Varun Shipping Company
BSE: 500465 | NSE: VARUNSHIP | ISIN: INE702A01013 | Shipping
- Directors Report
- Chairman's Speech
- Auditors Report
- Notes To Accounts
- Accounting Policy
- Finished Products
- Raw Materials
| Directors Report | Year End : Mar '08 |
The Directors have pleasure in presenting the Thirty seventh Annual
Report together with the audited statements of account of the Company
for the year ended 31st March, 20O8.
(Figures in millions of Rupees)
Current Year Previous Year
ended ended
31.03.2008 31.03.2007
PROFIT BEFORE TAX 2,278.99 1,476.90
Less: Provision for Taxation
Current Tax 14.00 56.80
Fringe Benefit Tax 7.20 6.60
PROFIT AFTER TAX 2,257.79 1,413.50
Less: Transferred to Tonnage Tax Reserve under
Section 11 5VTof the Income-tax Act, 1961 460.00 260.00
Add: Surplus brought forward from previous year 813.36 758.85
Amount available for appropriation 2,611.15 1,912.35
Your Directors propose to transfer an amount of Rs.800 million to
General Reserve. The Directors have also recommended payment of final
dividend of Rs.2 per equity share for the year ended 31 st March, 2OO8
which together with two interim dividends totalling to Rs.3 per equity
share declared and paid earlier for the year ended 31 st March, 2OQ8
aggregating to Rs.5 per equity share will absorb Rs.749.90 million and
Rs. 127.45 million towards dividend tax. After the above
appropriations, your Directors propose to carry forward a balance of
Rs.921 .63 million in the Profit and Loss Account.
Freight and charter hire income was Rs.8,508.07 million compared to
Rs.6,726.27 million forthe year ended 31 st March, 2OO7. Net profit
after tax was Rs.2,257.79 million for the year ended 31 st March, 2OO8
as against Rs.1 .41 3.50 million during the preceding year.
Revised Accounting Standard 1 1 CAS 11) issued by the Ministry of
Corporate Affairs vide Notification dated 7th December, 2006 has become
part of Companys Accounting Standard Rules, 2O06. It was made
applicable with effect from 1 st April, 2007 as a result of which
exchange rate differences arising on account of repayment and
revaluation of foreign currency loans taken for acquisition of ships
from abroad are required to be recognized as income/loss through profit
and loss account statement in the period in which they arise. In the
previous years, such differences were required to be adjusted to
carrying cost of the ships and amortised by way of depreciation.
Accordingly, the income for the financial year ended 31st March, 2008
includes Rs.817.60 million on account of net exchange gain on foreign
currency loans taken for acquisition of ships from abroad. This has
resulted in increase in depreciation charge by Rs.90.23 million.
The Company continues to maintain its focus on the hydrocarbon sector
and build up on its core competencies by expanding its fleet of tankers
and gas carriers as also by expanding its assets and operations in the
rapidly developing oil and gas exploration and production industry.
Towards this end, the company acquired a Very Large Gas Carrier (VLGO,
Maharshi Bhardwaj in June 2007 with a cargo carrying capacity of 76,644
com. This is the first Indian flagged VLGC and is the largest LPG
carrier in the Indian fleet. The Company has secured the first
long-term contract to transport LPG in a VLGC to the newly commissioned
Cavern Storage at Vizag, This contract has helped the Company to
consolidate its position as a leading LPG shipping company in India.
The companys owned LPG carrier fleet of 12 vessels is the largest in
India in terms of both fleet size and cargo carrying capacity of
360,581 dwt (436,722 cbm) and forms approximately 81 per cent of total
LPG tonnage under Indian flag. The company has transported
approximately 72 per cent of all LPG cargoes imported into the country
by the Public Sector Undertakings (PSU) during the year ended 31st
March, 2008.
The Company acquired two large, modern Anchor Handling Towing and
Supply (AHTS) vessels, MV Sudaksha and MV Suvarna in May, 2OO7 and
March, 2OO8 respectively. Both these vessels have a bollard pull in
excess of 1 8O Tons. These vessels together with the AHTS MV Subhiksha
which was acquired in January, 2OO7 have enabled the Company to
establish its leadership position in the large AHTS sector in the Asian
region. These vessels will cater to the deepwater offshore sector in
Indian and international oil fields. Further, these vessels are the
most powerful AHTS vessels under Indian flag. During the year under
review, the company sold one 1 974 built Large Gas Carrier Maharshi
Vishwamitra. The Company presently owns a well diversified fleet of 21
vessels. In January 2OO8, the Company had announced a capital expansion
programme of US$ 4OO million out of which the Company has acquired AHTS
vessel MV Suvarna. The Company is proposing to conclude balance
expansion programme by the end of year subject to availability of
suitable tonnage.
In April, 2OO8 one of the companys vessels, LPG/C Maharshi
Krishnatreya was awarded a Certificate of Excellence and the Ship of
the Year (Indian Flag in Foreign Trade) award by the National Maritime
Day Celebrations Committee (Central), Mumbai, Directorate General of
Shipping, Government of India. This award is given to a ship which
comes out successfully through various inspections depicting its clean
image and efficiency of its master and crew. This vessel had also
undertaken search and rescue operations in July, 20O7 when a Korean
vessel M.V. Orchid Sun, had sunk in the sea of Oman and was successful
in rescuing two crew members.
Mr.Yudhishthir D. Khatau, Managing Director of the Company was awarded
the Policy Maker of the Year award at the Seatrade India Shipping
Summit Awards 2OO7 ceremony held in Mumbai. According to Seatrade, this
award is given to an individual of influence whose contribution has had
a beneficial effect on the Indian maritime policy.
During the year under review, the Company issued and allotted
3,950,000, 2,850,000 and 450,000 equity shares of Rs. 1 0 each to
Khatau International Limited and Tarun Shipping and Industries Limited,
promoter group companies and Mr.Arun Mehta, Vice Chairman & Managing
Director of the Company respectively, pursuant to their exercise of
option for conversion of 3,950,000, 2,850,000 and 450,000 Optionally
Fully
Convertible Warrants respectively at Rs.75 per equity share. The funds
raised from the said issue have been fully utilized for expansion plans
of the Company and for corporate purposes/requirements. As on date, the
total paid-up equity share capital of the Company is 150,007,773 equity
shares of Rs, 10 each aggregating to Rs.1 ,5OO.O8 million and no
instruments are outstanding for conversion into equity shares.
In response to companys application for voluntary delisting of equity
shares, the Company, equity snares have been delisted from The Delhi
Stock Exchange Association Limited. The delisting from the Calcutta
Stock Exchange Association Limited is awaited.
Management Discussion and Analysis:
(a) Industry Structure and Development:
The international shipping industry transports hydrocarbons and bulk
commodities in wet bulk, dry bulk, liquified gas, bulk chemicals and
container sectors. Offshore support vessels provide various services to
the offshore oil and gas exploration and production industry. The
Company owns a well diversified fleet of 21 vessels, operating in the
oil, gas and offshore support sectors.
According to The Platou Report, 2O08, the year 2007 was the fourth
consecutive year with a full utilization of the world merchant fleet.
The peak was reached in 20O4, but the next three years have only been
marginally weaker, with a modest upturn from 2OO6 to 2007. Again,
global economic growth showed greater strength than what was expected
by forecasters at the start of the year.
According to The Platou Report, 2008, strong global economic growth and
favourable geographical distribution have more than doubled the tonnage
demand growth rate from the 1 990s to this decade; from 3 per cent to
6.5 per cent. There is a high corelation between global economic growth
and growth in tonnage demand. Based on data from 1 992 to 2OO7 as much
as three quarters of the annual changes in tonnage demand can be
explained solely by global economic growth. Even with an annual
expansion rate in world shipbuilding of 1 6 to 2O per cent, the fleet
growth of 8.4 per cent last year was marginally lower than the
estimated tonnage demand growth of 9 per cent.
According to The Platou Report, 2008, despite the financial turmoil in
2007, economic growth was not negatively affected. Global growth is now
estimated to have been 5.2 per cent compared to 4.6 per cent predicted
in January, 20O7. According to International Monetary Fund, China
contributed to global growth by 34 per cent and India by 1 1 per cent
in 20O7.
Under investment in earlier years, surge in Chinese growth and
scrapping of vessels built in 1 970s have created the conditions for a
very strong market for tankers. Further, the gap in charter rates
between single hull and double hull vessels is widening as more
charterers prefer double hull tonnage and flag states impose
restrictions on single hull tonnage. In the coming years as single hull
will be mandatorily required to be phased out, the demand for double
hull tonnage will be strong.
Tanker new building prices have been very high and delivery lead times
have been longer. Further, secondhand values of tankers continue to
rise even when spot earnings were lower resulting in widening the
disparity between earnings and ship values.
LPG is one of the most preferred fuels due to its clean burning
properties. LPG carriers are primarily used for transportation of LPG
and Ammonia. The year 2OO7 was a volatile year for Very Large Gas
Carrier (VLGC) freight rates. The rest of the fully refrigerated gas
carrier fleet enjoyed a good year 2OO7.
According to The Platou Report, 2OO8, despite more volatility in day
rates and a great deal of speculation concerning impending oversupply,
activity in the offshore support vessel market has remained high in
20O7.
According to The Platou Report, 2OO8, for the year 2007 in total, the
demand for new tonnage was 53 per cent higher compared to 2OO6. The
strong economic growth has not only resulted in a price hike for
shipbuilders but has also dramatically increased the cost of input
factors. One of the most important factors is labour, which typically
increases during periods of high economic growth. Steel is another
important factor for which prices have rallied. Equipment cost, which
accounts for about 4O per cent of the building cost for a merchant
ship, has also increased. The hike in prices is a result of demand
pull rather than a cost push as the yards have improved their
margins during this period.
(b) Opportunities and Threats:
Rapid economic development and an increase in demand for both wet and
dry bulk products, including liquified gas the world over, have
resulted in substantial increase in shipping activities. About 9O per
cent of the world trade in volume is carried through sea
transportation, hence the growth in cargo availability has fuelled an
impressive growth in shipping fleet and the world cargo carrying
tonnage
As per Indian National Shipowners Association (1NSA) Annual Review,
2O07, the share of Indian ships in the carriage of countrys overseas
trade has been declining over the years and it was around 1 3.7 per
cent in 2OO5-O6, thereby remaining stagnant for the last 3 years.
Looking ahead, the exim trade of India is expected to double to touch
one billion tonnes by 2O1 1 -201 2 from 450 million tonnes, which is a
huge business opportunity but requiring substantial investments. Thus,
in order to maintain the present share of Indian ships in the carriage
of Indias overseas trade at about 1 4 per cent, the Indian shipping
tonnage needs to rapidly expand from the present 9 million GT to about
2O million GT. Since during this period around 4 million GT of the
existing fleet will be scrapped due to old age/International Maritime
Organisation phaseout regulations, the net addition to the fleet would
have to be around 1 5 million GT. It is estimated that the cost of
investment for such tonnage replacement/augmentation would be
approximately US$ 2O billion.
According to INSA, in 2OO6-O7 Indian ships carried 61 million tonnes of
the countrys overseas cargo constituting only 1 2.2 per cent share as
against 41 per cent in 1 987-88. The Indian shipping companies can
accordingly grow on the strength of strong Indian cargo base with the
right of first refusal for Indian flag vessels with respect to Indian
charterers.
For a country like India, with huge exim trade, direct and indirect
taxation ought to be rationalised in line with international shipping
hubs, thereby ensuring that there are no cost disadvantages to the
owners, charterers or end users. Tax rationalisation will not only
assist in providing a level playing field and a viable operational
environment to the shipping companies, but also help in mobilizing the
huge investment required to replace tonnage as well as achieve growth
of Indian fleet commensurate with the quantum of Indias exim trade.
Further, Indian shipping companies are also adversely affected on
account of drift of personnel from Indian ships to foreign ships due to
peculiar taxation problems of discrimination faced by Indian seafarers
working onboard Indian ships vis-a-vis their competitors on foreign
ships.
(c) Segment-wise Performance:
The Company is engaged only in the business of shipping and there are
no separate reportable segments.
The diversified fleet enables the Company to offer a comprehensive
shipping solution across the entire hydrocarbon chain. It also serves
as a hedge against downturn in any single sector thereby mitigating the
cyclicality associated with the shipping industry. The Companys
fleet of twelve LPG carriers, including ten medium size CMGC), one
large size (LGC) and one very large size (VLGO, has been deployed on a
mix of time charters, spot charters and voyage charters with Hindustan
Petroleum Corporation Limited, Indian Oil Corporation Limited, Bharat
Petroleum Corporation Limited, Exmarand BW Gas.
In the crude oil and petroleum products sector, the Company owns three,
double hull Aframax crude oil tankers and one single hull product
tanker. The three crude oil tankers which are placed in the Sigma
Tanker Pool, trade globally and the product tanker is employed on time
charter on the Indian coast.
In the offshore sector, the Company has a fleet of five AHTS vessels of
which two are deployed on time charter with Oil and Natural Gas
Corporation Limited, two with Reliance Industries Limited for
supporting their deep sea oil exploration and production activities in
Krishna Godavari Basin and one on spot charter in North Sea. The
Company is the first Indian company to operate a large Anchor Handler
in the North Sea.
(d) Outlook:
As per current and longer-term oil market outlook of International
Energy Agency (IEA) dated 8th January, 2OO8, despite measures to
address environmental, economic and energy security concerns, demand
for oii is set to grow, led by the transport sector.
EIA the US Department of Energy Office) expects a total oil production
growth of close to 3 million barrels per day (mbd) during the calendar
20O8, out of which 2 mbd from OPEC, of which 1 .7 mbd is crude, which
should result in a tonne mile growth of 6 to 8 per cent.
International Monetary Fund (IMF) forecast still sees low but
nonetheless positive US growth in both 2O08 and 2O09 despite the
continuing problems in US financial and housing sectors, the fall of
the dollar, signs of weakening activity in manufacturing and services
and rising inflationary concerns.
According to The Platou Report, 2O08, the two largest uncertainties for
2008 are the seriousness of the US economic slowdown and the resulting
impact on the rest of the world. Traditionally, the USA has been the
locomotive in the global economy and a slowdown has quickly been spread
to the rest of the world. Due to the larger share of emerging markets,
primarily, China, many experts have argued that a decoupling has now
taken place. Emerging markets and developing countries have in general
weathered the financial storm and have a solid basis for continued
strong economic growth in 2OO8.
As spenders in countries such as UK, Euro zone and US are becoming
savers while savers in countries such as India, China and the Middle
East are becoming spenders, global demand scenario appears to be in
transition.
According to International Energy Agency - World Energy Outlook, 2007,
China and India Insights, developing countries, whose economies and
populations are growing fastest will contribute 74 per cent of the
increase in global primary energy use by 2030 compared with only 41 per
cent today. India and China alone will account for 45 per cent of such
projected increase.
It is expected that the charter rates for VLGCs may continue to be
under pressure in 2O08 with higher number of new VLGCs entering the
market during the year 2008. There have been delays in LPG supply
projects in Middle East and West Africa, which have resulted in
pressure on VLGC charter rates as new buildings for which orders were
placed in anticipation of such projects coming on stream are coming up
for deliveries ahead of the growth in LPG supplies. The Company
currently owns only one VLGC which has been gainfully employed on time
charter. The outlook for MGC and LGC sectors appear to be steady for
the current year.
Currently household LPG use per capita in countries like China, India,
Vietnam and Indonesia is very low compared to countries like Japan,
Malaysia, Taiwan and Korea indicating that there is a strong potential
for increase in consumption in such countries. It is projected that the
LPG and Ammonia exports and imports will grow over the next years
resulting in increased tonne-mile for LPG vessels as 50 per cent of the
midsize LPG vessel transport concerns ammonia transport. Further, new
production of LPG as an associate gas from LNG and refineries will be
emerging over the coming years.
Crude does not necessarily move to the closest demand region resulting
in increased tonne mile. The order book for tankers is growing;
however, it is expected that due to emerging markets and demand for
energy and its products, the charter rates will remain above historical
averages.
It is expected that India and South East Asia will increase their
imports of crude oil over the next five years as a result of growing
demand and expansion of refining capacity.
According to Indian Hydrocarbon Vision 2025, there will be a widening
gap between demand and production of crude oil as it is expected that
demand of crude oil will be 376.5 mmt whereas production is estimated
to be 61 .4 mmt by 2024-2025. Demand for natural gas will be 391 mmscmd
and supply will be 1 7O mmscmd by 2024-2O25.
According to The Platou Report, 2O08 on the back of higher oil and gas
prices, they also expect a strong increase in exploration and
production (E&P) spending for 20O8. The E&P spending of oil companies
is expected to continue increasing and consequently reinforce demand
for all types of offshore support tonnage. On the down-side, the US
credit crisis and looming recession threaten to dampen world economic
growth in general, including energy markets. Platou is still
optimistic about the offshore support vessel market going forward and
expects 2008 to be a year filled with continued higher offshore
activity.
As per current and longer-term oil market outlook, of International
Energy Agency (IEA) dated 8th January, 2O08, the E&P industrys track
record in pushing the limits of technology to access deepwater
resources is impressive and will continue towards reservoirs in greater
depths and farther away from the coastline. This will translate into
greater demand for deepwater assets such as large anchor handlers.
Company will be able to take advantage of emerging opportunities for
such deepwater assets.
(e) Risks and Concerns:
Shipping industry being global in nature is prone to several risks and
uncertainties including, international competition, marine mishaps and
accidents, amendments in Government policies, new regulatory
compliances, port state control, increase in financial costs, exchange
rate fluctuations, changes in tax laws, acts of terrorism, wars,
piracy, arrest of vessel by maritime claimants, shortage of qualified
seafarers, etc.
The company endeavours to counteract these risks by adopting certain
measures like diversifying its marine assets, hedging its freight rates
through long-term contracts and pool arrangements, complying with
international ship management practices, insuring various risks with
hull and machinery underwriters, Protection and Indemnity Clubs,
training of crew etc.
The Board of Directors periodically reviews and assesses the adequacy
of the risk assessment and minimization procedures so that risks can be
assessed and minimized through well defined framework/ procedures.
(f) Internal Control Systems and their adequacy:
The Company has proper and effective internal control systems
commensurate with its size of operations in order to ensure that all
systems and procedures are functioning satisfactorily. Internal audit
function is carried out by the Chief Internal Auditor on a regular
basis.
The Audit Committee of the Board of Directors regularly reviews the
effectiveness and adequacy of the internal control systems to monitor
due and proper implementation thereof and for due compliance with
various applicable laws, accounting standards and regulatory
guidelines.
(g) Discussions on financial performance with respect to operational
performance:
The details of the financial performance of the Company have already
been dealt with in the earlier part of the report.
(h) Human Resources:
The relations between the employees and the Company remained cordial
throughout the year. The Company had 99 shore staff and 627 floating
staff employees as on 31 st March, 2008. The committed shore based
staff provides its prompt and efficient support and guidance to the
floating staff on a continuous basis, which helps to maintain effective
performance and operational efficiency at all times. The Company
continues to focus on the safety, training and development of the
employees.
The Company has initiated a major post-sea training programme for its
marine officers, where 1 521 man days of training was imparted. The
Company has expanded its trainee marine engineer (TME) and Deck Cadet
programme and currently trains 41 TMEs and Deck Cadets on its fleet.
This initiative will help the Company build a well qualified cadre of
experienced seafarers for its expanding fleet.
(i) Social Responsibility:
As a socially responsible corporate citizen, the Company continues to
support a wide spectrum of community initiatives through NGOs as well
as programmes for health, education and the environment. Amongst
others, the Company supports The Corbett Foundation, a charitable
organization founded and headed by our Chairman, Mr. Dilip D. Khatau,
works tirelessly amongst the poor and needy in Uttaranchal and Gujarat.
The Corbett Foundation consists of a group of dedicated men and women
who are committed to the conservation of wildlife and nature with the
objective that men and nature must co-exist in harmony.
Total foreign exchange earned and saved including deemed earnings of
the company for the year ended 31 st March, 2008 was Rs.8,324 million
and the foreign exchange used was Rs.6,5?3 million.
As required under Section 217C2AA) of the Companies Act, 1956, your
Directors confirm to the best of their knowledge and belief that:
i) in the preparation of the annual accounts, the applicable accounting
standards have been followed;
ii) the Directors have selected such accounting policies and applied
them consistently and made judgements and estimates that are reasonable
and prudent so as to give a true and fair view of the state of affairs
of the Company at the end of the financial year and of the profit or
loss of the Company for that period;
iii) the Directors have taken proper and sufficient care for the
maintenance of adequate accounting records in accordance with the
provisions of the Companies Act, 1 956 for safeguarding the assets of
the Company and for preventing and detecting fraud and other
irregularities; and
iv) the Directors have prepared the annual accounts on a going concern
basis.
As required under Section 212 of the Companies Act, 1 956, the audited
statements of account along with the report of Directors and Auditors
of VSC International Pte Ltd, Singapore, a wholly owned subsidiary of
the Company, for the year ended 31 st March, 2008 as also the statement
under the said section are attached to the Balance Sheet of the
Company. Consolidated accounts prepared in accordance with the
accounting standards issued by the Institute of Chartered Accountants
of India, are also attached.
As required by the Listing Agreement with Stock Exchanges on which
shares of the Company are listed, a Report on Corporate Governance
together with the certificate from the Auditors of the Company
regarding compliance with Corporate Governance is attached to this
report.
Mr. Charles Cayzer was appointed as a Director by the shareholders at
the Annual General Meeting held on 14th August, 20O7.
Mrs. Rina D. Khatau and Mr. Praveen Singh retire by rotation and being
eligible, offer themselves for re-appointment. Separate resolutions
are being proposed for their re-appointment.
The term of office of Mr. Arun Mehta, Vice Chairman St Managing
Director of the Company expires on 2nd October, 2O08. Your Directors
propose to re-appoint Mr.Arun Mehta as Vice Chairman & Managing
Director for a further period of five years commencing from 3rd
October, 2008. During Mr. Mehtas tenure, the Company has made
significant progress both in terms of performance and profitability and
consequently, your Directors feel that his continued association will
be beneficial to and in the interest of the Company and therefore, a
special resolution for his re-appointment is proposed for your
consideration.
By a resolution passed at the Thirty-second Annual General Meeting of
the Company held on 3rd September, 20O3, the shareholders had approved
the payment of commission to Non-Executive Directors of the Company,
which was effective for a period of five years, upto 31 st March, 2008.
As it is proposed to continue the payment of the said commission, a
special resolution for the same is proposed for your consideration.
You are requested to appoint Auditors of the Company and fix their
remuneration. The retiring Auditors Messrs Sorab S. Engineer & Co.
being eligible, offer themselves for re-appointment.
As required by Section 217C2A) of the Companies Act, 1956, read with
Companies (Particulars of Employees) Rules, 1975, as amended, the names
and other particulars of the employees are set out in the Annexure to
the Directors Report. However, as per the provisions of Section 21 9C1
)(b)(iv) of the Companies Act, 1 956, the Report and the Accounts are
being sent to all shareholders of the Company excluding the aforesaid
information. Any shareholder interested in obtaining such particulars
may write to the Vice President - Corporate Affairs, Secretarial &
Legal and Company Secretary at the registered office of the Company.
Your Directors express their thanks to all the officers of the Ministry
of Shipping, Road Transport and Highways, Directorate General of
Shipping, Ministry of Petroleum and Natural Gas and oil companies for
the valuable help and co-operation extended by them to the Company.
Your Directors also thank financial institutions and banks for their
continued support to the Company. Your Directors also thank the
shareholders of the Company for their sustained confidence reposed in
the Company and its management. Last but not the least, your Directors
express their deep appreciation for the sincere and hard work put in by
the floating as well as the shore based officers and staff of the
Company.
On behalf of the Board of Directors
DILIP D. KHATAU
Chairman
May 22, 2008
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