According to a Times of India report last week, Vijay Chibber, financial adviser and additional secretary in the shipping ministry, warned the government of the financial condition of Shipping Corp. of India Ltd (SCI) in a note titled, “Alarming financial health of SCI".

The report maintains that, according to Chibber, SCI will be in the red from this year, if the interest income and income from sale of assets is excluded.

So how bad is SCI’s present situation? An oversupply of ships has wreaked havoc on freight rates, affecting the performance of shipping companies in general, and SCI is no exception.

The state-owned shipping company posted net losses of 6 crore each in the previous two quarters (March and June 2011). In both quarters, SCI’s liner segment posted losses at the earnings before interest and tax (Ebit) level, the loss increasing substantially in the June quarter.

The liner segment, which includes break bulk and container transport, accounted for around 30% of the total revenues in both the quarters.

Most of SCI’s remaining revenue comes from the bulk segment, which comprises tankers (both crude and product), dry bulk carriers, gas and phosphoric acid carriers. While the bulk segment posted profits at the Ebit level in the previous two quarters, the profits have declined sharply on a year-on-year basis.

In short, the operating environment for shipping companies is quite weak and there appears little respite in the days to come.

True, the company is making profits at the operating level, but higher depreciation costs have taken a toll on net profitability. SCI’s depreciation costs are pretty high on account of new fleet addition and the discard of fully depreciated old vessels.

Interest costs, too, are increasing at a faster pace. As at 31 March, the company had loan funds (debt) of about 4,700 crore and a comfortable debt-equity ratio of about 0.7 times. Over fiscal years 2011-13, SCI has a huge capex plan to add vessels. A big worry among analysts is that the break-even of the vessels ordered when the market was at its peak (and, hence, at comparatively higher rates) would be challenging given the current charter rates.

So is there a silver lining? Well, there is the hope that things will start looking up after 2012-13. Analysts believe SCI’s current capex is likely to benefit the company when the shipping cycle reverses in future for the better.

But that seems far away and investors would do well to look at other sectors at this point of time. Perhaps, if there is a further meaningful correction in SCI’s stock, it could make sense to consider it from a long-term perspective.

We welcome your comments at