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

Good evening, ladies and gentlemen. Thank you for standing by. Welcome to GE Shipping earnings call on declaration of its financial results for the quarter ended September 30, 2021. [Operator Instructions] I now hand over the call to Mr. Shivakumar from the Great Eastern Shipping Company Limited to start the proceedings. Over to you, sir.

Thank you. Good evening, everyone, and welcome to the conference call to discuss the results and the market for Q2 and H1 FY '22. As is our usual practice, we'll take you through a presentation, giving the highlights, and then we'll be happy to go into Q&A. Our Deputy Chairman and Managing Director is also with us, and we'll be happy to take questions from you. Normal disclaimers apply. Let's look at the results first. These are the reported results, and these are as per the accounts and the accounting standards. So we have a profit for this quarter, which is higher than the profit -- reported profit of the first quarter, which was affected in a significant way by the derivatives and exchange rate. This one had very small effect of derivatives and exchange rates. So it's closer to reflecting very accurately what the business has done. So here are the normalized results. Normalized profit for the quarter on a stand-alone basis, that for Q2 FY '22, was INR 249 crores. That's on the leftmost column. And the consolidated profit was INR 217 crores. Obviously, the subsidiary, which is Greatship India Limited, which is in the oil field services business, because of the way that, that business has been for some time, rates are pretty poor, and therefore, they have had a loss in this period, just as they had in the previous quarter. Coming to the balance sheet. On a stand-alone basis, we have net debt, that's net of cash, of INR 900 crores or approximately $125 million as of that exchange rate. And on a stand-alone basis and on a consolidated basis, we have about INR 1,330 crores, which is about $180 million. So the cash position continues to be comfortable within the group. And we have brought down our leverage significantly over the last few years, and we'll look at that as well in 1 of the forthcoming slides. Normalized financials. This is the explanation that we put up every time. You can refer to it or if you have any clarifications on it, we are happy to take it. But since this has been repeated in our presentation for the last 5 or 6 quarters, I'm not going into it. Looking at the highlights and the most important data is right at the bottom, which is in the orange row. The net asset value per share on a stand-alone basis is now at 570. You may remember this was -- and you had the number of Q2 FY '21, which was in September last year was 445. In March this year was 490. So within this period, we have gone up by about [ 16% ] within the 6-month period. Again, all of this -- sorry, a very large part of it is due to dry bulk asset values going up. Of course, we also have the earnings which have come in, which have been decent. And we had a positive BP rating, which adds to the net asset value. But dry bulk values in this 6-month period have gone up about 30% to 35%, and that's helped a lot in this -- in the NAV going up so rapidly. Yes. Looking at the TCYs, the comparative TCYs, the crude and product tankers and we look at those markets in just a moment. The crude and product tankers continue to be at very poor rates. So between the 2 of them earning about $9,000 a day on average, just as they were in the previous quarter as well. That's in Q1 FY '22. But in the corresponding quarter of last year, the average earned by our group tankers was $25,000. That was largely due to the effect of some contracts that we took in order to lock in our crude centers because we were anticipating that the market would come off from those heady days of April, May 2020. And therefore, we did not suffer as badly. Probably the overall market would have still done somewhere in the $10,000 to $15,000 range in Q2 FY '21, but we outperformed the earnings of the broad market significantly because of the cover that we took. When it comes to LPG carriers, they are much of a muchness. They have been strong for the past few years. But these rates that you see here are not the spot rates. Our vessels, as you know, if you've been following us for some time are typically on time charters ranging between typically 1 to 2 years. And so these are the times -- average time charter rates being earned by our 5 LPG ships currently or in the last quarter. So they have not moved very much though the spot rates have been quite volatile, but our earnings from these have been in a fairly narrow range. You can see it's within a 10% rate, [ $26,000 to $29,000 ] over these few quarters. The highlight, of course, has been dry bulk. Last year, the dry bulk ships on average in Q2 FY '21 earned $11,250 per day. And in this quarter, earned $30,000 a day. Even compared to the immediately preceding quarter, we have gone up significantly, we're at $24,000, and we've moved up to about $30,000 a day on average across our fleet. So we have 14 dry bulk vessels, just to remind you. So this is the average earned by those 14 ships. This is the revenue visibility that we have. Again, the broad messages, you can see the LPG carriers, 86% of our days up to March '22 are covered. Dry bulk, we have 28% of our day is covered, but less than 20% of our tanker days covered. Again, this is a function of the rates that we were getting to cover the ships, and we did not feel it made sense to cover our ships at those rates because it wasn't really providing a downside protection. On the offshore side, the Jackup Rigs are almost 100% covered. In fact, this 4% was a rig, which is prior which was unemployed as of early October. And I'm happy to report that on 29th of October, she has gone on hire. So all of our rigs are currently working. On the PSVs and anchor handlers, we have 90% plus coverage. The MPSSVs are basically 2 vessels, which are operated by a very high capability vessels, which are operated by our Singapore subsidiary and which have slightly lower coverage. But broadly, we have a lot of coverage on our offshore assets. Let's look at what happened in the shipping markets. And first, our tanker market. And you can see this graph tells you everything. This is the Suezmax and the medium-range product tanker. And you can see what it was like in first quarter of FY '21. And thereafter, it's been quite in an abysmal market. Average earnings have been somewhere in the [ $5,000 to $13,000 ] range through this period. And so it's been very weak, whether it's a crude tankers or product tankers. And now let's look at the reasons for why that was so. So the major factor is that the pandemic impact on air travel is still having a huge impact on air travel. And therefore, jet fuel demand is 2.7 million barrels per day lower than the pre-pandemic levels, and we are looking at September '19 for comparison purposes. And that's why we haven't seen the demand for crude oil come back to where it should be. Refinery runs at crude again because of the lower demand for products remain below the pre-COVID levels. And at the same time, you have had fleet growth. Obviously, the market demand-supply balance has changed for the worse. OPEC+ has released the schedule to increase crude production by [ 400,000 ] barrels a day every month. But that's not yet had a real tightening impact on the market. We await that. And based on the last forecast, it appears that it will reach pre-COVID levels only by September '22. Looking at the dry bulk market, where we've seen quite a lot of excitement, and again, the chart -- graph looks a little different from the tanker market. And this again supports our case for being in these different sectors because last year, you can see how bad those rates were. And this is -- this chart is of a Capesize, the Baltic Capesize average. And you can see that, that was below $10,000 [ barrels ] a day in April and May of last year, just when tankers were making a lot of money. And now when tankers are not making much money, the dry bulk ships are providing significant profitability. So you have the Capesize, which was in H1 of last year average, which averaged $15,000. H1 of FY '22 has averaged $36,000 a day. So again, what drove this trade growth of 5.5% year-on-year in the first 9 months of '21 versus the same period in the previous year? Again, the base, of course, was low because of COVID impacts for a couple of months, but we've also had COVID-related congestions and reportedly congestion in Q3, that is the quarter which is just has gone, July to September, at 5% was the highest. It's been since Q4 of 2011. So we've seen, again, coal prices, energy shortages, all of those hitting the headlines, and there has been demand for transportation of coal because of that. On the other side, we have a pretty poor growth in steel-related demand. So iron ore trade hasn't grown much as China that moves to cut or at leased achieve flat steel production in 2021 over 2020. So iron ore hasn't provided much joy to the dry bulk market. It's mainly been the minor bulks, which have helped, including steel. And that's why you've had such a solid performance from the -- what we call the [ stub kits ] which is basically the Handysize, Supramax, [ Secondhand ] Panamax, Kamsarmax sizes, which have done very decent earnings over the last 6 months or so. Coming to LPG, again, this doesn't affect us too much because we are on time charter, but let's look at it. All the time has been -- the market has been a little bit weaker than in the first half of the previous year. You've seen $36,000 going down to below $30,000. Again, our ships are on time charter. And they are affected when they come up for repricing sometimes, but those rates don't move as dramatically as the spot market range. So yes, the trade grew by 5% during the quarter and mainly this is U.S. export growth, which has been driving the LPG market for the last several years. The fleet grows quite strongly, and that's a concern for the market because the order book for the VLGCs is also quite strong. So despite that, we have still held at about $20,000 to $25,000 a day on the spot market. Coming to supply, and we've been showing this graph for some time. This is one of the lowest order book-to-fleet ratios. It's moved up very slightly. We were below 6% in dry bulk, probably about 5.5%, but now it's moved up to about 6.5%, still not a high number. In historical terms, it's probably in the bottom 10% of all readings that we've had for the last 25 years. Even in crude tankers, which have an 8% order book, this is a very subdued order book. Looking at asset price movement, I mentioned that bulk carrier prices have gone up by 35% on average within -- in the last 6 months. You can see it from January, you can see the Capesize rate has gone up from -- and this is all based to 5 years ago being 100. So it's indexed. So if it was at 115 in January this year, it's at [ 173 ] now, which is about a 60% increase. We have had and we pointed out earlier also that it's quite puzzling that tanker prices have also gone up in the last -- since the beginning of this year, despite having such weak freight rates. And that's something which has prevented us from expanding. We have, as I mentioned earlier, built up quite a bit of cash and deleverage. We will look at opportunities to expand, but we haven't got the opportunity because prices haven't really come down, reflecting the earnings situation. In LPG, the prices have been strong for over a year now, and they continue to be strong. Looking at scrapping, we have had tanker scrapping picking up. And again, from a very low base, you had in cal '19 and calendar '20, you had only about 0.5% of scrapping. In the first 10 months or so of this year, you've had about 1.6% scrapping in both crude and product tankers. Dry bulk, of course, because the market is so strong, scrapping has been minimal. There is still quite a bit of scrapping potential. Scrap prices continue to be high at around $600 a tonne. So in recent weeks, we have seen quite a bit of scrapping on the crude and product tanker side, but let's see if that continues. Coming to the oilfield services business. This is, again, 1 statistic that we show. So we have had -- we have a low order book, obviously, because very few people have actually ordered rigs ever since the oil price collapse in 2015 and the offshore market went down -- the rig market went down. We've had a lot of scrapping. We've had 135 rigs removed over the last 5.5 years. And we still have a few rigs which are more than 30 years old. 34% of the fleet is more than 30 years old and that presumably will have some pressure to scrap at some point if these rates don't go up significantly. And then you have the cold rigs which have been cold stacked for more than 3 years, which is 53 rigs, which again will have difficulty coming back into the market without spending a large amount of money. There is a gradual utilization and rig utilization. Again, we have come back to the levels that we were in January 2020 where we said that we are beginning to see some hope on pricing and pricing power. That time, the recovery was choked off by the COVID impact. However, we have now started reaching that again. Again, I'll point out that it's -- sorry, that is the total number of rigs being employed. So it's rates are tending to go up. We have seen the recent pricing that we have seen are higher than the lows that we saw in 2017 and '18. But we'll wait to see if that trend continues. Internationally, also, we are getting signs of contract pricings improving a bit. Talking of repricing, we have 4 vessels that are to be repriced in the next 6 months, that is up to March. We have the Greatdrill Chitra coming off contract in H1 FY '23. So sometime in April, May 2022. We had bid her in our tender in India, and that's for a 3-year business. We will await the outcome of that, whether it translates into a contract for us, but that's the 1 rate that needs to be repriced in calendar '22. Apart from that, there are only 2 other vessels, which need to be repriced in FY '23. So most of our vessels are covered. Again, not a very profitable rates, but at least their employment has been assured. Coming to broad financials. We have put this chart before. We started off with about $110 million of net debt in March 2016. We went up all the way to $350-plus million of net debt, and that's come back down again to about [ $125 ] million of net debt. So we are in a position -- on a net debt-to-equity basis, yes, we are at about [ 0.15 ] or so. So we are in a position to do a significant amount of CapEx. Again, this is just a cyclical [ trailer ] to levered up because we saw opportunities to invest. We have got the returns on the investments that we did. That's why the cash flows have been so strong. I'd like to point out here that the investments that we did from April 2016 onwards, on average, have produced an unlevered IRR in excess of 17%. That's in dollars. So we invested about $530 million in total interest, and that's the average project IRR that we made on all those investments in this period. And again, this is a share price to NAV. We are currently trading at a little over 0.5 price to NAV on consolidated and maybe about 0.6 price to NAV on stand-alone, probably among the cheapest shipping stocks worldwide. So that brings me to the end of this presentation. We are happy to take questions from you.

[Operator Instructions] Our first question is from the line of Himanshu Upadhyay from PGIM.

Am I audible now?

Yes, we can hear you loud and clear.

So my first question was on the dry bulk side where we have seen quite a strong momentum. We had 2 Capesize, okay? So what is the status? Are they running still on spot or time chartered? And are we increasing our time charter on the overall dry bulk? Or how are you looking at the market some cost on that?

Yes. So both the capes -- Himanshu, this is Bharat, both the capes are currently linked to an index. And therefore, move up and down, their earnings move up and down with the spot market. Your second question was, are we looking at fixing something into period? So with the volatility that we are seeing at the moment, I think we will prefer to remain so on our tonnage because the volatility we are seeing now is pretty usual. As we are not seeing any concerns in terms of the market in the short to medium term, we think demand will remain reasonably strong. Supply side, like we mentioned in the past is very muted. And congestion is, of course, being the biggest factor in driving the dry bulk market as it has been driving the container market. And congestion will ebb and flow depending on ports. So I guess we may fix 1 or 2 of the -- out of the entire fleet of 14 ships, we may look at 1 or 2 ships to fix, but otherwise, they will broadly remain spot.

Okay. And 1 other question was on offshore logistics. So if we compare Q2 FY '21 from 1,700 revenue days, it went down to 1,227 days. What is the outlook for debt from here on means on offshore logistics?

So now yes. So going to offshore logistics, most of our boards are now covered. The gap was because between contracts, there's work to be done, right, from boats. So they come off a contract and then they go into a new contract. But we've now got more or less everything covered. So the number of earnings days or revenue days should go up or will up, not should, will go up.

And even the realization of these days will be better than what historically was because we are just seeing [ minus ] in the market?

Yes. No, I think the realization is not going to be great as far as the boats is concerned. We have a couple of boats on the spot market, and there we are seeing a little better realization. One is in West Africa. We had 1 in Malaysia, Singapore, where we are seeing better rates. As far as the boats, which are in India are concerned, I think it's just going to be a little over operating process, but nothing we're right home about.

And then 1 last question on the tankers side. Generally, we have seen when the crude prices move up, the crude also tends to move from much further away places, okay? Are we seeing anything of that or signs of crude moving from further places to the refineries, let's say, in China, India and Singapore?

Yes. So actually, there is not a great relationship between crude going up and markets, not all, right? So what really is the situation is just what are the arbitrage opportunities and what are the kinds of crudes that refinery want. Do they want sweet crude, do they want sour crude? There are multiple, multiple kinds of crudes. I think I mentioned this at the last investor call. And it just depends on the demand for a particular grade of crude, which is much more important than the price of crude. Typically, what has happened is when prices have gone up, OPEC has pumped a lot more oil, which, at this stage, you might have read the OPEC+ news is that they intend to do it moderately, the increase. So whereas I think a lot of the consuming nations who are getting impacted by crude prices are pushing OPEC+ to get much more aggressive in the supply side. So tanker rates are much more correlated to what is going to be the eventual supply of crude, which needs to be moved from destination A to B on or through ships, not next because sometimes you get accrued improvement -- flow improvement, but it could be by pipeline. And then that doesn't help the tanker market at all. So I think there are multiple, multiple factors at play that eventually determine the market. So not necessarily just the price of crude.

We'll take a next question from the line of Vikram Suryavanshi from PhillipCapital India Limited.

Hope I'm audible.

Yes.

Okay. Sir, in case of dry bulk, what asset price increase, what you have seen, how much impact is because of I think asset prices are also increasing for new deal with containers are mostly reinforce container orders, and that is also increasing the new prices for the other categories. So this Secondhand price increase, is it mostly correlated with the freight increase? Or it also has some impact of incurring new build prices? So I just wanted to have the correlation or connect between the freight and new build prices.

So I think it's both clearly because new building prices have gone up. And as you rightly said, a large part of the world shipyards is being at the moment occupied by container orders. Dry bulk orders also have gone in, but not in a very moderate basis. But yes, new building prices have gone up. So that is 1 reason why asset values have gone up. The other reason why asset values have gone up is very clearly the very strong current yield one gets on existing ships, which are in the water. And as we've been discussing, we've seen rates move up from -- compared to this time last year, we've seen rates move up 2x, 3x, 4x depending on the asset category. So I think it's a combination of both. People are earning very strong cash flow, particularly on older assets. And if you sell a ship, yes, you will get a certain number of money. But how do you get back into the market? That's another challenge that some people will have to tackle with. So there are some people who would like to sell, but are uncertain how to get into the market. Some people who have lots of ships can say, okay, we will sell 1 and we have the luxury of waiting it out for the next few years, even if you can't get back into the market now.

Got it. Second question on tanker side, basically, now we have a lot of people are talking directionally upward trending in crude prices. So does that increase storage or speculation with the quantity? Or it will not have a material impact on storage side of the business impact?

No. So storage is dependent on whether forward trading contracts in oil, whether they are trading at a premium or discount to spot oil what we call from [indiscernible]. And currently, the forward contracts trading at a [Indiscernible] crude oil. Okay. So currently, forward contracts on crude oil trading at a discount and consequently storage is not going to happen with the current price curve on oil. And as far as the volume I just explained, a lot hinges on what we see in from the United States in terms of shale exports and what OPEC+ decides to do going forward. There is a lot of talk that crude oil could hit $100 and maybe even surpass the $100. And my guess is that there will be a lot of political pressure on OPEC+ to significantly increase the supply of volume, which, of course, if it all happens, it will be good for the market.

Understood. And last question, sir, on the outlook on the I guess [ OPEC ] business. So basically, the number in presentation that you have given I wanted to clarify that around 480 plus availability, which incudes the cold stack of around 50 plus that of 1 point I wanted to clarify. And second think in terms of ... Okay, it is included?

Yes.

And are there any signs or possibility that rig count can go back at least around [indiscernible] plus down the line next quarter? Or how you are sensing that the impact of coal price in the particularly supply side and demand side from the recount?

Sorry.

Go ahead, go ahead.

Yes. No. I think eventually, it will all depend on the E&P activity. What has happened is obviously all oil companies are making tons of money at the moment. But there is this big concern that oil companies have got on a lot of the pressure that they are facing from shareholder activism on E&P activity, particularly on fossil fuels. So we've got to see how all this plans out. But at some point, right, I mean, rigs are not as the CFO has just said, nobody is building any rigs. More and more rigs are going into cold storage or getting deactivated for the first time after many years, we have seen rigs getting scrapped. And I was sharing the analogy with somebody the other day that if you see what has happened in the container market for 10 years, people made no money in the container space. And in this 1 year, they have made more money there in their lifestyle. So when the demand for these things come up at a time when the supply has been completely ignored over long periods of time, you see significant increase in earnings. And we've seen this happen before in the drilling business. And I'm sure we will see it again. Now the point is when will it happen? I don't think anyone has an answer to that. We certainly don't. But the longer the down cycle, the greater will be the strength of the up cycle whenever it happens.

Happy Diwali.

Same to you.

We'll take the next question from the line of Amit Khetan from Liberum Capital. [Operator Instructions] In the meanwhile, Mr. Shivakumar, there is a question that's received by text. Maybe request you to please read it and take it forward, sir.

Okay. The questions are the crude tanker asset value increase, as you mentioned, is puzzling. What's your outlook on longer term? And two, if you look at the average age of gas tankers at 17 years, would we prefer to buy gas tankers instead of other options? The question is from Mr. Avadhoot Joshi of Newberry Capital.

We first answer crude. Can you repeat the crude question?

Crude tanker asset value increase, as you mentioned, is puzzling. What's your outlook on the longer term? I think it is on the asset values, yes.

So whatever little homework we have done, we believe that the crude market is going to tighten. Again, to be very precise on the timing is difficult, but there is a very decent probability that the tightening may begin in the second half of '22. And we remain confident that if not in second half of '22, then almost certainly by '23 the crude markets could see very meaningful tightening. And if that tightening were to take place or even if people get a wiff of the tightening, asset values could go up a lot more. Does that answer the crude question?

I think, yes. So the next question is on -- if you look at the average age of gas tankers at 17 years, would be prepared to buy gas tankers instead of other options?

So we never have a preference for any asset class. We just look at what we think is the right price. And if the price is right, we will buy almost any asset classes. It could be crude, it could be products, it will be gas dry bulk. And if the price is not right, then we would not buy. It's as simple as that. So we have no preference really speaking for any 1 asset class vis-a-vis the other. Having said that, we'd always like to remain diversified in multiple asset classes in the industry. So however, cheaper assets gets, we've never become a single asset class company. I think that answers the question.

Now Mr. Amit Khetan has put his question in the chat. We have been reading about the illicit oil trade between Iran and China. Could you give us some sense of how large this trade is? And should the sanctions be removed and the trade legalized, what percentage of the global fleet could be removed, assuming most of this is happening through older, noncompliant ships? Basically, he's saying that there is yes, you got the question, right?

Yes, yes. I mean, basically, whenever there is illicit trade, one never knows the exact quantity of that trade that is moving around, because obviously, a lot of this is done under the radar. Now there are 2 bits. If let us say, the sanctions are lifted, and I was reading very recently that there is a lot of behind-the-scene activity on the resumption of nuclear talks on which there was an agreement and then which agreement was [indiscernible]. Now if it does happen, number one, there will be more crude on the water which is a positive. Number two, it also could mean that a lot of the current tankers, which are in storage, can also get released and that will therefore be a balancing factor to more oil coming into the market. So I would say that it's really all over the place. I don't think we can make a statement that yes, it is great or no, it's a disaster. I think it's just going to be much of a muchness. A lot more is just going to depend eventually on the demand for oil because if there is no demand, then whatever sanctions get lifted that itself is a constraint because then somebody else will have to cut allowing Iran to supply. So just lifting the sanctions does not produce any resolution to the tanker market. This will be really dependent on demand. And as we have seen more or as relevant as absolute demand. And therefore, a lot will then depend on where the crude is being supplied from. Is it coming long haul, short haul, et cetera, et cetera. There are simply too many moving parts to know what's likely to happen from Iran. But irrespective, we believe whether Iran happens, does not happen, we do see tightening either in the second half of '22 or indeed in the start of '23.

I think we can go back to the question queue.

We have next question that's from the line of Rajakumar V., an individual investor.

I have a couple of questions. The first question is on the revenue visibility slide. So I think 28% revenue visibility shown for dry bulk and I also understand that 1 of the ships are on fixed time charter. So all of them are on time charters. So given that it is not similar -- yes, if you can please clarify that sir, how this 28% -- is it based on...

Basically, what happens is -- so first, let me clarify. Out of the 14 ships that we own, currently, 2 ships are on what we call fixed income, right? We were contracted -- one was contracted in November of 2020. Another one was contracted in April of '21, both for a period of 1 year. The one that we contracted in November of 2020 before the market rally, will now come for repricing in the next 2 weeks because the 1-year period is getting over, correct? The other one, which also we fixed before the market rally will come up for repricing in April of '22. Now assuming we don't fix any of that, then we will have the entire fleet on the spot market. But there is always a chance we may take something for 1 year again.

Just let me clarify one thing here. That 28% that we talk of is from 1st of October up to 31st of March. So by -- you will already have some period fixed in voyages itself.

Yes. Yes. I think if I understood correctly, the average voyage period is somewhere between 45 to 60 days, right?

It could be anything. Yes, something like that because you could have 90-day voyages as well. We do those.

So let me break it up. Yes, I can break it up for questioner, right. If you have capesize vessels, the average duration will go from 45 days to 100 days. On the Kamsarmax kind of assets, they can go from 30 days to 100 days. And on the Supramax kind of vessels, they can be as little as 10 days and typically may go up to 40, 45 days.

[Operator Instructions] We will take our next question from the line of Anuj Sharma from M3 Investments.

Yes, am I audible?

Yes, you are sir.

Sir, just wanted to understand, 1 is on jack-up, I do understand we don't have anything for the next 6 months, but how is the pricing behaving for jack-up globally?

So the tender that opened recently, the ONGC tender at least, that has opened recently has indicated slightly higher price than the last tender. But it is still under negotiation, so we don't know what will eventually transpire. Globally, what we are foreseeing is that there is more business that is been inquired for, and you've seen the slide on utilization. Now typically, what tends to happen is once the utilization reaches somewhere between 70%, 75%, then the pricing power starts to shift meaningfully between the service provider and the service recipient. So maybe we are still about 400 to 1,000 basis points below where we would ideally want the utilization to be for a big change in the pricing path. Obviously, at a 66% utilization, the pricing power has improved in favor of the service provider, but not to the full extent.

Right. And same length, if you were to reprice all our contracts today, what is the average increased last tender or rough estimate?

No, we have already repriced.

In the entire portfolio, if we were to [Technical Difficulty] but if the entire jack-up was to [Technical Difficulty] then what is the realization increase we could see?

See, I'll tell you, it is difficult to answer that. And I'll give you the reason why. It also depends on who else is bidding and what will be they bid at, right? So let us say there is -- because remember that these are at least -- so long as ONGC is your client, you only get 1 bite of the cherry. Now let us say there is somebody who just wants a business, irrespective of improved utilization, irrespective of what is happening in the global markets. He just wants the business and say he has a very old rig, which maybe the lender puts pressure on him saying, you must go and get the business. He may still price it weakly. And then you got to match it, right, or you may say I don't want to do business in India, I'll go somewhere else. So these things are very difficult to answer in isolation.

Okay. And sir, my last question is you said that [Technical Difficulty] markets are operating near to the cost [Technical Difficulty] cost. I just wanted to [Technical Difficulty] what is there is in the [Technical Difficulty] of the board? How much premium they could move around or what [Technical Difficulty] they could move around going forward?

Sorry, how much premium what?

How much maximum historically, we have seen them moving around the pricing or the profitability in the way?

So you see when the markets tighten, right, all bets are off. So currently, we know that both are just sort of making a very minor contribution to EBITDA, okay? That's where they are at the moment. And we have seen these both earning 4x, 5x, 6x operating cost. So one, as I said, whether it is in the drilling business or it's in the boat business, once the market tightens, then people are just willing to pay anything that the service provider asks for. The critical thing is utilization. And in the boat business, the utilization is still only 55%. So that will take time.

Our next question is a follow-up from Mr. Rajakumar V., an industrial investor.

Sir, my question is on the capital allocation policy. I see almost INR 2,500 crores of cash you were carrying on the balance sheet on a consolidated basis, which is almost like 1/3 of your net equity. So given that you are bullish on the freight market and given the assets currently are priced on the higher side, so just wanted to know what are you thinking on the management side to carry such a huge cash and might not consider getting a higher dividend payout?

Before you answer just 1 thing. Cash is actually higher than what you mentioned. It's -- yes, it's INR 4,000 crores.

Actually, it makes the problem even worser.

Yes, that's right. Yes.

But don't worry. So let me answer that question. So basically, whether the cash is INR 4,000 crores and all, I think your question is right, what does the management do as it builds up cash, particularly as the prices are going to remain at a high point. I think at this stage, there are 2 things or 3 things you can do with cash, right? You can either distribute up in 1 of 2 ways. One is through dividends and 1 is through cash flow restructuring. And then the third use of the cash is always buying physical assets or buying ships. Now ships we've already discussed that asset values are where they are and these are at price points where we think we will not be able to meet our internal targets on dollar returns. As far as dividend and capital restructuring is concerned, let me first address capital restructuring. Unfortunately, as you are aware, the government introduced 22% transaction cost on capital restructure, which we think really doesn't do justice to either the -- all the stakeholders in the business because effectively what it does is it compels those who don't wish to tender to effectively pay the 22% tax. I mean, they are effectively paying tax on behalf of the person who is [indiscernible]. And therefore, there is no equity in terms of going down that path to all the stakeholders, I repeat. On dividends, what happens is ideally what should happen in any corporate, right? If you're sitting on excess cash, you should be able to give it out to the shareholders and take it back as in the new life without transaction costs. But there are transaction costs. All that has happened is it has moved away from the company to the individual. And at some point, right, the capital will be required to buy assets because as night follows day, the values of the ships will come down. Now whether they come down in '23, '24, I mean, I don't have an answer when they'll come down, but they will come down. And when they come down is when you really want cash on your balance sheet to be able to move quickly. And if you have started -- if you get into aggressive distribution policies, you may not have the cash when you require it the most. So unfortunately, at this stage, I think we will have to live with sitting on the cash, which we all recognize earns suboptimal returns, but I do believe -- and we've actually done a pretty interesting exercise on this that even if we were to sit on the cash for as long as 3 years, if we get sensible pricing opportunities in that period of time or even soon thereafter, we can move quickly, we can move aggressively and we can move meaningfully. And a combination of all that, would then mean that even with 3 years of cash earning you under 1% in dollars, you more than make it up if you get the right asset class or if you get it at your price point. I think the real issue will be that if we get the opportunity to buy and we don't buy, that will be a tremendous disservice to all shareholders which I hope that doesn't happen.

Sir, but what is kind of battling is your market cap, in NAV or in cash, I mean, as Shiv mentioned, it's INR 4,500 crores of cash you're carrying and your market cap is close to the cash that you are carrying. So what is the concern? And I think you must be meeting all of the institutional guys. So I just don't understand because this kind of game is played for many, many years then?

Don't worry that you don't understand. 99.9% of the people I have met don't understand. So you are just part of the 99.9% of the crowd.

Yes. I mean, in a market where the companies are valued based on sales no longer based on profit, so it is really disheartening to see such kind of a discount.

I mean, some companies are valued the higher the loss, the greater the badge of honor, it seems to be.

Yes. Okay. Sir, lastly...

But that is for executives to answer, not for management to answer. And don't forget that possibly is the reason why 75% of shipping globally is privately owned. There's only 25% of global shipping that is in public domain.

Yes. Got it, sir. Maybe the market is worried on the volatility of the earnings. Anyway, so moving on to the next question, sir...

Well, the market seems less worried on knowing that the company is likely to lose cash day in and day out. We see much less worried on that. It's a mystery to all of us.

Sir, lastly, I want to know what is your view on the dry bulk index? It's been volatile, it has kind of lost quite a bit in the last month or so. So just wanted to have your outlook.

So what -- if you see -- if you study history on dry bulk market, this is nothing new. And there had been months in the past and I would just say if you went to just go back to the last 5 years, you don't even need to go back a lot more than that, this has happened before. And then, again, because all this business was on the margin, a few more cargoes come into the market and the market can double at the same speed that we hit [indiscernible]. So we just -- those of us who have been in the business long enough, just take it in our stride because we've seen this happen often enough to know that the fundamentals of the business haven't changed or the fundamentals of dry bulk. The supply is very, very moderate, the demand is clearly there. So if the fundamentals don't change, these things will come back.

Maybe we can take a couple of the questions which are on the chat. So the first question is from Mr. Ritesh Patel of Capital Ideas. So he asked a question on the buyback as well. I think you have answered it. He said your views on buyback, as you mentioned, GE Shipping is 1 of the cheapest companies based on discount to NAV. Do you think at 0.5x price to NAV, it is attractive even after considering tax on buyback that you have alluded earlier. I think you have answered this question.

Yes. And it's not just the tax on buyback, right? That is 1 thing. But the moment you do these things, there are a lot of traders, right, who just take your stock up, whether you speculate, then you pay distribution tax. And if the whole thing is -- it's just a lot less efficient at this stage in India, unlike in the more developed market.

Yes. The next question was from Shivan Sarvaiya of JHP Securities. He said, you spoke about the possibility of tightening of the tanker market in H2 FY '22 or FY '23. In this case, how are we looking at deploying our cash in acquiring new vessels before asset prices react to the freight rates?

Sorry, is the question are we going to buy right now?

Yes. His question was how are we planning to deploy? Are we planning -- yes, sort of, yes, are we going to buy? Are we looking to buy it?

So I don't think we have -- see there is a chance -- I mean, obviously, if the tanker markets were to go up, asset values will go up, right? But I think a lot of the current value of the assets on tankers is reflecting that level of optimism because today, if assets are earning just a margin over operating costs and making almost 0% contribution to EBITDA, there is no justification on asset values where they are. So a lot of the forward news has been factored into today's prices. So we are unlikely to buy at this prices.

Yes. So when he says before asset prices react to freight rates, it is that they seem to have already priced in a significant increase in freight rates?

See, we never know how much is baked into the current price. What we do know is a certain amount has been baked in because there is absolutely no justification on these asset prices with current ones.

Yes. Okay. The next question is from Amit Khetan of Laburnum Capital. We have seen good rates on dry bulk for the last 6 to 9 months. Yet, the order book has gone up by just 0.9% from March. What's preventing ordering of ships? Is it skepticism on the strength of demand, constrained yard capacity or uncertainty around ships being compliant with future regulations?

I think it's a combination of a couple of these factors that have been mentioned. I don't think it's to do with the concern on the market. It is much more to do with the -- first of all, if you look at dry bulk, Korea has more or less shut its doors on building dry bulk vessels, more or less. That leaves you with Japan and then China. Now in Japan, they are very, very, very finicky whom they will build for because significant part of Japanese yards cater to Japanese customers. And only a very small percentage of Japanese yard cater to foreign customers. And that too, they only like to cater to customers who have built with them in the past. So they're very finicky in other ways. That then leaves you with the China option. And China, as you may be aware, has seen a lot of rationalization on shipbuilding capacity. And therefore, there is only so much that can now be built. That is number one. Number two, the yards are taking in a lot and lot and lot of container orders. Now the margins for the yard in building a containership is much higher than building a dry bulk vessel. So for the same space that dry bulk vessels will occupy at the shipyard, they would refer to build a container ship as opposed to building a dry bulk ship. And therefore, consequently, and which container demand the way it is, the yards are saying first preference containers, second preference tankers, there's, of course, LNG and all, I am not getting into all the categories. But the -- 1 of the last preferences is dry bulk. So -- and of course, technology is always -- but that technology is true for all asset classes. It's not only dry bulk. So today, some people are concerned on what is likely to be the fuel of the future. I don't think anyone has a sensible answer to that. People are taking speculative bets and if the bets workout, fine. If they don't, then there's a challenge. So I think a combination of all this is reflecting the way people are behaving or reacting to the current market.

Yes. Next question is from a [Vikram Suravamshi]. How is contract renewal scheduled in the gas segment?

You mean our ships?

Yes, our ships.

Yes. So we have 1 ship that we've just put away for 2 years. This was -- I think the new contract will start in December of '21. We have 1 vessel to be repriced in end of February '22. And then we have a vessel to be repriced at the -- during May '22. And then we have a small gas carrier, what they call the MGC, which will come up for repricing around July, August '22

Yes. There is a question from Nirav Shah from GC Holdings. While calculating the market value for the rigs for NAV purpose, what is the implied discount to our purchased price for the rigs? Yes. It's about 60%, I suppose.

Yes.

That is the exact -- it's about that much lower than...

Yes, maybe even...

Yes, 60% and 70%.

Yes, somewhere between 60% and 70% compared to the new building prices yes. Absolutely, yes. But of course, you can't take it to new buildings because you have depreciated it over 10 years.

Yes. That's right. Okay. Anybody in the voice queue?

We have a question from Himanshu Upadhyay from PGIM.

My question was last time when the order book was low in 2019 and we saw a furious amount of activity by private equity players, then we had a second okay. And again, the payment terms were very, very lenient okay? So are we seeing private equity again coming back into the market of private equity players? And and the payment terms also improved from the shipyard side or they remain similar to what they were at that point of time?

Yes. So first, let me answer your question on private equity. We still haven't seen the private equity money coming in. I guess a lot of private equity people burn their fingers. The last time they tried to make a play in shipping, I think they timed it all badly. And of course, they invested in the wrong company. On new building prices because actually, the yards are pretty full up until '23, and therefore, the terms are getting tighter, not loser for new building.

Okay. So is the upfront payment, which had gone down to 5% and 6%, moved back to something like 20% for the new order?

For the smaller -- I mean, for the mid- to small players, it would be 20% to 25%. For the more established players, it may be closer to somewhere between 10% and 15% on the initial payment. But the other payments have got crunched into a smaller time frame. You get contracts somewhere between 10% and 15%, and then you have a term which says contract of 6 months. So within 6 months, you are paid close to 30%.

Okay. Okay. And one small question on this -- in our presentation, we had stated that the jet fuel demand or the demand for jet fuel is still low, and it is still running very low. Would it mean that once the recovery starts happening, the product tankers, the improvement in yields and demand can be much higher than the crude oil business because the...

Yes, we think so. So I think once the product -- I mean, once you get jet back into, say, great pre-pandemic levels or hopefully even higher than pre-pandemic levels and the other commodity demand stays strong, I think there is -- and remember, the product side, supply side is much more muted than crude. So -- and of course, there's a lot of arbitrage, I think unlike crude. Crude has a certain amount of arbitrage products have a lot more arbitrage. And if this arbitrage starts working, we think the product market will rally ahead of the crude market.

Okay. And was it when the markets with the asset prices have gone up so sharply, but the day rates are so low, what time would be good for in chartering the fleet or we run a model of in chartering also of ships. So when does it tends to in chartered, yes?

Yes. So we are in the market to look at in chartering. Again, because there is a lot of optimism, unfortunately in the market, we were close to negotiating some crude oil tankers, but there was a difference in the bid offer price. So we couldn't conclude that. We are trying to see if we can do something on the product side. But again, there is a difference between bid offers since [Technical Difficulty] progress from our side.

And when the level of difference between the bid and offer, will it be very significant and would that difference be justifying the current market price of ships? Just trying to understand what is the state of [Technical Difficulty] ships markets, especially on tankers side, yes?

No. So there are different owners, there are owners and owners. As you know, ours is a very fragmented industry, right? Now let us say that there is -- there are certain owners who need the time charter because that's the only basis on which the banks will fund them. There are certain owners who don't need the time charter because they have a lot more equity in the ship. Now when you in-charter a ship also, you want to ideally go to the quality owner, correct? And more often than not, the quality owner has a lot more equity in the asset and is therefore reluctant to come down on its charter rates or whatever he is aspiring to get. And as far as we are concerned, we want to be very, very disciplined because -- I mean, obviously, we've got the capacity to take the loss. But we would -- just like we've been successful in acquiring assets and we've had a good track record in the last 5 years, the CFO has just mentioned that, we obviously want to make sure that we create a similar record when we in charter ships. So once again, we need quality ships. It's easy to in charter, but there's no point in chartering a batch because eventually, you are the face of the customer when you in charter a ship and then that has reputational challenges. So number one, we will only in charter a quality ship. And number two, we will only in charter it at a particular number. And currently, there is a gap of approximately 10% between where we are happy to pay and what the seller wants.

Okay. And can it make sense on offshore side also in charter or?

No, no. Because offshore is a much more domesticated business, right?

Okay. Okay. So even on the boat side, it won't make sense?

No. No. I think we could do it -- yes, but I don't think we are -- and again, it doesn't move the needle. So we also want to now spend a little more time where if our decisions are going to go right, it starts moving the needle.

Now we have a question on the text box, and this is from Mr. [Chris Marona]. There has been an increasing focus away from fossil fuels with companies pivoting strategically away from fossil fuels given that your major asset classes are directed to transport or drilling for these resources. And I would like your thoughts on what type of company GE Shipping will be in 5 years?

So we think that the demand for fossil fuels whilst it may peak or some people believe it will peak in 2030, some people believe it will peak earlier, but I think there is going to be a demand for fossil fuels. And as far as we are concerned, if there is a demand and somebody needs a ship to move it, we will need to be in that space to move it. Today, if you see what has happened to the energy mix, it is precisely for the reason that people were reluctant to invest in fossil fuels. We are seeing a lot of the fossil fuel energy pricing at multi-year or multi-decade highs for precisely this reason. And I think one of the lessons from this current reflection in the energy mix is that whilst no one is against the challenges of climate change and decarbonization, so on and so forth, I think we need to do it in a much more calibrated manner because any underinvestment for any length of time can lead to significant price increases. Just see what has happened to gas, right, because -- I mean, just see natural gas has gone up, what is it, 5x, 6x? And the same -- without naming people, the same countries that were totally against fossil fuels are now saying, please give us fossil fuel because otherwise we're going to have power shortages, winter is approaching, so on and so forth, right? So these things are there. So I don't see Great Eastern is still moving away from -- yes, we need to calibrate the fleet mix. So we too will be very alert to see what is our exposure to crude oil, what is our exposure to products, what is the exposure to ships which move coal, et cetera? Our current focus over the next 5 years is going to be a lot more and making sure we focus on reduction in emissions and we improve our carbonization rating. So we are already taking multiple measures. We are making our ships more fuel-efficient, our existing ships by taking a lot of measures, which we can do on existing tonnage to reduce CO2 emissions to remain, again, at the top of the customers' list saying, okay, here is an owner who has successfully brought down emissions, who has improved the CII rating, so on and so forth. So that's where our current focus is. And eventually, there is no substitution. If everyone on their own says, we don't want a fossil fuel share, we would love it because then we could really buy cheap. But today, if you look at what the world is saying, they're saying, we all want fossil fuel ships. So that's why prices are not coming down.

Yes. This leads to underinvestment in the sector, which again leads to then tightening of the demand supply balance, yes. I think Rajakumar has a follow-up question to this, which is will mutual funds and financial institutions focused on our ESG -- on ESG, skip investing in GE Shipping given our offshore exposure?

So well, if they did, again, it might give us an opportunity, I leave it to them to decide. Irrespective of what mutual funds and other investors may wish to do, we ourselves have set up an ESGT because as a responsible corporate we do want to focus on the best role that we can play in this area and make sure that we are not behind the curve on any of our actions and that people recognize that here is an organization that is a good corporate citizen and is doing everything it possibly can. Now having said that, if investors say, we don't want to invest, fine, that will give us a great opportunity on capital restructuring. But even that is not happening.

So they are not, so we are -- because the focus on ESG so far is that it's on the governance aspect, it's also on the environment in terms of how well are we treating the environment in the context of our business. And it is clear, and we've also put out a sustainability report this year voluntarily where we have spoken about all the actions we are taking to reduce our carbon emissions. And that also, I think, is taken into account by investors when they look at our ESG score.

Yes, so that we are doing on our own voluntarily.

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

It's not to try and say, okay, we invest in the company -- as I've always said, that shipping has to be privately owned. It should never be owned by in public domain.

Are there any other questions? Yes. [Chris Marona] has asked another question. Is the rotation of sea ferries still a critical risk?

So if you have a vessel trading in the west of Suez Canal, the problem is a lot less because more and more countries are now opening up to crew changes. I think if you have a vessel trading east of the Suez Canal, of course, with the exception of India, the Middle East has become a little more considerate on crew change. India has always been very considerate on crew change and full marks to the government on this. I think once you cross Sri Lanka, it's really becoming a challenge. So we really can't do any crew change in Singapore, China; limited crew change in Korea, Japan, Philippines, Malaysia, Indonesia, Australia, New Zealand, so on and so forth. So we haven't successfully done a crew change, I would say, east of the East Coast of India. And that remains a challenge. And just for your information, in the first 6 months, our operating cost on account of COVID, which includes crew change cost has gone up by $400 a day across each of our 46 ships...

Yes, which has gone into our P&L, yes.

Yes, which is already reflected in the P&L, but I'm just putting out some data on the COVID impact on direct operating costs.

So I think that's all we have in question. Rajakumar has just put a comment saying kudos to your crew team and the management, and please convey my thanks and wishes. Thank you, Mr. Rajakumar. Yes. I think nobody else is there in the question queue, Linda?

Yes, sir. That was the last question. I now hand over the floor back to Ms. Anjali Kumar for closing comments. Over to you, Ms. Kumar.

Thank you, everybody, for joining today and having such an interesting conversation on the industry. The branch of this call, both the audio link as well as the video link, the transcript will be available on the site in a couple of days. So -- and other than that, of course, please feel free to connect with us if you have any further queries.

Thank you. Thank you all.

Thank you.

Thank you, members of the management. Ladies and gentlemen, on behalf of The Great Eastern Shipping Company Limited, that concludes this conference. Thank you for joining us. You may now click on "Exit the Meeting" button. Thank you.