Mark to Market | Shipping firms still sailing in rough seas1 min read . Updated: 09 Oct 2012, 10:31 PM IST
Oversupply of vessels has put pressure on freight rates and made the business unattractive
The operating environment for shipping companies has been rough for quite some time. The main reason is an oversupply of vessels that has put pressure on freight rates and made the business unattractive. Shipping Corp. of India Ltd (SCI), the country’s biggest ocean carrier by fleet size, had posted losses in 2011-12 and the June quarter.
In the September quarter, there is little reason to rejoice. The Baltic Dry Index, an important variable, declined by about 23% in the three months on muted Chinese demand and too many ships. The tanker market was also subdued.
The weak demand is reflected in weak expectations from the industry in the quarter. SCI is expected to post a loss yet again by adding weak industry fundamentals to higher interest expenses and depreciation costs in the three months ended 30 September, which was the case in the June quarter as well. “Revenue is expected to decline about 6% on account of subdued global demand. SCI is expected to incur a loss of about ₹ 75 crore at the profit after tax level due to increased depreciation on account of fleet addition," ICICI Securities Ltd analysts wrote in their results preview.
Great Eastern Shipping Co. Ltd (GE Shipping) is expected to report a net profit. The company has outperformed SCI because its offshore business is supporting overall earnings. GE Shipping showed a net profit in the June quarter.
The better financial results is a reason why its stock has fared better than SCI’s. GE Shipping’s offshore business is expected to drive earnings growth and its share price seems to be capturing the positives at current levels.
But the outlook for SCI’s scrip continues to be weak. The industry is not showing signs of recovery and higher interest and depreciation costs are expected to put pressure on its net profit. There are hardly any key valuation triggers in sight for the stock.