Ministry cries halt to SCI expansion plans

Written by Praveen Kumar Singh | Praveen Kumar Singh | Nikita Upadhyay | Nikita Upadhyay | New Delhi/Mumbai | Updated: Oct 7 2011, 10:52am hrs
The shipping ministry has asked state-owned Shipping Corporation of India (SCI) to scrap plans to expand fleet, diversify into shipbuilding and operate ports after the company posted two successive quarters of losses. Shipping minister GK Vasan has told the navaratna company to operate with the existing fleet and focus on its core business of operating ships and not purchase new vessels. Analysts, however, say the decision will hinder the company's competitiveness once the market improves.

There is also a view that SCI could go the Air India way due to the constraints imposed, although those at the helm of the company and its administrative ministry sought to rebut the perception.

Vasan, who met senior SCI management last month, was concerned about the deteriorating profitability of the company. Sources told FE that the minister had also asked the firm to exercise caution on forging new joint ventures (JVs). SCI has a JV with state-owned steel maker Steel Authority of India for handling the latters coal imports, among several other JVs. Expecting greater business opportunity in Southeast Asia and Africa, the shipping line was considering joint ventures with firms in Indonesia and South Africa.

SCI has already ordered 29 vessels to be delivered by 2012 to the existing fleet of 81 vessels, entailing an investment of over R6,000 crore.

The company was firming up plans to place new orders of 26 ships this year to reach closer to the target of contracting 62 vessels between 2007-08 and 2011-12 at a cost of about Rs 13,500 crore. With the new ships coming in, the SCI fleet's average age will come down from the current 15 years to 13 years.

SCI also planned to own a minority stake in a shipyard to build ships on its own and operate port terminals to become an integrated shipping company.

The directions have come as freight rates are falling due to low demand of shipping services. Baltic Dry Index, which tracks worldwide international shipping prices of various moving dry bulk cargo, has fallen 32% in last 11 months. SCI has registered net loss of close to Rs 6 crore each in last two quarters.

Shipping ministry's financial adviser Vijay Chhibber has also circulated an internal note, calling for a stop on expansion plans fearing a repeat of Air India, which ordered more aircraft than it needed and is on the verge of financial collapse.

We keep reviewing our long-term plans every year and every quarter and keep aligning them with the market conditions and resource availability. The utmost thing that is kept in our mind is the viability of the company from short as well as long-term perspectives, SCI director (finance) BK Mandal said. SCI's debt equity ratio is only 0.66% as on March 31, 2011, which is pretty low compared to any shipping company's balance sheet, he added. SCI had cash reserves of Rs 2,467 crore and debt of Rs 4,715 crore at the end of 2010-11.

Shipping secretary K Mohandas said there was no reason to panic. Depreciation could have some impact on the financials as these are costly assets, he said. He added that SCI would renew plans as and when the industry gets back on its feet. Comparing the company with Air India would be criminal. Internally, we write such critical notes but there is absolutely no concern about SCI's financials. It has had a track record of sound performance and there is no reason for panic, Mohandas said.

Experts say the company is building on its strengths and preparing for the future. Deloitte India senior director Hemant Bhattbhatt said: Being a PSU, SCI has to go through a procedure even for vessel acquisition and hence is incapable of moving quickly according to market dynamics as compared to other private shipping companies. In the short term, the depreciation cost will hit its books and for the next one or two years, its financials will look stretched. However, it is building intrinsic strength in terms of creating capacity and readying for the future. The bare minimum that the government can do to help SCI is to patronise its capacity with trade needs of other PSUs and government industries.