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No near-term recovery for SCI earnings, optimism not justified

No near-term recovery for SCI earnings, optimism not justified
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First Published: Mon, Jan 04 2010. 12 15 AM IST

Updated: Mon, Jan 04 2010. 12 15 AM IST
In a rather surprising move ,with the shipping industry still battling recession, the state-owned Shipping Corp. of India Ltd (SCI) has announced plans to buy three new container ships. Is this an indicator of better days for the company on the back of rising freight rates?
According to company officials, SCI plans to buy three container ships for $225 million (Rs1,050 crore). It has also?placed?orders?for?10 vessels in the dry bulk category, in which it plans?to?increase its presence in the coming years.
SCI, which accounts for around 35% of the country’s shipping tonnage, has a fleet of 76 vessels. Although the company has a diversified presence in shipping, 70% of its tonnage is through tankers, with the balance accruing from dry bulk carriers.
Also See Freight rate movement (Graphics)
For now, there is only a marginal recovery visible in the freight indices. In the tanker segment, the Suezmax index is up from $11,566/day in April to around $16,831 on 10 December, with a sudden rise visible in November. Likewise, the dry bulk rates are up from $1,659/day to $4,107/day during the period.
According to D.D. Sharma, senior vice-president, research, Anand Rathi Securities Ltd, “A rise in commodity prices like ores and coal in recent past suggests improved demand for these commodities and this could boost demand for dry cargo.” Crude oil prices, too, have been rising in the last one week.
However, the purchase is well-timed given that asset prices are on the decline due to the deep recession. Prices of new ships are lower by around 30-40% and that of second-hand ships by around 50%. SCI also has a healthy balance sheet with debt:equity of around 0.2, indicating ample scope to raise debt for its fleet acquisition. Ideally, assets are acquired with a 20:80 mix of equity and debt. This may be difficult at least for another 12 months as the sector, according to analysts, is not on the radar of financial institutions.
SCI’s sales for the six months ended September were down 23% at around Rs1,727 crore. However, costs on most fronts such as port dues, cargo handling, employee costs and fleet maintenance were higher, leading to a fall in operating profit by around 62% at around Rs235 crore. Earnings per share were down from Rs13 in the year-ago period to around Rs3.
The announcement that it would buy container ships has triggered investor activity in the counter, with the share touching nearly Rs150 on Wednesday, up from around Rs143 on the previous day and more than double its 52-week low of Rs70.
Charter rate hikes are visible in shipments to Europe and the US markets. But it remains to be seen if the charter rates’ increase is seasonal, given that in winter there is relatively tighter supply. The optimism is not entirely justified, as rates in the tanker segment, which forms a major portion of SCI’s revenue, are too low compared with the year-ago period. Besides, despite economic and trade revival, there is a significant oversupply of fleet which will not move rates up in the near to medium term. This means that renewal of long-term charters will come at lower rates for some time.
Write to us at marktomarket@livemint.com
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First Published: Mon, Jan 04 2010. 12 15 AM IST