Risk Diversification Has Improved Earnings

Updated: Oct 13 2002, 05:30am hrs
Calm, yet powerful. Silent, yet strong, reads the cover of The Great Eastern Shipping Company Ltds (GE Shipping) annual report. With a fleet of 61 ships with dead weight tonnage (DWT) of 1.3 million, GE Shipping reported a net profit of Rs 207.50 crore on a turnover of Rs 1,173.01 crore for the year ended March 2002.

We try to find out more on the companys plans to navigate in a regime of low charter/freight rates. GE Shipping managing director Bharat Sheth spoke to Kailash Rajwadkar of The Financial Express on the current scenario. Excerpts:

What is your perception of the movement in freight rates in the tanker segment for the next two quarters What growth does the company foresee in its top and bottomline in the current fiscal over the previous year
Both the crude and product freight markets have witnessed a continuous declining trend over the last 12 months. However, the fall seems to have been arrested in recent weeks with freight rates looking stable albeit at weaker levels.

On the tanker supply side, significant net tonnage accretion is expected during the current year, as new building deliveries will outpace scrapping.

An improvement in the freight rates is expected contingent on winter demand, economic recovery, OPECs stand and political developments. These developments at the macro level will influence freight levels. Current tanker rates are substantially lower than last year and this will influence our tanker earnings.

Can you broadly elaborate on factors impacting freight markets
Freight rates are primarily dependent on two factors: absolute tonne demand (influenced by commodity demand) and more importantly tonne-mile demand (influenced by trade patterns). In the tanker segment, demand is influenced by crude oil and petroleum product requirements, OPECs stand on production levels, winter variations, political developments and world economic growth. The tonne-mile demand is influenced by activities by oil producing & exporting nations, location of refineries and consumption pattern.

In case of the dry bulk segment, the steel and grain trade primarily influences the demand. Additional demand for steel translates into demand for iron ore and coking coal, which together account for close to 45 per cent of total goods carried. World economic growth along with weather patterns tend to influence other dry bulk trade like grains.

With the freight markets down, is the company exploiting avenues like focussing more on its offshore division
Offshore business contributes around 20 per cent of the total revenues. Over the last few years, there has been a considerable growth in performance and revenues of this division. The division provides the whole spectrum of oil field services including port logistics and has emerged as a "one-stop shop" for offshore services.

The company evaluates business opportunities in both shipping and offshore divisions with the decision essentially being driven by future cash flow potential. Accordingly, adequate investments are made in both the divisions for either fleet expansion or modernisation.

With the dry bulk segment being less-remunerative, will the company consider exiting it and focus on the tanker, gas carriers and offshore assets
Shipping being an example of derived demand, global economic trend reflects on freight rates, resulting in earnings volatility. The freight rates are market-determined with ups and downs in earnings being an integral part of business cycles.

The complexities involved in operating dry bulk fleet are much less in terms of technicalities and adherence to stringent regulatory requirements as compared to that of tankers. Hence operating dry bulk ships is relatively easier and less expensive. Over the last few years, the company has nurtured a good team of professionals that operate the dry bulk vessels. Apart from this, dry bulk earnings help in diversifying the shipping risks and GE Shipping does not intend to exit from this business.

GE Shipping has focussed itself as an energy transportation service provider. What are the key benefits
We have focussed our abilities to operate in businesses with relatively high entry barriers and where markets differentiate between a good quality operator and average quality operator.

Our endeavour is to provide logistics support in energy transportation with a difference.

This, in fact, will get us brand valuation. As charterers are getting more and more concerned over the safety of their cargo and with stricter norms being imposed, average quality operators will tend to get marginalised.

We strongly perceive that shipping is more effort-related than mere transportation of commodities. Hence, service standards and impeccable safety record will command a preference in time to come.

GE Shipping has been outperforming financially even in times of falling freight rates. What is the single critical factor for this performance
Its all about extracting value through risk diversification. Broadly we operate in two sectors - shipping and offshore services, with a presence in domestic and international markets.

We own and operate a diversified fleet - in shipping we have crude, product, gas and dry bulk carriers. Similarly in offshore we have rigs, anchor handlers, supply boats, construction barge and are also into port support services.

Apart from the asset profile, we follow a judicious mix of time and spot charters. We have also capitalised on business opportunities by in-chartering vessels. This enables orchestrating our asset base to generate improved earnings.

The high-cost debt was substituted with low-cost debt, resulting in lower interest cost during the year ended March 2002. How far is the interest cost expected to come down in the current year
The company continues to replace its high-cost borrowings with low-cost debt. Substantial portion of our debt is linked to LIBOR. Softening of interest rates globally have proved advantageous to the company.

With the SCI disinvestment being postponed time and again under one pretext or the other, how does the company plan to utilise its funds in the short term Will it look at another buy-back substantiated with its strong cash flow
Currently, we have two Aframax and two product tankers on order with deliveries expected at various dates between January 2003 and January 2004. As of now, decision on any fresh investment / fund allocation is in abeyance pending the outcome of the disinvestment of SCI. In line with the global trend among leading shipping companies, the company has always maintained a comfortable cash balance to capitalise on business opportunities in the short term and we would continue to do so.

Can you lay the road map for your company
Within shipping we intend to increase our exposure in the tanker segment. Our ships are trading internationally including the US.

In the offshore business, we have a strong domestic presence catering to ONGC and other private domestic and international E&P operators. Our assets have been deployed in the challenging conditions of the North Sea and have a presence in the Middle East market as well. Our aim is to diversify the client base and become a preferred service provider from India in all class of assets that we operate in.