Low freight rates globally would continue to weigh on the bottomlines of Indian shippers, but the situation is unlikely to worsen further, says AR Ramakrishnan, Managing Director, Essar Shipping. In an interview with moneycontrol.com, he said his firm managed to stay profitable mainly due to long-term contracts with its customers.
Low freight rates globally would continue to weigh on the bottomlines of Indian shippers, but the situation is unlikely to worsen further, says AR Ramakrishnan, Managing Director, Essar Shipping. In an interview with moneycontrol.com, he said his firm managed to stay profitable mainly due to long-term contracts with its customers. Essar Shipping's net profit for the December quarter fell 63% as surplus capacity and dull international trade pressured freight rates.
Ramakrishnan expects container rates to be a bit more stable in future, on steady demand in the US as well as in manufacturing activities in emerging markets like China. Did you read: Expect boom on growth in India & China, says Essar's Ruia
While the logistics and sea-transport segments may not see a big rise in revenues near term, the company's oilfield-service arm is likely to maintain its strong performance on high probability of drilling contracts from global oil and gas companies.
Apart from a general slowdown in the sector, debt refinancing remains the next big challenge as banks were wary of lending to the sector, Ramakrishnan said.
Essar Shipping itself is looking to partly refinance its debt of Rs 5,500 crore.
Below is an edited excerpt of Ramakrishnan's interview to Moneycontrol.com
Q. Your third quarter numbers were sluggish; do you see things improving in the current quarter, especially in the crude oil transportation business?
Currently, the shipping industry is confronted with over supply of tonnage and the situation is likely to improve by 2013-end. Besides, pricing pressure may continue to remain on shipping freight rates for sometime. However, we have an integrated business model with a focus captive demand in transportation services, logistics and cargo handling infrastructure. Hence, a stronger performance in any of the segments helps compensate for a downturn in any other vertical.
Q. What is your outlook on the tanker market? Industry is hopeful that things will start looking up over the next few months?
Tanker rates are likely to inch up in the next few months, with new refineries going in for Latin American crude, involving long-haul shipments. With demand situation improving and capacity stabilising, market may improve going ahead.
Q. The Baltic index fell around 60% YoY. Do you see pricing pressure persisting due to oversupply?
The freight markets remained challenging during the quarter as the Baltic index fell sharply. Rates may remain depressed for some time until new ship deliveries ease out. However, our company policy to enter into long term charter agreements provides a natural hedge against the cyclical nature of the industry and ensures long-term visibility of revenues and profitability.
Q. Due to a conservative policy of signing long term contracts, you have minimal exposure to spot market rates. Will you stick to this policy?
Long-term contracts provide a natural hedge to spot market rates.
We are following the conservative policy of entering into long-term contracts with reputed global and domestic clients, thereby ensuring assured cash flows and long-term profitability, as well as hedging against spot market volatility. Most of our vessels have committed cargo contracts well into the next decade.
Q. Amongst logistics, sea transport and drilling business, prospects for which segment look promising in the medium term?
We are looking to consolidate our oil services business and are banking on success of our offshore oil rig, wild cat, and the launch of two new inland oil rigs. We had won $121 million contract from oil super-major ConocoPhillips in October, 2011 to drill eleven offshore wells on the Indonesian coast. ConocoPhillips is likely to extend the contract as the oil super-major is looking to drill some more wells at the site.
Q. You are looking to refinance your debt partly. Of the Rs 5,500 crore debt, how much will you convert into dollar denomination (debt) to ease interest cost?
We are looking to convert rupee loans worth Rs 700 crore into dollar loans and extension of tenure for dollar loans equivalent to Rs 500 crore by two to five years. Rupee loans come at a high interest rate extending from 11% to 14%. Loan conversion can help us bring down our interest cost.
Q. Do you endorse industry demand for launching dollar bond issue for the sector, as companies are highly leveraged and do not have any appetite to raise funds on their own.
There is a need for the government to allow dollar bond issue which will help companies renew ageing fleet. Even European banks have curtailed their shipping portfolio. If financial institutions are allowed to raise large sums of dollars, they could lend to shipping companies which are in expansion mode and are unable to access funds.