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

Ladies and gentlemen, good day, and welcome to the GE Shipping earnings call on declaration of its financial results for the quarter ended June 30, 2021. [Operator Instructions] I now hand over the proceedings to Mr. G. Shivakumar, CFO and Executive Director at The Great Eastern Shipping Company. Thank you, and over to you, sir.

Thank you, Aman. Good afternoon, everyone, and thank you for joining us for this Q1 FY '22 results conference call. I hope all of you are well and keeping safe. Let's start with the presentation first. Aman, you have to make me the presenter, I think.

Yes, sir. Please go ahead, sir.

Thank you. Yes. Before we start, we may make some statements which constitute -- which are like forecasts. Please remember that our markets are very uncertain. Shipping markets, freight and asset prices are extremely uncertain. Please keep that in mind when you hear what we have to say. So let's take a look at the results first. I hope you've had a chance to see those results. These are the reported numbers. We'll also come to what we call the normalized numbers. So on a stand-alone basis, we have reported net profit after tax of INR 99 crores for the quarter as opposed to a PAT of INR 465 crores in the same quarter of the previous year. On a consolidated basis, we have reported INR 12 crores as a profit versus INR 468 crores in the corresponding quarter of the previous year. Now let's look at what this looks like on a normalized basis because we have had some of the usual currency and derivatives impacts. On a stand-alone basis, our normalized profit goes up from INR 99 crores to INR 134 crores, still 70% down from the same quarter of the previous year. And we look at the markets and how they have moved in between Q1 FY '21 and Q1 FY '22, and that will explain this difference. On a consolidated basis, we have -- the profit has dropped from INR 423 crores to INR 85 crores on a normalized basis. The significant event of the quarter is the increase in the net asset value. The net asset value, which was at about INR 490 as of 31st March 2021, has now gone up to INR 540. That's a INR 50 or about a 10% increase in the last 3 months. This is due to a significant increase in the price of assets, whether it's by carriers or tankers or gas carriers, in the last quarter, and we will look at how the asset prices have moved also. On a consolidated basis also, the movement is similar by approximately INR 50 per share. Just to remind you of our fleet profile, we have 46 ships currently with a total carrying capacity of just under 3.7 million deadweight, of which 27 come under the category of crude and product carriers, 5 are gas carriers, and we have 14 bulk carriers as well, dry bulk carriers. Let's see what happened in each of the individual sectors that we operate in. And here, you have -- on the left side, you have the Suezmax earnings chart. This is the market averages. These are not ours. These are the market averages. You see the blue line represents how the market was in the last financial year. And you can see that the first quarter of last year was, of course, spectacular because of the huge oversupply of oil, which we had through the month of April and part of May. And therefore, we had very high earnings. So FY '21 Q1 average Suezmax spot rates were at about $48,000 a day. In contrast, you have this quarter, April-June '21, which has an average of below $5,000 a day, which is a drop of 90%. And that's a reminder of what can happen in the shipping market. On the MR side, which is on the right side, the MR product tankers, we had an average -- the market was more or less similar. We had an average of about $26,000 last year. And this year, in the first 3 months of this financial year, the average was a little under $7,000, which is about a 74% drop. Now what led to this, basically, refinery runs remain 5% below the pre-COVID levels. The crude trade itself remains 10% below what it was before COVID, so that's at the very end of 2019, Jan 2020. OPEC+ has held back crude supply in order to support the higher price. They are -- they have reached an agreement to start releasing oil back into the market, increasing by about 400,000 barrels per day every month. So hopefully, that should help improve the availability of crude oil to carry. And while the trade has collapsed, we have had significant supply growth from new buildings. And we've had the floating storage release, which has happened over the last 1 year or so. Last year, you remember that the floating storage took up about 10% of the fleet in May last year, and that's been coming down. We are still at about 4% to 5%. Also, despite the poor freight market and very strong scrap prices, scrapping still remains slow or 1% or less of the tankers have been scrapped in this 6-month period despite very, very poor earnings, which are just about operating expenses. Coming to dry bulk, which is one bright spot, and it's almost the opposite -- exact opposite of what's happened in tankers. So we had a very poor first quarter last year. This is a Capesize graph you're seeing and the Capesize earnings you're seeing in that table. Capesize has averaged below $10,000 a day in April to June 2020. In April-June '21, they averaged $31,000 a day. And you can see that the blue line, which is pretty low in the first quarter and then recovered later, and this year April, it just started off at a very high level. It's above $30,000. And more than the Capes, the sub-Capes, which is the Kamsarmaxes and the Panamax and the Supramaxes, have done very well. They've earned almost the same as a Capesize bulk carrier. And the reason for that is the second point here, which is that the demand for minor bulks, which is commodities like bauxite, limestone, clinker, those kind of commodities, which typically are carried on smaller vessels, smaller than Capes, the demand for those has grown faster. And therefore, the demand for smaller vessels has been growing faster than that for Capesizes, which are mainly dependent on iron ore and coal transportation. Also, as a result of the sudden surge in cargoes in dry bulk, port congestion has increased, pulling in a lot of supply and tightening the market further. Currently, the port congestion stands at about 5%, which is its highest level since 2014. So all of this has served to tighten the market. The market continues to be at around $30,000 a day, whether it's Capesize bulkers or Kamsarmaxes or Supramaxes. Moving to LPG. The quarter was more or less in line with what it was in the previous quarter in terms of averages. So last year, we averaged $33,000. The spot market averaged $33,000. While this year, it averaged about 8% higher at about $35,500. It's currently a little lower than that. It's probably -- the spot market is probably around $15,000 to $20,000 a day. Of course, our ships are all on time charter, so they don't directly get affected by the spot rates. Again, there was a lot of congestion in the VLGC sector in December, January, especially at the Panama Canal. This has eased. So the supply situation has eased a little bit. Despite that, the rates have been reasonable. U.S. LPG exports have suffered a little bit because local demand for LPG has increased, and they have been drawing down from inventories for exports. So they'll have to rebuild the inventories. Coming to the fleet supply situation. We've been showing this graph to you for quite -- this chart to you for a few quarters now. And it gets -- it keeps -- the order book keeps reducing. The dry bulk order book is now at 5.6%, and the product tanker order book is now at 6.6%. It's at its lowest level since we have records. The database goes only up to Jan '96. So it's the lowest since then. So we don't know how many years before that we have to go. The crude tanker order book has been building up in recent months. People have been ordering crude tankers. So it's built up, but it's still at only 8.6%. It's at its lowest for the last 8 years. Let's see what happened to asset prices, and this is a bit of a conundrum here. We -- you can see the crude tankers chart, which is the top left side, which is the Suezmax group tanker. Between Jan '21 and July '21, rates -- that is earnings have been only around operating expenses, so probably not even to cover basic interest costs even at the current very low levels of interest. However, the prices have gone up by 10% in the 6-month period. The product tankers have also gone up, not to that extent, but even product tankers have gone up in price. Dry bulk is much more easily explainable. The prices have gone up between Jan and July by 40% to 50%, depending on the age of the ship. So at the more modern end, probably 30%; and at the older end, more than 60% or 70%. So this has been the movement in the asset prices. But at least, that is explained what has happened to earnings. So -- but the tankers, it just does not explain why prices are going up like this, except, of course, like newbuilding prices. Because of high steel prices, newbuilding prices have gone up. And because of high steel prices, scrap prices have also gone up. And they've gone up from probably $450 per ton to $600 per ton and maybe even more. And that's a big increase in scrap prices, which is pushing up the prices of ships as well. LPG has been more or less flat, maybe 5% higher over the last 6 months. Coming to the offshore business, Greatship (India) Limited. This is again a chart that we have shown for a long time. There are a lot of cold stacked rigs which have been cold stacked for more than 3 years, you can see the number at the bottom, which is 60 rigs which have been cold stacked for more than 3 years. And the reason we look at cold stacked rigs is because it will take a significant amount of investment to get them back into operation. So you can actually consider that these rigs may probably not come back into service unless the market becomes extremely strong from here. So they will probably not be counted as part of the effective fleet supply at all. We are not yet seeing this really reflected in our -- in the pricing. It's not gone up in any big way. Hopefully, this will -- just like the low order book for ships, at some point in time when the demand picks up, we will see an additional tightness because of the lack of supply of assets. We are seeing some pickup in the utilization for jack-up rigs. Again, this is not our rings. This is global utilization as reported by industry reports. So utilization has ticked up from very low 60s, which it was in the beginning of this year, to about 66%. That is the green line. So we are up from about 61%, 62% to about 66%, which is not bad. We are getting close to where we were in January 2020, where the market was looking quite good, which seemed to be on its way to a good recovery before we were hit by COVID. So let's see if this trend continues. Coming to repricings. We had 2 rigs which came off contract between March and April, the Greatdrill Chetna and the Greatdrill Chaaya. The Greatdrill Chetna has gone back on hire in June onto a new 3-year contract. The Greatdrill Chaaya still remains without a contract. We have, however, bid that rig into a tender. The tender has opened. It's for a 3-year contract, and we are L1 in that tender. So we hope that there is a good chance of getting that contract, and we will be able to go on to the contract immediately after the monsoon. As you know, we -- you can't go on to a contract during the monsoon in the West Coast fields. So we will have to -- if we get that contract, it is -- the rig will go on hire after the monsoon. So that's the 1 rig which is showing here in H1 FY '22. We have 7 vessels also which are up for repricing, of which 4 are already off their current contracts. Four have been bid into contracts with -- in ONGC. And hopefully, when the tenders open, we will land some more contract coverage for those vessels. Apart from that, the next rig which is coming up for repricing is coming up in about May 2022. And then the next one after that is in May 2023. Now we thought we should update you on what initiatives we are taking on the environment. We voluntarily published our first ESG report this year. And I hope you would have taken a look at it because we've been very -- we have given some very extensive information on all the things that we are doing and all the data points on our environmental initiatives. So it's part of our annual report, which we have released about a month ago, for FY '21. And I think you will find it an interesting read. Second is we have established a working group to study on alternate fuels and fuel optimization technologies in lieu of the IMO emission reduction targets, and we hope that we'll be able to make some headway on that in the next couple of few quarters. Third point is on the low sulfur -- lower sulfur emissions. After the Jan 2020 IMO mandate on switching from 3.5% sulfur to 0.5%, there has been, of course, a drastic reduction in the SOX emissions using a mixed strategy of scrubbers and low sulfur fuel oil. Finally, this is something that I would refer you to, we've created an ESG profile of our company based on certain ESG metrics. This profile is available on our website under the Sustainability tab, and I would request you to take a look at it. It's quite interesting. Among the things that we have done to save energy on our vessels, these are among the things that we've done, and we can go into detail on this separately if you want to have an explanation on that. The high-performance paint basically is applied on the ship's hull in order to reduce friction when it is sailing and, therefore, to improve the efficiency, basically streamlining the ship and reducing your fuel consumption. The Mewis duct, the Propeller Boss Cap, the Eco Cap, all of them helped make the propeller more effective and, therefore, reduced the power lost while -- that it is providing to the ship and, therefore, help to reduce the fuel consumption. The LED lighting, again, this LED lighting is something which makes a very small difference to the overall consumption of the ship. But we think that every little bit counts. So we are doing -- whenever we get an opportunity, we're changing all the lighting on the ships to LED lighting just so that you can save these little fractions of fuel and help to improve our record on emissions. The Rudder bulb and the Pre-swirl fins also helped to make propellers more efficient. Coming to financials. There's just 1 slide, actually, the stock price to NAV. So the stock continues to trade at a discount to net asset value. We have -- and this is based on the price as of yesterday. So it's a little lower today. So we continue to trade at a significant discount to the net asset value. So that brings me to the end of the presentation. And that was just -- we have more slides for you in the presentation which has been uploaded for the usual data that you'll look for. So it's available in the uploaded presentation on our website. So you can feel free to take a look at that. We didn't want to waste too much time going through the presentation here. We'd like to have as much time as possible for discussions and Q&A so that we can explain our strategy, and you can ask us more questions on the markets itself. Thank you.

[Operator Instructions] Our first question is from the line of [ Saravanan Balakrishna ] from [ Reed India Academy ].

So I see a good set of numbers. So my first question is regarding the SCI divestment. So recently, I heard the Safesea Group is also -- has got approval for bidding for government's divestment of SCI. So I presume due to some procedural delays, so it may even become next year. So provided if we were able to successfully bid for SCI, so how do you think the industry dynamics will change? That's one. And the second question is, so that is, again, INR 900 crores of sale tax dispute that we have pending right now. So any reason why this number goes up every year with regard to that?

Yes. Mr. Sheth, would you like to take the SCI or shall I take it?

You can take it. I can take it. It doesn't matter. Who would you like to answer that? Yes.

You can go ahead with -- okay. Let me take the easier one first, the sales tax. Okay, the sales tax thing is that it's an issue which is -- it's a recurring issue. It is -- it comes up and some years, you get a demand for it. It's -- ours -- what we provide is a service. And I think it's fairly clear that we are providing a service even on the offshore side. And unfortunately, we have got demands for -- like a sales tax. So it will go up, and it goes with the business. And we'll have to deal with it. We are dealing with it appropriately, and we are fairly confident on our stand on it. With regard to Shipping Cooperation, we have decided not to put in a bid for SCI. We looked at it, and we thought that -- you may be aware that we are fairly risk averse, and we have very specific risk parameters, especially with regard to the balance sheet. As it stands, we have decided not to put in a bid. So we have not put in our expression of interest, and we are not in that process as of now.

Got it. So another question that I have regarding the capital allocation front is that -- so if we just look back over the last 5 years, right, so NAV has definitely gone up. So here, we have built in multiple contrarian bids in terms of buying different assets. So I just want to get this from a long-term view where -- like what's the ultimate end game. Like now since the industry is almost consolidated, right, even in one of your earlier con calls, so you mentioned that almost -- a lot of existing capacity has gone out of the market. So how do you see this evolving going forward like in terms of sales as well as the industry structure itself? So will it be more of like, again, more of asset buying? Or is there a substantial value unlocking that could happen due to the structural changes that's happening on the ground?

Sorry, I didn't quite get that on the consolidation. Yes. So there has been no great consolidation in the industry. There have been -- so it's a very fragmented industry. The commodity transportation industry is very fragmented. And probably the top 20 players don't control more than -- or top 10 players don't control more than 20% to 25% of the fleet. And the rest is very fragmented. So consolidation doesn't really help. You don't get pricing power. Everybody is a price taker in the business. Whether you have 30 ships of a particular kind or whether you have 1 ship of that kind, if you meet the quality requirements of the customer, you get the same price. So there is no pricing power available. With regard to the net asset value, good that you asked that question, and I should have mentioned this earlier. We changed our approach towards investments starting in 2016 and, as you mentioned, contrarian investments. As it stands today -- and we do this at the end of every quarter because you can get a price for each asset. As it stands today, as of end of June, that is the end of -- so 30th June, our investments of about $530 million in total that we have made between 2016 and now are giving an average unlevered IRR of 16.5%. That's dollar unleveraged IRR. So it has worked for us. We think that kind of strategy works, contrarian investments. Sometimes you get lucky, and you get a really high IRR. Like 16.8% is -- our target was 10% to 15%, and we've done better than that. But I didn't quite understand what you mean by going forward on what we're expecting.

Going forward in the sense that since now this whole segment has -- there are 2 listed players, right, like who control almost 90%, 80% plus approx revenues in this space. So now since SCI also getting divested, which most probably will be taken over by another private player, so do you see this could again alter the dynamics moving forward? Or like it's going to, again, like remain consolidated with the top 5, 10 players?

No. There's nothing -- so let me comment here. Basically, the way Great Eastern is positioned is, we are -- we do a lot more international business than domestic business. And I guess that trend will broadly continue. So -- and as the CFO just said, ours is a very fragmented industry. I believe it will remain fragmented, and we will just be opportunistic players. And I think -- so there is nothing like an end game. What we hope is that we are able to replicate our success on capital allocation that we have seen over the last 5 years. And so long as we can keep churning that out, I think that is a phenomenal dollar return. And I'll be more than happy if this can be sustained over multiple decades because think about it once you leverage, right? Our average cost of debt at the moment is 3.5%. And the moment you lever the transaction, which we do, we are then talking about returns -- in dollar returns in excess of 25% to 30% on invested capital. So that is a very, very high number. And if we can sustain that, nothing like it.

Got it. One last question, then I'll come back in queue. So there is some EEXI compliance that's coming from 2023 rates. So we are -- again, we are preparing for the compliance that's kicking in the next couple of years. So how is that coming up?

So we have just completed an internal study on EEXI. That becomes effective from 1st January '23, and it's actually your first annual survey, which you have to do from 1st January '23, where it kicks in. And having analyzed each of our 46 assets, we don't see any challenge at all in meeting the criteria.

The next question is from the line of Archan Pathak from Centra Advisors.

In the last quarter, when the con call happened, Mr. Sheth told -- when the tanker prices were starting to build up, Mr. Sheth told us how the deal has been overtaking the [ logic ]. And -- but you still told us that you expect the prices to collect upon in the near coming future and are waiting for the right opportunity to make the CapEx. But since then, the -- even though the freight prices have remained high, the asset prices has -- grows even more. And now if the demand returns, the freight prices will -- starts to improve. And that will again raise the asset prices to another level. So what I want to know is the -- do you think or do you feel like you missed the opportunity of the CapEx? Or do you see one coming in the nearby future? Basically, your outlook on the asset prices in the near term.

Yes. So let me tell you, so on tankers, about a quarter ago, clearly, with earnings at 31-year lows, clearly, we were expecting values to correct. Now even with the benefit of hindsight, quarter ago prices were too high for us, and we would not have bought those assets even with the benefit of hindsight. And today, when we think about it, we are obviously very surprised that asset values have continued to rise rather than come down. But that's -- there's obviously a lot of factor that is driving it. And clearly, the big one is liquidity and very low interest rates. Now these things can correct pretty quickly. And if we want long term to be continuously having the success that we've had in the last 5 years, I think we should not break away from that discipline. So whilst we are -- we would love to have asset prices come off, they have surprised us by remaining strong. And -- but I wouldn't say that we've missed bank. It's because even when we look back, we would not have bought at those price points. We just don't think we could have delivered a return. And these things have a momentum, right? So in a strong momentum, yes, you can deliver returns. But if we break the discipline of price points, then at some point, we will get back to the old days when, as you know, Great Eastern had to take in significant impairment. And we just never want to be in that position again.

And another question. Just like SCI, do we have any such organic expansion coming? Are there any opportunity upcoming in the coming future?

Not at the -- sorry, not at the moment, no. Yes.

The next question is from the line of Himanshu Upadhyay from PGIM MF.

Yes. Hello. Am I audible?

Yes, you are.

Yes, you are.

Yes. So my first question was, we have seen significant repricing on the assets on the offshore side, okay, 2 jack-up rigs. And again, vessels also, we would have seen some repricing. So are we seeing the trend moving upward direction? And blended, if you can give the -- how the rates would have moved on vessels and rigs, let's say, from the prior contract to the new contract, what we have done? Not particular asset prices, but let's say, to what it was earlier and how much percentage improvement you would have seen?

So on the rigs -- on the boats, actually, there has been no improvement. That remains a big disappointment. And maybe it will improve, but possibly with a time lag. On the rigs, we have seen somewhere between -- on the revenue side, we have seen an improvement between 30% and 50%, again, albeit from a very, very low base. And there, we are seeing, as I think the CFO showed in one of his slides, a gradually tighter market in terms of utilization. What we are also seeing overseas, be it in the North Sea or be it in West Africa or even be it in the Middle East, we are seeing jack-up prices on the revenue side going up. It still hasn't translated to asset values, but I think the worst is behind us in terms of asset values. So if revenue goes up, then as night follows day, asset values must go up. It hasn't happened yet, but we think it must happen. What we need to see is this increase is sustained over the next sort of few quarters. So we don't want it to be a flash in the pan, but we think it is here to sustain. And we would not be surprised if this increase continues for some time to come. And especially now with oil prices having moved up from the $10, $20 to $70-odd, I think there is a lot more feel-good factor even with the customers [indiscernible].

Okay. And one more thing, in the offshore annual report, we have said that even in the longer term, there can be issues. But medium term, we remain quite confident on the business, okay, or it can be a highly profitable type of statement. Can you elaborate what you are trying to say in your annual report on the offshore business?

Yes. So I think the real message on the offshore business is that we believe, as I've just really articulated, we are seeing that as the rigs come up for repricing, there is a very good chance, unless, again, heavens fall, there is a very good probability that the repricings will be higher and as I've just said, with a time lag, and we don't know what that time lag will be, that you should see even an improvement in the boats. And as the repricing goes up and utilizations improve, hopefully, the worst of what we've seen in the offshore space will be behind us.

Actually, the voice was cracking or is my connection problem? I could not hear the reply very clearly.

Yes. The last minute or so was not very clear.

Hello?

Yes. the last minute was not -- yes.

I'll graciously repeat. Can you hear me now?

Actually, your voice is breaking, sir. We're not able to hear you clearly.

Can you hear me now?

Yes. This is better.

Yes.

So I'll just [indiscernible]. Hello?

Yes. We can hear you now, sir.

Hello.

Yes. Bharat, sir, we can hear you now. You may please go ahead.

Just broadly repeat what I've just [indiscernible]. Can you hear me or not?

Still a little broken.

So I'll just repeat what I've said that we expect the broad [indiscernible]. [Technical Difficulty]

Sorry, Bharat, sir, we're still not able to hear you clearly.

What should I do?

So maybe I'll call you on your number. In the meanwhile, if Shivakumar, sir, can proceed.

Hello? Can you hear me?

Yes, sir, you're audible.

Yes. Okay. Yes. So we are expecting a recovery. So Himanshu, the broad thing is that even if in the long term, there are some challenges with regard to oil, we think there will be some tightening before that. And therefore, the tightening of the oil market balances. And therefore, there will be a decent market for oilfield services assets.

So we have said about medium term, okay? So for us, medium term is 5 years plus time frame.

Yes. Yes, up to 5. Yes. Yes, up to 5.

Okay. And one more thing. On the LPG, if we look at the spot rates, have been better, okay? I think you said that they are not the best way to look at it because ours have been longer-term duration or charters, okay? Because our rates are 8% Y-o-Y down. So how should I understand where we are or...

So the charters got repriced. So we were on charters. We are typically on 1-year charters. The charters got repriced down in the earlier part of the year. So that's the whole thing. And these are charters which were fixed a few months back. So not affected by the current spot market sentiment. And by the way, the current spot market is down to between $15,000, $20,000.

Okay. And on this asset prices on the Slide 25, where a lot of discussion happened, okay, in one of the questions also, if we look at the 5-year prices, the same chart, okay, the least movement over last 5 years is still Suezmax only. So that $100 moves to only $105 only, okay? And for various others, it has moved $100 to $140 for dry bulk and...

No. No. See, it's a starting point. July '16 was a pretty strong point in the cycle. You will see that July '16, which was $100, was -- by December '16 was already at $85. It just depends on the starting point, right? So we've just done a 5-year indexed values, as you have mentioned that. It's an indexed values, which is starting at July '16 equals $100. So in dry bulk, that was a low point of the cycle. So there was really no way to go but up. In tankers, it was -- in crude tankers especially, it was just coming off a very high point in the cycle, which was in the beginning of 2016. And therefore, it was sort of mid-cycle-ish, okay? So I'd just point, $100 is only $105, no, you're right. But it went down all the way to $85, and then it's recovered from there.

Okay. And then one small thing, this government subsidy, that INR 1,624 crores over the next 5 years, what they have stated, PLI Scheme. So the assets, what we'll be purchasing from here on, so let's say the -- some assets we got in this calendar year, I think it is from 1st Feb. So there, we'll get some benefit on those assets, okay?

No. Including -- you get on the old ships also, except that the rates are lower. You get 5% less on the old ships also, old ships meaning existing ships.

To us, it is a beneficial thing only, okay? It means -- and how will it operate?

Yes. So the way it's contemplated to operators, this is applicable only to import cargoes, where central public sector enterprise or a government department is chartering a vessel. And if there is a foreign ship which is L1, and there is an Indian ship which is there, they get a right of first refusal at some level which is higher than the L1, okay, depending on the age of the ship and when the ship was bought, et cetera. It's between 5% and 15% but subject to the maximum difference. Hello? Himanshu, are you there?

Yes. I am here.

Yes. So let's just take an example. So let's say that the foreign ship is L1 at $20,000 per day for a charter, okay? And let's say there's an Indian ship -- and let's say that you are in a category which gets a 10% subsidy. So -- and let's say you have bid $23,000. So you will get $22,000 from the charterer, which is a PSU. Then the government will reimburse that extra $2,000, which that charterer has paid to you. The government will reimburse through that PSU. If you have bid $21,000, the charter will give you $21,000, and the government will reimburse $1,000.

And this will also happen for period charters also, so 1-year duration charters also or...

Yes. It seems so, yes. No, no, everything. We'll wait for -- see, we have to wait for the full details to come out for implementation purposes. Let's see, maybe there will be further communication. But this is our reading so far.

And this is only for shipping, not for offshore...

Only for import cargoes, not even for coastal cargoes or exports. Only for import cargoes. So if you're carrying -- a product tanker carrying cargo around the coast of India, this does not apply.

Next question is from the line of Vikram Suryavanshi from PhillipCapital India Limited.

Yes. Am I audible, sir?

Yes, you are.

Okay. Some of the questions were answered, but okay. On the crude tanker side, basically, what we are seeing is that some of the capacity is getting back in the water because of unwinding of storage capacity as well as the last OPEC meeting was also not very conducive in terms of cutdown to the production cuts basically. So how is the -- we are readying in terms of tanker freight market going ahead? And what would be the triggers for recovery?

Yes. So there are 2 things. One is, you may have read that OPEC+ has announced that they will increase supply by 400,000 barrels a day a month starting in August. So on an annualized basis, that's really another 5 million barrels a day coming to be transported on ships, a significant amount. That -- the [indiscernible] of storage is now more or less done. There is -- inventories, for your information, now are at 5-year lows. Global oil inventories are at 5-year lows. So there is very little now online. Maybe another 1% or 2% can add to the supply because there's always an X amount of oil that is held on assets. So there is a natural drawdown, beyond which there will be no further drawdown. So we are coming very close to the point. And if you read multiple reports across the world from those who dare predict tanker freight rates, everybody now says that things can only go up from here.

Okay. And in the offshore side, obviously, you have given a good amount of commentary. But looking at the underinvestment for so many years and also you are also expecting some recovery in the medium term as possible, so are we considering some acquisitions or capacity addition in offshore side or we'll still hold on with existing fleet to -- and wait?

We may look -- we may, and I repeat the word may, look at 1 or 2 possible acquisitions. But we haven't yet taken a decision on it. But it's -- so the jury is out to that extent. We are still debating internally whether we should wait a bit or whether we should invest in something now.

And if we keep aside some risk capital as well as just to take care of the business continuity in case of downturn continues, how much kind -- or what kind of CapEx we can uphold in, say, shipping or offshore right now in terms of million dollar what -- which we have in terms of CapEx available?

Yes. So again, this is just self-discipline. But I guess between shipping and offshore, we should be able to undertake in the region of $300-plus million of CapEx.

And last question, sir, just...

But this is a moving target, right, because the longer we wait, the more firepower we'll have eventually.

Yes, sir. I understand it, yes. And last question, sir, we do get scrap value in shipping because of steel price and all that. And that acts as a hedge or bottom or at least in terms of valuation for old ships. But in case of rigs, do we have any scrap value or like a dismantling and mobilization is too big a cost to [ release ] scrap value? So how that actually...

No. In rigs, we really don't. You're quite -- I think it's a good question. But in rigs, you really don't have that much because it's a lot more machinery, much less steel. So -- and there's a huge cost of mobilization. So in rigs, typically, what happens is rigs just get cold stacked, as the CFO presented. And the longer they're out of service, the less likely they will ever come back to be used again because to mobilize or to [ report ] a rig that has not been in operation can cost tens of millions of dollars. And it just becomes a very, very expensive exercise. So consequently, even if it is not scrap, you can take it out of the equation as an asset from the supply side.

The next question is from the line of Shivan Sarvaiya from JHP Securities.

Hello. Am I audible? Hello?

Yes.

Okay. Two questions from my end. One is on the scrapping. So we've seen record low freights and yet no scrapping. So I would like to get your thoughts on the possible reasons for the same and your outlook on how this will increase over the next few months. The second one is you mentioned -- it's on the scrapping part only. You mentioned that in the first 6 months, the scrapping was less than 1% of the total tanker fleet. So sir, at what level would the scrapping start negating the oversupply in the market? So at what percentage of scrapping would that start negating the oversupply in the market? And sir, the third one was on your capital allocation strategy. I think I missed this, so if you could just repeat it. Are we looking out for acquiring ships? Or are we going to be on the sidelines? So these are the 3 questions from my end.

Yes. What was the first question? I got the second and third.

Sir, the first one was that in spite of about 6 to 8 months of pain seen in the tanker market in terms of freight rates, we're not seeing the level of scrapping that one would have expected. So your thoughts on the reasons for the same and your expectations on when it would start increasing from where it is currently.

So again, I do not have an answer as to when it will increase. Obviously, those who did not scrap in spite of a very, very -- it's a 31-year low market, have obviously benefited, right? Because scrap prices were $450 a year ago. Now they are $600 plus. And therefore, people who have taken the decision not to scrap have -- they've got more money in the -- on the ship. And maybe there are people who believe that scrap prices are unlikely to come down and maybe go up further. So why people -- I guess that's the only explanation as to why in such a poor market, people are not scrapping ships. What I do feel is, once this EEXI, the new regulations, come in, which is due from 1st January '23, I think people are going to have no option but to scrap. So that, I think, will accelerate the level of scrapping. And until then, people will just speculate on the price of scrap, I guess. So that is at least my view. I could be wrong, but that's my view of what -- when we will people eventually scrap. What -- your second question was?

Sir, the second question was on at what level of scrapping. So sir, you mentioned that currently, in the first 6 months of the year, we've seen less than 1% of the overall tanker fleet being scrapped. So at what percentage would be the oversupply in the tanker market be negated with the scrapping? So would it be 5%, 6% of scrapping? What would that number be in a ballpark range, sir?

Yes. Yes. Okay. So I don't think it's -- so yes, I've got the question. Yes. So I don't think it's [indiscernible] if I can answer... [Technical Difficulty]

Sir, we can't hear you.

Your voice is breaking.

[indiscernible] issue of oversupply.

Bharat, sir, sorry to interrupt you, your voice is breaking again.

[indiscernible] Hello? Can you hear me?

Yes, sir. Your voice is breaking, sir.

It would not be breaking. Yes, but what do I do about it?

I think it's fine now. You can go ahead, sir.

Can I?

Yes, please. Yes, it seems to be clear now.

Hello? [Technical Difficulty]

Sorry. Participants, I would request you to -- I request you to stay connected while we check the line for Bharat sir.

So can I answer the question now?

Yes. You're loud and clear, sir, audible.

Yes. So as I was saying, it's not an overhang of supply. The real issue is demand. And if you see the demand -- the crude oil demand, the trade is down by 10%. Now if OPEC+ sticks to what they have said, which is additionally providing 400,000 barrels a day per month for the next 12 months, that's going to bring in 5 million extra barrels to be moved by ships. So it's not a supply challenge at all. It's only a demand issue now. So whether ships get scrapped or not scrapped, once demand kicks in, you will see a meaningful move in the tanker market.

Okay. Okay. Got your point. And sir, the last one was on the capital allocation CapEx part. I think I missed that. So the question was that, are you going to be looking out for vessels or you would be referring to stay on the sidelines?

So where prices are today, we will stay on the sidelines. We will obviously keep looking and hoping against hope that asset value is correct. They may not. And if they're not -- if they do not, then we will be on the sidelines.

Our next question is from the line of [ Raj Kumar ] as an individual investor.

Yes. Hello. Can you hear me?

Yes.

Yes. Yes. Sir, I have a couple of questions. Sir, first on the asset prices, you just said that the prices are very sticky, and you're not in place to buy at this level. So I just wondered what is driving the prices today? Is it the steel price or it's the freight market? Or what exactly is -- or the interest rates? And the other -- the connected question is, what do you expect? Do you expect the freight markets to kind of tone down and that is why you are waiting on the assumption that prices -- price will come down? Basically, I want to know, of these 3 factors, which one do you think will pull the prices down? And second thing, why are we not capitalizing on this opportunity by -- either by selling some of our tankers or by scrapping it? That is the first question.

Okay. So you've talked about asset prices. As you know, the one sector where we are very surprised at the strength of the asset price is in the crude and the petroleum product sector because that is the one sector where earnings have now, for the last 8 months, been at operating costs. And it's been the lowest 8-month consecutive period in the last 31 years. So that sector has clearly surprised us. And our -- I mean, there are -- these are just guesses, right? There are multiple reasons why asset values haven't dropped. One is that at the older end, scrap prices have moved up considerably, and that is underpinning the value of older ships. At the higher end, at the more modern end, newbuilding prices have gone up considerably for 2 reasons. One is it is driven by a huge upsurge in raw material costs, particularly that of steel. And also, we have seen a huge ordering on the container side. So shipyards are getting a lot of business in a sector that is then taking away capacity from shipyards building crude oil tankers or product tankers, right? So on one hand, you've got newbuilding prices going up, which is supporting the value of the modern tonnage. On the other hand, you have scrap prices going up, which is supporting the value of older ships. And also, you have huge liquidity in the market, right, which is supporting every asset class globally. So every commodity in the world now is at a very high point of -- at a very high price point. So if interest rates remain where they are, which are at multi-decade lows, and if the liquidity continues, and when I say liquidity, I mean dollar liquidity, then I suspect it's going to be very difficult to see a downward correction in asset prices. And then I think the only thing we can do is wait patiently until one of these things reverses. And the one thing that can reverse quickly is withdrawal of dollar liquidity and a possible rise in U.S. interest rates. And if that happens, then you could see a downward correction in asset values. As far as dry bulk and gas is concerned, asset values are supported simply because earnings has gone up very sharply. And the current deal on some of those assets ranges from 20% to 50% in dollars. So with that strength of current deal, there is just no chance of asset prices coming down.

Yes. Sir, actually, my question is, why are we on the sidelines? Either we should be a buyer or a seller. So I mean, if -- you're saying if you are on the sidelines, do you -- which means that you expect the prices to further go up and that is when you want to sell? Or if you could just give more color on that.

Yes. So I don't think that one necessarily -- it's wise always to be a buyer or it's wise always to be a seller. There are times when you are best served being on the sidelines. And we will wait for -- I mean, we may sell first and buy later. We will -- so we have certain price targets at which we will sell ships, particularly the older ships, because if scrap prices were suddenly to reverse, those ships will drop very sharply in value. So yes, we will look at opportunities to sell older ships. As far as the -- would we sell modern tonnage? We would be reluctant to sell modern tonnage. But if prices again keep going up, we will have to have a very hard look and maybe even sell some modern ships. But we'll do it carefully. Obviously, we don't want to leave too much money on the table when we sell. So we try and optimize -- just like we try and optimize our buy decisions, we also wish to try and optimize our sell decisions. But there's nothing wrong being on the sidelines, yes.

The next question is from the line of Jayesh Gandhi from Harshad H. Gandhi Securities Pvt. Ltd.

Am I audible?

Yes. I'm more worried if I'm audible.

Yes. You are audible, sir, loud and clear.

Can I request the moderator to reconfirm that people can hear me?

You are -- yes, sir. You are audible, loud and clear, sir.

Yes.

Thank you.

Sir, my first question is, in one of the slides, you explained in charts how the price of ships are moving up. While the freight rate on crude and product tankers have been coming down, in your opinion, how far this disconnect can continue? Or do we see this should correct in near term? I mean, the freight's moving up or maybe after COVID -- once COVID significantly resurged in Asia.

So I think -- I mean, again, we've been wrong in the fact that we didn't expect crude oil prices to be as strong as they currently are, especially with 8 months of owners only earning operating costs. But at this stage, my bet -- I mean, the bet I probably would take is that asset values are unlikely to come down in the short term. If earnings remain this weak, let's say, for the next 6 or 12 months, which, again, I don't expect they will, I think we've seen the worst behind us and earnings are likely to improve, then I guess that asset values may -- I mean, you may not see poor earnings for the next 6 or 12 months. If, however, for any reason, let's say, this COVID situation gets worse again globally and the demand for oil just simply doesn't pick up, then it is possible that asset values may come down. But I think the one issue on which asset prices will -- or a more likely issue is if interest rates in the U.S. were to go up and some of the liquidity which we are seeing, if that were to withdraw, then you might see a global correction across the commodity basket. And shipping is just another one commodity.

Sir, my next question is, which segments do you see the fleet size globally increasing? I mean, is it crude, product, LPG, bulk carrier? And what will be our strategy in the future, I mean, while buying the ships?

Yes. So the one on which we are seeing -- again, you've got to go up to '23 because shipyards are now more or less committed till '23. So over the next 2 years, the biggest supply overhang is going to come in the LPG sector and in the container sector. Now we are not in the container sector, but that's where we see a max -- a huge overhang. People have gone sort of pretty crazy ordering container ships. And also, a lot of gas carriers have been ordered. That's where I see the overhang. I don't see any overhang in crude or products or dry bulk. And as far as our strategy is concerned, as I've often said, if we have to remain on the sideline, we'll remain on the sideline. Sadly, I can't say for how long we need to remain on the sideline. But what it will mean is that we keep deleveraging the balance sheet, keep building our firepower. So whenever the opportunity next presents itself, we'll be able to do significant CapEx. And in the long term, this will really serve us well. In the short term -- and in a company's life, 1, 2 years is short term. So in the short term, it may look painful. But trust me that as asset prices will correct, and as and when they do, we hope we are the only person standing.

By strategy, I meant -- I mean, since the world is moving towards nonfossil, are we still open to buy crude and product tankers?

Yes. Absolutely. At price points, absolutely. Because see, the world is not going to go to 0, right? So I think as we've seen, it is possible that the peak demand for fossil fuels may be done. Some people, of course, believe that you will see one last hurrah, as it were. But bit by bit, the demand will come off. But it's not going to 0. So there will still be considerable trade in fossil fuel. If you remember, everybody had written off coal 5 years ago. I don't know if you recollect that story. Right? Coal was the most polluting commodity. And everyone in the round, if you read any international publication or even domestic publications, they said coal is done. It's finished. And we are now seeing 5 years later coal at a multiyear high. So never try to second-guess what the market's going to do.

And sir, last question, in what territories we actually rent out our assets? I mean, are we renting it across the world or it's specifically in particular territories?

No. No, we trade across the world.

The next question is from the line of Pushkar Jain from Joindre Capital Services.

Yes. So basically, because of the increase in the asset prices, so our NAV has gone up. And there is a discount between the -- substantial discount between the share price and the NAV now. Do we consider a buyback at some point because of the growing disconnect?

So it depends -- so there are 2 issues here. One is if the disconnect keeps mounting, it's always an option available to us. But you must remember that by introducing a 22% tax on buyback, buyback is now a lot less efficient than it used to be before the tax got loaded. We are hoping that at some point, the government may reconsider not imposing this tax on buybacks because eventually, all we are doing is returning money to the shareholders. And we think it's very unfair that there should be such a significant tax on it. In fact, there should be no tax on it. There never used to be, and there never should be. So we'll wait and watch, and we'll keep seeing where we lie in terms of net asset value.

Next question is from the line of [ Samraj N. ] from [ Dwarka Share Brokers ].

Yes. Can you hear me?

Yes.

Yes. We can hear you.

This particular question I'm asking you since you have been considering whether to be on the sell side or on the buy side for -- in the S&P market. So this -- with reference to this, one question was I had attended a marine money conference a few weeks back. And Randy Giveans from Jefferies, he had asked this particular question to the owners, that is Danaos Shipping. When you consider a purchase or a sale, what sort of EV to EBITDA is your -- multiple consideration when you think of secondhand vessels?

Yes. So when -- what we are targeting is somewhere between over a 3- to 5-year horizon, right, we should have a 90% confidence, you can never be 100% sure, that we should have at least a 90% probability of earning somewhere between a 10% and 15% unleveraged dollar return over 3 to 5 years, right? So obviously, not on the day you buy the asset. Now this -- yes, and this is basis -- our current cost of debt. So we are able to raise debt, I think I mentioned it earlier, at around 3.5% at the moment. Now -- and therefore, we are okay even if we got a 10% return because it is still creating a significant spread over the cost of debt. So somewhere between 10% to 15%.

Okay. So would I...

And we never hope what that's going to be, right? So...

Okay. So would our calculation be right if -- that you would be comfortable with a EV to EBITDA multiple of, say, 7.6% on the vessel when you consider a buy or a sell?

Yes.

About 7.6% would be the ballpark.

Well, yes, but we don't look at EBITDA as much because we don't know what it's going to be, right? So what we look at is just historically where asset prices have settled. right? And historically, so long as buying a certain price point -- and if you see all the acquisitions we've done, I don't know if you were part of the call when the CFO gave us some numbers, but having invested a little over -- or just under $600 million since 2016, we have averaged close to 17% dollar returns on unlevered capital, which really, I shouldn't be saying this, but it really is a wonderful performance. And this is in spite of the fact that tankers are at -- not at very high price point.

Right. Right. Appreciate. But if you could just sort of give a number on that, what I considered, 7.6%, or it will be in 6% area.

Yes. I'd just like to jump in here. See, we don't look at it as EV/EBITDA. We are looking at it as an IRR, okay? Yes, you can convert your EV/EBITDA. But remember that we have to consider -- you can just put a multiplier on this and say, therefore, 15% and, therefore, EV to EBITDA, 100/15 is 6.6%. But it is not so. You have to recognize that there is a depreciation of the asset possibly as well or there could be an appreciation of the asset. So when we buy the ship, we are also pricing in that. When we are looking at the IRR, the EV to EBITDA does not look at what happens to the price of the ship. And you mentioned Danaos. And because you mentioned Danaos, it's a containership company. And maybe that suggests -- and maybe that EV/EBITDA is based on the long-term charter. So it's a very different model from ours. Our model is to...

Right. But do you think that Great Eastern at -- definitely at 5% and sub-5% EV to EBITDA is definitely under par for the cost, correct? You would agree to that?

No, not technically. So let me take you -- yes. So let me take you back to 2005 and '06 and '07 and '08 when we had the super cycle in shipping, right? A lot of people bought assets with an EV/EBITDA of 6%.

Of what, sir? I mean, I didn't get the number. Of 6%, okay. Okay. Right, sir. I can hear you.

So this is in the super cycle, right? Because your EBITDA was very strong. And therefore, people went and bought assets at an EV/EBITDA of 6% and 7%, and then they got wiped out. They just went into bankruptcy. So that's one reason why we don't like to follow that principle. We don't look at it at all.

So let me just put one point to you. Among the best investments we did was buying 2 resale bulk carriers in April 2016. At that time, we bought them at a very, very low -- yes, there was no EBITDA. Basically, we bought them at 25x EV/EBITDA because there was no EBITDA. So it's like that because we buy when the markets are so bad that there are no earnings because -- and we are expecting to make it up on the earnings going up and on the price of the asset, therefore, going up as well. So it's a very different model to a containership company, which is doing long-term charters. So we can't force with that -- their formulas onto our business model.

By share, even when we -- I mean, just to digress for a second, you had very low EV/EBITDAs in the drilling side. When rigs were selling at $200 million, you had 5-year charters at huge numbers, right? And you had a very low EV/EBITDA then. But lots of people have gone bankrupt following that model. So we don't think it's a sensible way to run the business long term. Hello?

Hello?

Yes, can you hear me?

Yes. I can hear you loud and clear. I don't know where the person who was asking the questions, where he's gone.

Yes. Okay.

Moderator? Hello?

Yes, sir. So we've lost the connection from the...

Yes. Okay.

Have you lost me or you lost the speaker?

No. No, we're on, I think. Yes, Aman?

The questioner, sir.

Okay. So we can move to the next one then, unless he's connecting back again.

That was the last question in queue. I will now hand the floor to Ms. Anjali Kumar, Head of Corporate Communications at The Great Eastern Shipping Company Limited, for closing comments.

Good evening, everybody. Thank you so much for joining us this evening. And as usual, we will be putting up the transcript on our website shortly, both the written one as well as the audible transcript. So do have a look whenever you would like. And feel free to reach out to our team for any other clarifications that you may want. Thank you so much.

Thank you very much.

Thank you. Thank you all.

Ladies and gentlemen, thank you for joining us. This concludes the session. You may now click on the exit meeting to disconnect. Thank you.