Last week, Shipping Corp. of India Ltd (SCI) increased freight rates on the Indian subcontinent to Europe and Mediterranean trade routes “to meet the overall operation costs” from 1 July. Since then, the SCI stock has gone up sharply, much more than the improvement in the Sensex.
It’s well known that the current operating environment for shipping companies is discouraging. Weak freight rates have taken a toll on the earnings of shipping companies in general and SCI is no exception to that.
How bad is the situation? Consider this. In fiscal 2012, the company posted a loss of Rs 428 crore against a net profit of Rs 567 crore in the previous fiscal. Apart from the weak operating performance, SCI’s profitability last year was also affected on account of massive finance costs. As on 31 March, the company’s long-term borrowings stood at Rs 5,525 crore, representing a 36% increase from a year ago. Higher interest costs along with higher depreciation are expected to affect the company’s financials going forward as well.
Given that, what does the recent freight rates increase mean? Of course, it’s a positive development, but at the same time it does not mean that the scenario is going to reverse dramatically. “Rates were unreasonably low earlier, and this rate restoration will offer respite to that extent,” said an analyst.
This increase has happened in the container segment, which is a part of SCI’s liner business. The liner business has posted losses at the earnings before interest and tax (Ebit) level for the past few quarters now. In the March quarter, the liner business’s Ebit loss was as high as Rs 225 crore, much higher than Rs 24 crore and Rs 1.6 crore seen in the December and September quarters, respectively. The liner business’s performance for the March quarter was also affected adversely on account of higher bunker costs (fuel cost for vessels).
In an interview to CNBC-TV18 news channel, SCI chairman and managing director S. Hajara said that, at the moment, container operators all over the world are maintaining some discipline and trying to rationalize the sales of their slot capacities. “In the coming months, we will be able to again increase the rate to some extent because even this hike of $200 (around Rs 11,160 today) per teu (twenty-foot equivalent), in our opinion, is just not enough, even though the bunker cost has come down to prevail at $570 from $750,” said Hajara.
Investors can look forward to some relief due to this rate increase and the SCI stock seems to reflecting that optimism. But still, analysts expect the company to post a loss at the net level this fiscal as well. In the last one year, the SCI stock has sharply underperformed the BSE-500 index. Given the weakness in the global economy, at present, there are hardly any strong factors for that trend to change.