SCI sees improvement in tanker segment; recovery in mid-'13

Shipping Corporation of India (SCI) Chairman S Hajara sees an improvement in the tanker segment, however, he says the demand-supply equilibrium is still remains very skewed. State-run shipping company reported a net profit of Rs 297.26 crore for the quarter ended September 30, 2012. It had reported a net loss of Rs 140.60 crore for same period last year.

Hajara expects to see some recovery in the company's liner and bulk segment, which reported losses on the EBIT side, by the middle of 2013. He plans to phase out seven offshore vessels and two bulk carriers. SCI will take delivery of 19 ships by FY14. "The demand-supply balance to be against ship owners till the second half of the year," he told CNBC-TV18 in an interview.    SCI's current debt stands at Rs 6000 crore. Below is the edited transcript of his interview with CNBC-TV 18 Q: Both your key segments, the liner as well as on the bulk, have reported losses on the EBITD side. Can we expect an improvement or a turnaround at an operating level? A: I really don't think that we can hope for any improvement in any of the segments except in the tanker segment. That is just because of the winter effect. We can see some marginal improvements. Therefore in the short term the results could be slightly better. The entire demand-supply equilibrium is still very much skewed against the ship owners and this will remain at least till well the second half of 2013. So, we cannot really expect very much of an improvement in the operating results. As far as going forward is concerned, at least for the next immediate quarters. Q: You are basically saying that 12 months from now would be the first time when you can see the demand supply balance shifting. In your own case you are getting some ships that will be pressed into services and you are taking delivery of ships that were ordered earlier. So, will even FY14 continue to mean lower margins for you? A: It will not be correct on my part to talk specifically about SCI margins and results going forward because obviously we have not shared that with the stock exchange. As per the Sebi guidelines, I obviously cannot give you any specific answer to that. What I am talking about is basically the global shipping scenario. As far as the global shipping scenario is concerned – as I mentioned that while in the immediate future because of the winter affect, what I understand is that the winter in west is supposed to be very severe. This will hopefully have some positive effects on the tanker market. But, other than that as far as the shipping segments are concerned for the next few months, I don't see any basic fundamental change. Therefore I don’t think there can be very much of a hope for a turnaround of the shipping industry _PAGEBREAK_ Q: You are in a very public platform, stock exchanges and all your investors are listening to you. Can you give us some broad direction on when margins can improve for your company? A: No that’s not the understanding that I have. Before I share it with anyone, I have to first officially communicate to stock exchange. As far as SCIs top and bottom line is concerned, I am not prepared to answer anything going forward. I can only answer about the previous quarter, the analysis of the same. I am fully prepared to talk about the shipping scenario in general, as far as the future is concerned. Q: Can you tell us how many ships you are taking delivery in the next 12 months? A: Totally we have 19 ships on order which will all be delivered by 2014. I think by this financial year we are expecting another five ships to be delivered, most of them will be in 2013-2014. Four- five of them will be in the 2014-2015 financial year. Q: Will this increase the total number of ships by 19? Or will you be also phasing-out some ships in the same period? A: Yes, definitely we will be phasing-out. I think in all we expect to phase-out quite a few of our offshore support vessels which ofcourse in terms of derivatives nothing. But we are likely to phase out as many as 6-7 of the offshore support vessels within the period of next one to one and a half years. Other than that I think there will be just another two vessels and two bulk carriers which are likely to be scrapped. Otherwise most of our vessels will continue to run for quite a few years. Q: We understand that pending capex of the company is USD 800 million. To fund this would there be an element of debt, have you raised it? Once you do that what would the debt on the books stand at? A: I think basically our debt equity ratio is still under 1:1. The total debt will be somewhere in the region of Rs 6000 crore or thereabout. For every project we will be raising debt. Earlier almost all the projects used to be funded in the ratio of 80:20, 80 percent debt and 20 percent equity. But, more over we find it difficult to raise debts upto 80 percent. The ship finances have now become wary because of various difficulties with the shipping lines to fund as much as 80 percent. So, maybe going forward we will have to compromise. We will have to take debts only to the extent of 70 percent. Otherwise every project will be debt driven. We will have, maximum 30 percent of equity. Q: Since you have so many ships and vessels you are looking to order, that means your debt would be going up. Any indication on where the debt would stand at the end of the year from the current Rs 6,000 crore? A: Basically, it will only go up to a limited extent. After all most of the initial payments for any orders we pay through our equity. As far as debt is concerned while taking delivery a large portion of that is funded by debts. Even going forward we do not expect our debt equity ratio to go up beyond 1:1. _PAGEBREAK_ Q: Let me cling to that ray of hope that you have indicated, that in the next 12 months perhaps the demand-supply balance in the global markets will stop being too harmful for ship owners, what are you basing this on that most of the ships ordered earlier in boom years will have been delivered? Or are you basing this on a hope that global trade will pick-up? A: No. You are absolutely right. The former is the case. At one time we had a situation where in terms of capacity 50-55 percent of the capacity was on order in the dry bulk and container segment. About 35 percent of the tanker capacity was on order. Today the situation is that below 20 percent of the total capacity is on order vis-à-vis dry bulk and containerized segment, whereas in the tanker just about 12 percent of the total capacity is on order. So, definitely the order book situation has become much more manageable. As you know 2010 was the historic high for ship deliveries. 2011 was closely following that. 2012 also will be closing following 2011. But as far as 2013 is concerned, the deliveries will substantially come down vis-à-vis 2010-2011 and 2012. So, that is what we are hoping, that definitely the growth rate in demand will more or less match the growth rate in supply. In certain segments as a matter of fact growth rate in demand should surpass the growth rate in supply. Q: Do you expect a further reduction in the freight rates because you spoke about the demand supply situation being mismatch? A: Yes it is mismatch now and I don't expect any further reduction. As far as tanker market is concerned in the immediate future, we do expect that to go up because of the winter effect. As far as dry bulk is concerned BDI has been more or less steady. I think today's BDI is 1024. It has remained steady over the last few weeks atleast. It has witnessed some ups and downs, but overall the level has remained the same. Going forward we expect also in both dry bulk and containerised segment rates will not come down. In the containerised segment hopefully it will slightly go up, not very much. For dry bulk our hope is that it will remain steady in the immediate future. Q: In which areas geographically are you seeing an improvement in demand? A: The improvement can only take place in the immediate future in intra Asia market. We do hope that the intra Asia trade will improve. This is something which I am going to say now which applies to almost any industry. The real boom going forward over the next few decades should actually come from Africa because there the base is absolutely low. So, the growth rate which can be achieved can be really good, provided political stability comes in Africa. Q: You spoke about a recovery taking place in the second half of next fiscal year. Would the recovery be sufficient for the company to start making a profit in FY14? Or will it not be to that extent and FY14 as well will be a loss making year for SCI? A: I will not be able to give you any projection on profit and loss on SCI. But, maybe because of the accounting standards, definitely SCI has come back to profit even in the last quarter. We have declared a profit of Rs 297crore. Q: At an EBIT level do you think that you turned around the corner in FY14? A: I hope so, but then again I will not be able to give you any specific projection.