Mumbai: During the course of the last six years that has seen the shipping industry pass through one of the worst recessions in living memory, India’s largest private sector shipowner, Great Eastern Shipping, has regularly churned out annual reports awash in black ink. There has been a diminution of profit, year-on-year, yes; a loss in any year, no.
“One major factor in our continued financial health was that we were never excessively leveraged. We never were in a position where we expanded beyond our means,” says Bharat Sheth, Great Eastern’s soft-spoken vice-chairman and managing director.
“A second reason was that we very swiftly divested a considerable chunk of our asset base. We had got rid of assets worth roughly $550-600m across the board by 2008. We sold crude oil tankers, dry bulk vessels and some offshore vessels, and reduced our capital commitment significantly.”
Sheth claims the company also had in the bag some good charters that had been fixed in better times – in 2007-08, just before the global financial meltdown.
“In addition, we approached some of the shipyards where we had placed newbuilding orders; and, at a price, cancelled those orders,” he says, adding that these quick “small haircuts” helped keep the company afloat.
Over the last couple of years, Great Eastern has gone back to the shipyards, and placed orders worth $400m which will add 450,000 dwt to the company’s 28-strong fleet.
Considering the size of its balance sheet, Sheth terms the company’s ordering as moderate. Around $200m will be used for six vessels, comprising five 81,000 dwt kamsarmax bulk carriers and one 50,000 dwt medium-range (MR) tanker. The remaining $200m will be spent on a newbuilding jack-up rig, ordered in 2012, and scheduled for delivery in February 2015.
A unique feature of this conservative outfit is the fact that it has always been conscious of the valuation of its assets. If one looks at the five dry bulk vessels it has ordered, it can be seen that its entry point was attractive.
“At those rates, our downside risk was pretty limited,” says Sheth. “Nobody can really anticipate the direction in which the market will move, so we concentrate on entering any sector where we will get trading returns, and also where we think the newbuilding cost of a similar asset can only go up in the future.”
Great Eastern’s offshore subsidiary Greatship – formed in 2006, shortly after Great Offshore, run by cousin Vijay Sheth, was spun off from the parent – today has 21 vessels in the water.
It is the performance of the subsidiary that has contributed heavily to the health of the parent’s balance-sheet – to the extent of 70% of the consolidated profit. 2012-13 may have been the best year in Greatship’s short history, with over 100% improvement in profit over the previous year, but even 2013-14 witnessed a compound growth of 70% in net profit, compared to 2012-13.
“Great Eastern pulled Rs 15-17bn ($250-280m) out of shipping in 2006, and invested it in oil and gas; and it is only fair that we have reaped the returns, to the extent of 25-28% per annum,” Sheth reveals.
For the foreseeable future, Sheth expects average earnings from shipping over a 12-month period to move in a narrow band with a 10-15% variance. Earnings from oil and gas, after peaking in 2007, are expected to remain either where they are now, or soften slightly.
“Eventually, this game is about how sensibly you allocate your capital,” he says. “This year, we have seen dry bulk values drop about 25%, product tankers sink 15-20%. From where we are positioned today, we would welcome a softening of the market, because we could then invest at the lower end of the cycle.” [19/09/14]