll take a next question from...

Manoj, you were cut or you finished your question?

You're saying that it's a little early, but the date is approaching another fortnight or so, February 13 is the last date.

Yes. So if you know, we will take a call nearer the date, Manoj.

I see. Okay. But is the Board in line, I mean...

No. We can't discuss what deliberations have happened at the Board. So we'll leave that aside for now. So the fact is that we need more information before can make a decision, and we hope to have that information in the coming days.

Next question is from Ankit Panchmatia from B&K Securities. [Operator Instructions]

Hello? Am I audible?

Yes. You are.

Sir, a bit of questions on the offshore side. So we have been tracking some offshore renewals which have been happening, although very few of them, the rates for the same looks quite upbeat. And so one thing, do we see a similar trend playing out for us in the offshore market, wherein we could get positively surprised in terms of the ways it gets renewed with, one? And second, is there any -- are the clauses more stringent this time in terms of the bidding norms? How -- or what is the participation, what does the participation looks like at this point of time? Any flavor over this offshore renewals would be much helpful.

Yes. So as the CFO mentioned, we have 2 rigs for which we have just participated in a tender. We won't know the outcome for a few months, but it is our belief that the pricing will be higher than what it is now based on, as you rightly pointed out, evidence to show that the newer prices will be higher than what they have been in the past. So we do hope and believe that they will be higher. How much higher will be difficult to say. It will depend on the competition and on what others have bid, et cetera, which obviously is impossible to guesstimate. As far as the boats are concerned, it is a business that comes up all the time on renewals. Again, that's a little more fragmented than it is on the drilling business. So very, very difficult to say. There, of course, the barriers of entry, as you are aware, are probably lower. So on the boat business, I am hoping that it will be higher than previously done. But again, I would just caution that these things are difficult to ascertain. It's also a function of what oil prices are doing at this point of time. They've now recently, of course, stabilized in the mid-$50s. So there is a little more enthusiasm possibly in that space. But we've seen how quickly oil prices can move down. And it's possible that the current price of oil is supported by OPEC+ action because as we have showed on one of the slides, the demand, I think, because of COVID, is still very, very weak. So we don't know the extent to which -- and what will be OPEC+ action going forward. Will they continue keeping oil of the market? Will they increase pumping capacity? So there are a lots of unanswered questions. But I'm a little more confident on the rigs. Because there, we have clearly seen a tightening of the markets.

And sir, on the newer contracts, how are they drafted? Are they stringent? Are we shortlisting process quite hard compared to where they were when the last time these rigs were renewed? Any flavor around the same.

No. There's nothing that we cannot price because the way the system works is you're aware from the beginning what are the customer requirements and you price everything accordingly. So nothing that will concern us, whereby we would not agree to price or we would not agree to participate.

Okay. Okay. And sir, on the gas side, what is the typical tenure we have been tied up for? Any of the gas carriers coming out from that tenure and we could just swipe it off to a spot rate? Any flavor around this gas that has been...

Yes. So one of our smaller ships is coming off in May '21 and one of the larger ships is coming off in August '21. That's when both will come of repricing, yes.

Our next question is from Himanshu Upadhyay.

Himanshu?

Himanshu, could you please -- Himanshu, could you go ahead with your question?

Yes. Am I audible now?

Yes.

Yes, we had this Sea Change Maritime LLC, investment in that company. It was into some container shipping businesses. We had taken provisions, but it is completely bound down or it still remains? Because...

Yes, it's gone.

No, it's shutdown.

Yes, that's the nature of the container. And it's actually to that point that container shipping is quite a brutal market.

Okay. Okay. And see, with the last 4 to 5 years, there's continuously reduction in the CapEx on the offshore side, okay? What is the outlook for 2021? Means anything you are hearing or what the larger players are saying means are we -- have we reached a stage working on...

All the larger players have become smaller players because they've all gone belly up. Almost every large player both on the drilling side and on the boat side have gone belly up. They've restructured under Chapter 11 or the equivalent of Chapter 11. And -- but clearly, the general view is a shift has -- the CFO pointed out in one of the slides, there's very little -- almost nobody is now building anything in that space. And many of the assets have been idling for considerable periods of time and are unlikely to come back into any level of activity. And therefore, it's -- I don't think Cal '21, there's going to be any real improvement. As I said, in the rigs, we expect the rates to pick up. But on the whole, it's difficult to be positive on that market over the next 12, 18, 24 months.

Sir, my question was more from the...

So nobody is -- yes, he's talking of E&P CapEx. E&P CapEx, everybody lags...

E&P CapEx, I don't think is likely to go up. You mean global E&P CapEx?

Yes.

Yes. That I don't think if...

Especially offshore.

Yes, offshore. I don't think it's likely to go up a lot.

Okay. But can you see if we can flush around?

If you ask me, it would be -- it's not going to go back to what it was, obviously, when it was $300-plus billion. It's now at 15-year low at $125 billion. I think it was last at these numbers in 2004, '05. So -- but I think that it's unlikely to go up a lot. I think where things could improve is more on the supply side rather than on the CapEx side.

And generally, in commodities, when we see if the CapEx has been low for a pretty long period of time, the upcycles also come over a period of time.

It can happen. Again, it all depends on how the renewables all shape up. And a lot of the oil companies now are moving a large part of their capital into renewables and not in fossil fuels. So I think we've got to wait and watch, and it's impossible to second-guess what the oil companies will eventually do. But from whatever we are reading, capital is getting diverted into renewables.

Also I think what happened with shale onshore also is -- it depends on that as well.

We'll take our next question from the line of Rajkumar, an individual investor.

Yes. Sir, given the bleak outlook for offshore, just wanted to know why we have not taken any impairment on the balance sheet? Because I still see almost INR 3,000 crores worth of net assets shown on offshore. And I think NAV, Shiv mentioned that it's in the near about of INR 50, INR 60. So any comment on this?

One minute. So I don't think you can...

No, no. NAV was not INR 50.

No, no. I think the way he's doing it is INR 450 to INR 500. Now the difference between these 2, which is the INR 50 per share is on top of their cost. So Greatship's cost in our books, you have to add INR 50 per share to that, and then you will get their individual NAV. But coming to your main question, which is on the impairment, Every accounting period, typically, this is annual for offshore, we do an assessment of the value of all the assets. This is based not just on the market value, but also on what is known as the recoverable value of the assets. Now how -- the recoverable value is based on forecast of what the asset could earn. The way we do -- how do you do a forecast of what the asset could earn for the immediate period, which is of 2, 3 years, we take the current rates. For -- over the longer period, we take long-term averages. Because, as you know, this is a cyclical business. And you will see the cycle come back at some point, you will have low markets and you will have high markets. Over a long period of time, you will tend to earn long-term averages. And that's how we do the assessment of the recoverable value of the assets. We do an NPV of that. And based on that, it is assessed that there is no impairment required, as of the last time we did the accounting, the checking. Again, we'll do this again in March. Again, remember that the long-term -- we get influenced by the current charter rates. But on a long-term average, long-term basis, the charter rates were much higher than where they are today. And those are the numbers which go into that calculations. If we do -- and that's the whole idea that you're not impairing -- just writing it down to market because this is not a calculation where you just write this down to market on a quarterly basis and then you will just have only capital value changes in your P&L. And therefore, this takes a longer-term view on the value of the asset.

Yes. Yes. Thanks, Shiv, for the clarification. So given that the market has significantly deteriorated compared to the last year, so is it fair to expect that you will have some impact coming up in the coming quarters, given that, that will be the last part of the year?

No, sorry. No, the market has not deteriorated as compared to the last year. Mr. Sheth just mentioned that we are expecting a better pricing than the last one. We are hoping for a better pricing than the last one because the market is getting a little tighter. So we don't know what pricing will be done on the contracts. But the general feel of the market is that the market for drilling assets at least is tightening, okay? So -- and since we seem to have a little bit of confusion on the NAV part, in the stand-alone NAV, we take the value of Greatship in Great Eastern's books at the cost, the equity investment cost approximately INR 80 per share of Great Eastern money. And that is sitting in the INR 450 per share NAV. So when you add that INR 50, you are not taking into account that INR 80, which we are starting with. You got that, right?

Yes, I got it, Shiv.

The NAV of the offshore business is close to INR 2,000 crores based on these numbers.

Sir, there is one last question, and I'll just read that out because he has typed out his question. It's from Mr. Jayanth. He says, over the last 5 years, your NAV has gone up from INR 450 to INR 500, whereas over the same period, your stock has been virtually flat. Is that the right way to look at the way the market values the company?

Sorry, what is the question? NAV has gone up and...

From INR 450 to INR 500 in the last 5 years, whereas the stock has been flat. Is it the right way to look at the company?

Well, there is no right or wrong way to look at the company. I mean, how the investors look at the company I have never understood because each investor will look at the company differently. And there cannot be unanimity on how people -- there'll always be a buyer, there'll be a seller. The way we look at it, in the role that we play, which is in managing the shareholders' funds is how -- are we building the value of the business over a period of time. Of course, in between there will be years when it will do well, and there'll be years when it won't do so well. But over a meaningful period of time, so long as we are building net asset value, that to me is building value in the business. Now how the market looks at it is impossible to tell. I guess we have to give a written reply.

No, no, no. This is just because -- they just posted it on the chat.

I am hoping he is online. Instead of asking it, he has typed it in the in box. So I hope he will read it out.

No, that's fine. yes, Yes. That's fine.

So with that, I think we have done for the questions. So thank you, everybody, for joining in today for the call. And we are available for queries. Of course, the whole team is here to answer any queries you may have. And we will be putting up the link -- audio link as well as the transcript on our website in a couple of days. Thank you very much.

Thank you. Can we sign off?

Yes.

Thanks, Shiv.

Thank you.

Ladies and gentlemen, thank you for your participation. With that, we conclude this session for today. You may now disconnect.