Great Eastern Shipping : 1QFY2023 Earnings Call Transcripts

"The Great Eastern Shipping Company Limited Q1

FY23 Earnings Conference Call"

August 1, 2022

MANAGEMENT MR. BHARAT SHETH - DEPUTY CHAIRMAN AND

MANAGING DIRECTOR, THE GREAT EASTERN

SHIPPING COMPANY LIMITED

MR. G. SHIVAKUMAR - EXECUTIVE DIRECTOR AND

CHIEF FINANCIAL OFFICER, THE GREAT EASTERN

SHIPPING COMPANY LIMITED

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The Great Eastern Shipping Company Limited

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Moderator:Good evening, ladies and gentlemen. Thank you for standing by. Welcome to GE Shipping Earnings Call on the declaration of its financial results for the quarter ended June 30, 2022. At this moment, all participants are in the listen only mode. Later, we will conduct a question-and- answer session. At that time, if you have a question, please click on the Q&A tab to ask a live question. I now handover the conference to Mr. Shivakumar - Executive Director and CFO at the Great Eastern Shipping Company Limited to start the proceedings. Thank you, and over to you, sir.

G. Shivakumar: Thank you. Good afternoon, everyone. And welcome to the conference call to discuss the results for Q1 FY22-23. Let's run through the presentation first with some basic information. And then of course, we are very happy to have a lively discussion with all of you with your Q&A.

First of all, forward looking statement, we don't know what the markets are likely to be like. We are not giving guidance on markets. So, please take it in that spirit.

So, let's look at the results for Q1 FY23. Compared to last year, which is the corresponding quarter and the immediate preceding quarter, our profitability has been much, much higher. And we can see that when we look at the TCYs, we'll also look at the reasons why we made so much more profit than the previous quarters. So, let's move forward. I'm sure you would have had a chance to look at these numbers already. Normalized, you would have seen the numbers which are there in our presentation. So, they were a little better than our reported numbers. Still multiple of what we did in the same quarter in the previous year.

Important and significant factor is the change in the net asset value from March, so that's just a quarter ago, our net asset value was about Rs. 618 on a standalone basis. It has now gone up to Rs. 732. We'll also look at the journey of how it got there within that 1 quarter. Key financial ratios. EPS on a normalized basis, so the EPS is steady Rs. 32 on a standalone basis and Rs. 35 on a consolidated basis.

Most important and we keep saying this over and over again, shipping is a very strong cash flow business. So, in profitable years, it produces a huge amount of cash flow. So, we have in the last quarter earned Rs. 48 of cash profit per share. Management commentary, this is something that we thought we should put new, just to give the highlights and the main takeaways. So, all 4 shipping sectors have done very well in Q1. You would have seen it in the TCYs as well that we earned, and having a large part of our fleet in the spot market, which helped us to take advantage of the strength in the markets and therefore earn superior TCYs. Strong cash flows from the business as I already mentioned and coupled with an increase in asset values. So, ship prices have gone up significantly during the quarter. It resulted in a significant increase in net asset value.

A long period of under investment in oil and gas production seems to have caught up with the oil market, and there's much more activity coming up in certain areas and that's boosting demand for rigs and vessels. This makes us believe that we are possibly past the worst of the offshore

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The Great Eastern Shipping Company Limited

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market. But let's see how it goes in the next year or two. Importantly, we must recognize that there are recessionary pressures building up, thanks to the increase in inflation and central banks moving to increase interest rates. And the impact of this is quite difficult to assess, as we stand today.

Looking at the time charter yields and this is what has driven our performance and we've rarely had this kind of performance where all ship categories have earned more than $25,000 per day on average during the quarter. This includes whatever part of the fleet was on time charter or on the spot market. So, across the board, all 4 sectors have done in excess of $25,000 per day in the last quarter. And you can see how it compares to the previous quarter which is Q4 FY22 and Q1 FY22, which is the corresponding quarter in the previous year. And huge outperformance has come from the crude and product carriers, which have doubled or more their earnings of the previous periods. Looking at what led to the changes in standalone net asset value, we had the Rs. 618 going to Rs. 732, to Rs. 41 of that change came from the cash profit per share, 79 rupees came from the increase in fleet value. This also includes the impact of the depreciation of the INR versus the dollar as we have mentioned many times. Though this does not come into our P&L, our assets are all priced in dollars and our earnings also are in dollars. When the rupee depreciates, or assets move up in value in rupee terms, and that's part of the impact which has gone in here in the fleet value. Then, of course, we paid out a dividend of Rs. 5.40 in the previous quarter, and that's reduced the NAV to that extent. This is the highest standalone NAV since our inception. And over the last 5 years, this has moved at a CAGR of 16%, again very high numbers. And we're not saying that this is something which is going to continue forever, but it's just the performance which has happened over this period. It's also a testament to the way that we have done investments over this period.

A quick word on the buyback:

We closed the buyback in early July, when the 6-month period was completed. We managed to do just under 60% of the buyback, that of the amount that we had targeted for the buyback. So, we spent Rs. 132 crore, and we also spent about Rs. 30 crore on the buyback tax. So, total of about Rs. 160 crore to Rs. 163 crore at an average price of Rs. 316 per share plus the tax. So, that's completed now.

Let's look at what happened to the shipping markets in the last quarter. First the tanker markets. You will see the tables at the bottom which give the YTD this year than previous year. And you can see the few 100% change because the markets were very weak. And they have turned around largely as a result of the conflict in Europe, which has disrupted the normal functioning of the market and by bringing in inefficiencies into it. So, let's look at the reasons. And what happens when you have these inefficiencies which come into the supply chain is that the rates just take off and when the market is otherwise quite balanced, all it takes is a couple of percentage points change in the demand supply balance which should take rate from $10,000 to $25,000 a day. We've mentioned this in the past and you can see how it played out in the last quarter. The recovery in the spot earnings in product tankers was mainly due to supply tightness in the

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Atlantic markets, which meant that you needed long haul carriage of refined products from the east to the west, which took up more product tankers. Refining margins were very high, and therefore, refineries were running at close to full capacity, which also results in improved demand for tankers.

While the crude and product trade actually remained 4% and 1% below the pre COVID levels, so we've still not reached the levels of 2019. We hope that this gap will get made up soon; again, this is subject to how the macroeconomics pans out whether we enter a recession, etc. Another factor which helped the market was increased congestion and something called the stationary fleet, and again ships waiting for cargoes or possibly waiting and one of the theories which is going around is, ships which are waiting to transship Russian oil, either crude or refined products has tightened the supply of ships. The dry bulk market - Capes performed significantly worse than in the previous year. So, versus $31,000, they had brought $21,000. Again, I must clarify, these are market averages. These are not our averages. These are market spot averages. So, they were significantly worse, while the Supramaxes actually did a little bit better than in the previous year and this has been a feature of the last couple of quarters where the smaller size vessels have done much better than Capesize. Again, iron ore and coal movement not being very strong in fact which is impacting more larger vessels. Our ships of course are not on the spot market, our ships are all on Time Charters.

Looking at fleet supply and we've spoken about the order book before:

We are at very low levels of the order book. We thought we'd put it in draft form to represent how low we are. So, the tanker order book is just about 5%. When I say tankers, I'm talking about crude and product tankers. The dry bulk order book is about 7%. In all of these, the median order book over the last 20 plus years that we have data for has been between 15% and 20%. So, we are very, very low by historical standards.

Asset prices have done well. As you would expect, crude and product tankers prices have gone up significantly in the last 3 to 4 months. Dry bulk continues to remain strong while LPG also continues to be strong, marginally going up during the quarter. There's not been much scrapping. In the first half of the year, we had less than 1% scrapping in crude and product tankers. Again markets have been reasonably strong for crude and product tankers, so no reason to rush into scrapping. And dry bulk, of course, the market was very strong through the period. So, very little scrapping has happened.

Coming to the offshore market:

This is standard data. Global utilization of jack-ups has gone up to just about 70% now. So, we're starting to get into a tightening kind of situation. Quite a few rigs which are cold stacked for more than 3 years, which is 10% of the fleet, that possibly may not come back into the market. That's something for us to see as the market strengthens. We have seen lots of new inquiries for contracts, lots of rigs changing hands, especially jack up rigs for contracts in the Middle East.

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Between Saudi Aramco and Abu Dhabi have been pulling in many more rigs. We've seen asset prices for rigs move up 50%-70%, sometimes even close to 100% over the last 6 months or so. Even the vessels market, especially for the more advanced vessels, in the international markets have improved significantly. We've had pricing increases of in the international markets again between 40% and 100% over the period between beginning of '22 and now. And that's what really makes us believe that the worst is behind us. This I mentioned again, global utilizations

	have come up to just under 70% for jack-ups.
	What is our situation? We have no rigs coming up for pricing till middle of next year. So, the rig
	comes off contract in the middle of next year, that's calendar '23. However, the pricing of this
	rig will happen sometime in the next 6 months. Hopefully, there will be tenders out, we will bid
	into those tenders. And hopefully, we will be able to price that rig and get that contract. Apart
	from that, we have 6 vessels coming up for repricing in the rest of FY '23.
	Again, this is a slide that we show all the time. So, we levered up, we've levered down now. We
	are down as of June'22 about $75 million in net debt. Now we are down to even lower numbers.
	And we are in a position to do CapEx at the right prices. Share price to consolidated NAV, this
	is as of Friday. So, we're still at about 0.6 price to NAV. Initiatives on environment. These other
	initiatives, we've mentioned in the past. The first one is that we have reduced our annual
	emissions by about 40,000 tons between FY19 and FY22 by investing in various energy saving
	technologies. You can't do much to a ship because it's the same ship. So, you can only improve
	on the margin by maybe 2% to 6%. This saving we're talking about is overall about 4% for the
	fleet. We tried to fit various energy saving devices onto our vessels so that we can save on fuel
	consumption and therefore reduce our carbon emissions. So, that's a constant endeavor that we
	do. We use the best quality of paint to ensure that friction when the ship is sailing is minimized.
	We're always looking at new things that we can do to reduce the fuel consumption. Finally, this
	is the story of Great Eastern Shipping which is in our coffee table book. The picture on the left
	is our first office, and this is our current office. You can read our story of the last 7 decades in
	the coffee table book, which is on our website. And we're very proud to share that with you.
	That brings me to the end of this presentation. And now we're very happy to take questions. Mr.
	Bharat Sheth who is the Deputy Chairman and Managing Director is also here, and we'll be
	happy to take your questions.
Moderator:	We will now begin the question-and-answer session. The first question is from the line of Naman
	Bhansali from Perpetuity Ventures. Please go ahead.
Naman Bhansali:	So, my first question is that we've seen a constantly improving NAV for GE shipping, and a
	significant part of it comes from high asset prices. So, what is the sustainable number for NAV
	if we assume that the asset prices fall?
G. Shivakumar:	So, there is no sustainable number for NAV. So, it depends on the extent of the asset price fall.
	So, I don't have a forecast that we can do for asset prices really. So, let's take a sort of thumb

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