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Varun: Ditching offshore in favour of gas

Mumbai: Varun Shipping’s vice-chairman and managing director Yudhishthir Khatau, whose company has just come back, virtually from the dead, is in surprisingly upbeat form when Maritme CEO comes calling.

Right through the course of 2014, Varun has been in the news for all the wrong reasons. In early-March, three officers aboard the company’s LPG carrier Maharshi Vamadev, had to be rescued by India’s Coast Guard after their health condition became critical, following a hunger strike lasting several days.

The captain of the vessel said his crew had not been paid wages since September 2013. The vessel itself had been stranded off the coast of Mumbai since the beginning of the year.

Later the same month, the company lost its licence to operate ships after it failed to carry out mandatory drydocking of the vessels for safety surveys and pay six to eight months’ wage arrears to its crew.

The Directorate-General of Shipping (DGS), India’s maritime regulator, declared its Document of Compliance (DoC) null and void, and threatened to declare all vessels under its ownership/ management as unseaworthy. Suspension of the DoC led to automatic cancellation of the vessels’ insurance cover.

Varun, headquartered in Mumbai and listed on the Bombay Stock Exchange, then had a fleet of 18 ships, comprising 10 LPG carriers, three crude oil tankers and five anchor handling, towing and supply vessels (AHTSs) used to support offshore oil exploration activities.

“What really hit us hard was the sagging of freight rates in the tankers and offshore categories, though LPG remained fairly constant,” says Khatau.

“Offshore at its peak was earning $70,000 a day; in the trough, it was just $15,000 a day. The trough level was the same for tankers, which had earlier seen a peak of $45,000 a day. We ended up losing $40,000 per day.”

The pain was compounded by two issues – the short, tight loan profile of the ships, and the ban on having foreign crew on Indian flag vessels.

“The fundamental issue in shipping is matching your assets with your liabilities,” says Khatau. “Ships are very capital-intensive. In the international market, when you finance ships, especially when they are young, you get a 15-year loan profile. Sadly, in India, shipping is not considered infrastructure; and, as a result, most banks finance you with a seven-year profile.

When Varun did its projections in 2009, it thought the market might come down by 10%. “Nobody expected it to come down by 65-70%,” Khatau says.

The other problem at the time was that India did not allow foreign crew on an Indian ship.

To get around the problem, the company decided to restructure its business from the grass-roots level.  It created three Varuns – Varun Gas, for the LPG segment, which was retained in India; Varun Asia for the tankers and Varun Cyprus for the offshore vessels.

Varun put its offshore vessels into long-term charter in Brazil and Azerbaijan, and placed its three tankers under the Singapore flag.

The company then went to the banks and got them to restructure its debt. But the challenge it faced was working capital.

“We had ten vessels that were perfectly seaworthy, but needed immediate statutory drydocking; and to put a ship into drydock these days costs anything between $2m and $2.5m,” Khatau relates. This was money Varun simply did not have. A lengthy delay in paying wages ensued.

“Last year, we had revenues of Rs600m ($10m), every rupee of which was spent in wages payments,” he claims. “Including bank loans, our aggregate wage bill last year was Rs750m.”

The company also had a dialogue with banks and worked out a package with Dubai Drydocks World to get its gas carriers operational, all of which will be complete by the end of September.

The company has sold one gas carrier to Mumbai-based Mercator, and got rid of two offshore vessels. It has taken a conscious decision to eventually exit offshore.

“The critical mass regarding the number of vessels required to make money in this segment is large, and beyond our capabilities,” says Khatau. “If we have to divide our resources between offshore and gas, we are better off staying in the gas sector.”

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