With each rise in the Baltic Freight Index (BFI), Indian shipping companies are riding high in the hope of a smooth sail. After peaking at 2352 during May' 95 BFI, which is indicative of bulk freight charges, slumped to a ten-year low at 992 during September '96 and is currently hovering around 1200-1300. Shipping companies have evidently started rising from the trough and are expecting better times ahead.

But the Baltic mainly reflects only the bulk cargo market and does not reflect conditions in the oil cargo segment which kept up a strong trend. As a result, the PSU shipping major Shipping Corporation, which has a share of about 58 per cent in the oil transport business, was not affected as much as all other Indian private sector shipping companies. SCI is the beneficiary of the Government's preference for oil movement on a fixed `cost plus' formula which actually works out 20 per cent above the international charter rates for oil.

"With the import of crude going up each year, the capacity utilisation of crude carriers face no threat at all. However, performance in the dry bulk market was not very exciting in 1995-96. But if the industry can sustain the 1996-97 growth levels then there is no reason for panic. On the other hand, if it can not, then there is every chance of freight rates and charter hire rates getting affected. The newly built vessels coming in by September '97 would possibly leave the dry bulk market in an oversupply position. The impact of this is currently unpredictable," says an Essar communique.

SCI officials, however, have a different viewpoint. "A number of tankers are in for scrapping this year which would create an immediate shortage, giving a sudden boost to freight rates. But keeping an eye on the expanding trade, the fleet owners may not do so. And hence it is difficult to say which way the freight market would move", says one SCI spokesperson. Conversely, if the fleet remains the same but trade expands, the charter demand would raise rates and there is a strong possibility of recovery in OECD economies which would boost the cargo market. And surprisingly when all the shipping companies are chopping through rough weather, a small company --Shahi Shippingremains totally unscathed because of its operations closer home in coastal waters. The domestic cargo movement from port to port and small carriers between anchorage to port are proving to be good business opportunities which Shahi is cashing in on. "The future of coastal shipping is bright because of booming industry but inadequate surface transport facilities," says S K Shahi of Shahi Shipping.

Another development is that Indian shipping is losing its share in overseas trade; it declined from 35 per cent in 1992-93 to 24 per cent in 1995-96 implying a slowdown in this sector. Foreign shipping companies are increasingly entering the Indian market especially in container services.

"One reason could be that more Indian ships are now being deployed in cross trades as a consequence of globalisation," remarks an Essar official. While the 1994 freight rate boom led to a spate of acquisition of vessels, the subsequent fall saw a reversal of trend.

Surprisingly, India's dead weight tonnage (dwt) declined from 11.72 million dwt in April '96 to 11.52 million dwt in January '97 although the number of ships increased marginally from 479 to 484. Obviously more tonnage was scrapped than was added. Only 35 ships were acquired during 1996 against 54 during 1995.

Indian shipping stands out on the global map ranking 15 in terms of the total fleet size. At 7.13 million GRT (gross registered tonnage), India accounts for 1.5 per cent of world GRT of 490.7 million tonnes. While majority of the Indian fleet comprises dry bulk cargo carriers (45 per cent) and crude tankers (32 per cent), others have a smaller share. Product tankers account for 9.4 per cent and dry cargo liners 6.3 per cent. Besides the average age of Indian fleet is 15 years which compares favourably with the world average of 18 years.

The shipping sector has not grown at a desirable pace mainly because of constraining Government policies and lower limits for external commercial borrowings (ECBs). While other modes of transport like aircraft, buses, trucks etc. get 40 per cent depreciation on written down value (WDV), it is only 20 per cent on ships which lowers their profitability. The Indian National Shipowners' Association (INSA) has urged the Government to raise depreciation to 40 per cent as also allow their income to be considered as export income to avail of 80 HHC benefit and MAT. The current Budget imposes an 8 per cent excise on ships built domestically which INSA is pleading should be withdrawn.

Another problem faced by the domestic shipping companies is that it keeps losing its trained professionals to foreign liners due to higher pay as well as tax benefits enjoyed as NRIs. Indian companies may ply more in the Indian waters making it difficult to declare themselves as NRIs. Besides abroad they get paid in dollars against Indian companies paying them in rupees only.

Shipping Corporation

The state-owned Shipping Corporation of India (SCI), India's largest shipper, is five times GE Shipping, describes James Capel B & K in its report on this stock. As a Government protege, the company is protected from the vagaries of the freight rate market. Nevertheless, after deregulation of the oil sector, it would be on a level playing field with others. However, SCI also does not get an opportunity to make a fast buck when the freight rates boom.

With a fleet of 122 ships, SCI earns 70 per cent of its revenue from the bulk and tanker division, 27.5 per cent from the liner division and 2.5 per cent from the offshore division. But an assured business of oil carriers has not left the company complacent. Despite pressure from the Government to operate on loss-making routes like liners to Andaman and Goa, the company has managed to diversify well.

The company plans to acquire 17 vessels at an estimated cost of $492 million i.e Rs 1,772 crore which will be funded through ECBs and internal accruals. SCI has been allocated Rs 885 crore by the Planning Commission of which Rs 617 crore alone would be through the ECB route. It plans to acquire 44 ships over the next five years entailing an expenditure of $1,250 million but the Government reduced its allocation from Rs 1,895 crore in 1996-97 to Rs 885 crore in 1997-98. This, the sources reveal, has disturbed its original plan of expansion by acquiring 89 vessels. Though inadequate for its planned acquisition, SCI still gets the lion's share of Rs 694 crore of ECB for the port and shipping sector.

To get over the problems of early acquisition and fleet expansion, the company is entering into strategic tie-ups with Indian as well as foreign shipping companies. It is getting into collaboration with Shreyans Shipping to operate feeder services between Chennai and Colombo which has come up as a hub port in the region. A similar tie-up has been forged with Integrated Container and Freight Services for a feeder route between Bombay and Dubai. The other feeder service on the Calcutta-Haldia-Colombo route in arrangement with the Ceylon Shipping Corporation is being considered.

SCI will also have a JV with G P Shipping of Thailand to tap the booming market of the South-East region. The company already has Irano Hind Shipping Company as JV in Teheran. It has penetrated Israel through alliance with Israel's Zim Line as also the South African market and has an extensive presence in the international tramp market.

According the company sources. SCI is likely to close 1996-97 with an income of Rs 2,200 crore and net profit of Rs 220 crore. James Capel B & K says "the bane of wearing the public sector mantle and the overhang of an imminent equity issue translate into low P/E of 2.2. However, all of this is already in the price and with not much downslide the stock offers good value at current levels."

G E Shipping

G E Shipping got into the non-shipping business to cushion against the misfortunes from shipping. However, it is shippingthat has salvaged the company's bottomline against the misfortunes of its other businesses namely real estate development. "GESCO reported disappointing interims; while shipping profit growth was encouraging, property development profits (the key to profit growth in the last couple of years) recorded a 44 per cent decline," says James Capel B&K report on the company. The company renegotiated its dry bulk charter rates in May last 10 per cent below the previous year's and still maintained a 36 per cent rise in shipping profits. The company completed 60 per cent of its Rs 100-crore expansion plan for '96-98 during 1996 itself translating into higher debt servicing but not much into real growth. BZW estimates a 15 per cent dip in earnings to Rs 4.50 per share.

GE Shipping has 60 per cent of its fleet in dry bulk cargo and 85 per cent of its income comes from shipping business. The company is diversifying into the business of offering pilotage services to the port. In the property business, it entered into a tie-up with Singapore Technologies to employ modern construction techniques for a 40-storeyed residential building in South Mumbai. The company jointly with Knight Frank & Rutley of UK and consultancy firm Praron will be launching a property index. GE Shipping flared up last year on the bourse on rumours of a take-over by the Jatias.

Essar-Sisco

Essar Shipping and South India Shipping Company (Sisco) -- both under the fold of the Essar group of the Ruias --have been in the news because of their proposed merger. A joint investment to the tune of $200 million has been undertaken with a view to strengthening the shipping business of the group which is looked at by observers as a prelude to the merger. However, group officials neither deny nor give any firm indication and respond with a vague statement "there is no immediate plan".

Towards the fag end of March '96, Essar transferred two tankers to Sisco whose fleet size jumped from Rs 345 crore to Rs 577 crore. As a result, Essar Shipping suffered a setback in the first half of 1996-97. Observers think that the group is deliberately strengthening Sisco so as to merge Essar Shipping with Sisco.

Already Essar Shipping operations have been moved to Chennai where Sisco is headquartered. Ruias hold a 56 per cent stake in Sisco and 38 per cent in Essar Shipping. Essar Shipping has been raising capital far too often. Its merger with Sisco would reduce the capital base and at the same time give the promoters Ruias a higher stake in the new merged entity.

The market, however, has reflected its antipathy towards the Essar group and Sisco too suffered the same fate after it came into Essar's fold in 1991. After touching a high of Rs 590 during May '92, at present Sisco is placed around Rs 35. The transfer of two tankers by Essar did not help Sisco to improve its performance. Besides Sisco did not pay Essar for the purchase of vessels.

Surprisingly, Essar has just about made Rs 10 crore profit on these sales which isn't anywhere near its recent strategy of a judicious mixture of buying and selling of ships i.e.buy low and sell high approach". Says an Essar official, "Essar believes that the shipping business cannot survive just on the returns from carriers. They have to sensitise themselves to the pulse of the market. To make returns on shipping investment attractive, it is essential that besides efficient operation of ships, other alternate means of enhancing revenue are also considered."

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.