Great Eastern Shipping : 1QFY2025 Earnings Call Transcripts

GESCO-Internal Document

"The Great Eastern Shipping Limited

Q1 FY25 Results Conference Call"

August 01, 2024

MANAGEMENT: MR. G. SHIVAKUMAR - EXECUTIVE DIRECTOR AND CHIEF FINANCIAL OFFICER - THE GREAT EASTERN SHIPPING COMPANY LIMITED

MR. RAHUL SHETH - MANAGER - THE GREAT EASTERN SHIPPING COMPANY LIMITED

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August 01, 2024

Moderator:Good evening ladies and gentlemen. Thank you for standing by. Welcome to GE Shipping Earnings Call on declaration of its financial results for the quarter ended June 30, 2024. At this moment all participant are in listen-only mode, later we will conduct a question and answer session.

I now hand over the conference to Mr. G. Shivakumar, Executive Director and Chief Financial Officer at The Great Eastern Shipping Company Limited to start the proceedings. Over to you, sir.

G. Shivakumar:Thank you, Yashashri. Good afternoon, everyone, and thank you for joining us for this conference call to discuss our Q1 results and the markets. So let's go through the presentation first, and then we'll be happy to answer questions. I have Mr. Rahul Sheth here with me, who works with the MD very closely, and we will be happy to answer your questions. First disclaimer, the usual one, we are not giving projections, projections of earnings. We do not intend to give projections of earnings, so please don't take these as earnings guidance.

So let's go through the highlights. First of all, we had a net profit of INR812 crores on a consolidated basis, significant improvement from Q1 of FY '24. Our consolidated net asset value moved up to INR1,464 per share as on 30th of June and we declared an interim dividend of INR9 per share. This is our tenth consecutive quarterly dividend. We have now paid about INR1,100 crores in dividends over the last 2.5 years.

The reported results, I won't go into it much. You would have seen these results and if you have any questions on that, we'll be happy to take them. We had a net profit on a stand-alone basis of INR668 crores and on a consolidated basis of INR812 crores. We show usually the normalized financials, which is after stripping out the effect of the derivatives and the currency impact because that used to have a very significant impact on our results. So the net profit after tax for stand-alone was INR677 crores and consolidated was INR817 crores.

We mentioned below our net asset value per share on a stand-alone basis, our NAV per share is INR1,181, up from INR1,127 in March, so within the 3-month period. We won't go through these ratios, that's the EPS history. This is broadly how the markets have done -- how our ships have performed. Crude tankers were slightly weaker than Q4 and then Q1 of the previous year. So $46,000 versus about $53,000 in Q4 and Q1 last year. Product tankers were around the same levels as in Q4 and much stronger than in Q1 of last year. Again, this is because mainly due to the Red Sea effect, where the ton mile increase for product tankers was very significant because of the rerouting around the Cape of Good book rather than through the Red Sea.

LPG carriers were around the same levels as in the previous quarter. but significantly higher than in Q1 of last year. Again, all of our vessels are on time charter. They have got fixed on new time charters at significantly higher levels than they were earlier. And dry bulk, again, was higher than it was in both the previous quarter and the corresponding quarter of last year. This is reconciliation of the change in net asset value between June '23 and June '24, we had a cash profit of INR200 per share. And so most of our accrual in net asset value has come from cash flows. And we emphasize this every quarter. because the understanding of net asset value is that

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it is a mark-to-market gain. In this case, the INR200 increase has come from actual cash profit, some of which has, of course, gone out as dividends already to the shareholders. But the mark- to-market portion of this gain is very minimal. It's only INR19 per share. In -- over the last years 5 years -- 5 years and 1 quarter, the NAV has gone up from INR374 to INR1,181, which is a CAGR of 24%.

On a consolidated basis, also there is a significant amount of cash profit. So the accrual has been about INR260 per share, of which INR248 has come from cash profits. And about INR50 has come from change in fleet value, and this is on the offshore side.

Let's look at the shipping markets. What's been happening with shipping markets. We've already discussed the TCY that our ships earned. This is what the broad market data is. So this is not what our ships earned, but this is based on broker reports on market earnings. So you can see that the Suezmax, which is crude tankers have earned somewhat less than in the same quarter of the previous year, about 11% lower, while the MR tankers have earned about 26% higher than they earned in the same period last year.

Now let's look at why this happened? Crude tanker earnings were softer year-on-year. And the big factor was Chinese crude imports, which has dropped by close to 1 million barrels a day. This is, again, April to June over April to June last year. Refinery margins have been weak, and that continues till today. So that was probably the reason for the crude tanker earnings being softer year-on-year. Product tanker earnings, as I mentioned, got a tonne-mile boost from the conflict in the Red Sea. And so while both seaborne crude trade and product trade declined by 2% and 1%, respectively, the product trade had the advantage of having a tonne-mile boost. And so the market actually tightened versus a year ago. Supply hasn't been much. There's not been much deliveries either last year or this year. So the fleet growth was only about 1% to 2%.

Asset prices continue to be strong as a result of the strong earnings. The order book has been building up in the last 6 months or so. So crude tankers, we have seen the order book bottoming out at about 3% to 4%. That's now at 8% -- a little over 8% and product tankers, which were in the low -- in the mid- to high single digits are now at 17% of the fleet.

In dry bulk, we saw the markets being stronger than they were in the last year. both for Capesizes and for the smaller sizes. Here, we have taken the Supramax as an indicator. And what led to the strength, basically, we had Chinese iron ore imports going up. we had Chinese coal imports going up as well. While Chinese steel consumption apparently has not been going up much. Iron ore imports have gone into inventories, inventories at ports which, of course, is borrowing from future demand potentially.

And we've also had strong steel exports from China to compensate for the lack of demand domestically. Coal imports have gone up because they had a hydropower issue, but this is now starting to reverse. Red Sea disruption continued to support the drybulk market in a small way. Again, the biggest impact of the Red Sea disruption was in the product tanker sector, and the other sectors had only small impact. In fact, in crude, it might have had a small negative effect as well. The bulk fleet grew by about 3%, and the order book is just under 10%.

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Looking at LPG, the trade declined marginally -- but still U.S. exports continue to gain market share. The spot rates have come off very significantly. So in the same quarter of last year, they were at $75,000 a day for a VLGC while they've come down to just over $50,000 a day. again, very healthy levels even at these numbers. But again, our ships are not on the spot market. We are operating on time charters. Fleet growth has been very, very strong, 12% year-on-year for the VLGC fleet.

The one factor which gave a boost to VLGC earnings about 6 months ago was the Panama Canal disruption, where due to a shortage of water, the Panama Canal restricted ships going through to -- they went down, I think, to 20 ships per day passing through the Panama Canal from the peak, which was about 32 to 34. They have come back now to 34 ships. They propose to take it back up to 36 ships. So that has entirely reversed now. VLGC asset prices continue to be at record levels. These are even higher than we had seen in the super cycle of 2004 to '08. And the VLGC order book, of course, is very high. It's at 25%.

Looking at the fleet supply situation, the order book, I've mentioned the order book already, and you see the gas carriers at almost 25% order book. but it's good to keep these numbers in perspective as well. A large part of the order book is tail ended, the deliveries are tail ended, so there's very little delivery actually happening in 2024 and '25. So if you see the crude tanker order book, which is at a little over 8%, only about 2% is being delivered in the next 18 months. In the product tanker order book, which is about 17% plus, about 7% is being delivered within the next 18 months. And if you look at the dry bulk order book, about half the order book, which is about 4.8% is being delivered within the next 18 months.

LPG, 20% is being delivered in 2026 or later and only 5% within the next 18 months. Scrapping, of course, with the strong freight markets, scrapping continues to be very low to non-existent, and this is resulting in a build-up of a scrapping overhang. That is ships which under normal circumstances or under weaker markets would be scrapped but are not being scrapped and because the earnings are so high. So if you just look at -- we made a grid on 2 axis. The y-axis is the ageing fleet where we have defined the ageing fleet has 25 years and above for LPG ships and 20 years and above for the other kinds of ships.

And you just have to compare that. So if you look at crude tankers, for instance, the ageing fleet is more than 15%, which is aged more than 20 years, while the order book is at only about 8%. In dry bulk carriers, it's about 10% old ships versus 10% order book. In product tankers, also it's about 15% old ships versus about 17% order book. In LPG, of course, the order book is very high, and the percentage of old ships is much lower at only around 9%.

Looking at asset price movements, as one would expect, asset prices are high because of the strong markets. In fact, dry bulk asset prices have been going up despite the markets being nowhere near as strong as in tankers, but money is chasing good ships. Looking at the business in great ship, there's a gradual improvement in utilization internationally. We, of course, had the event with Saudi Aramco a few months ago, where they did a few cancellations. Now this is a fleet supply, and we've had this old fleet for a long time now, which constitutes about 1/3 of the rig fleet and about 1/5 of the PSV and AHTSV fleet.

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	Let's look at our own contracting. We have 2 rigs coming off contract in the second half of FY
	'25, which is -- both of which are working on 3-year contracts and will come off after the
	monsoon. So somewhere around October and November, we will have them coming off
	contracts. We had bid both of these into tenders in India for 3-year contracts. Those tenders seem
	to have been kept in abeyance and you could even say they have been cancelled. So we await
	further news on new tenders coming out. In the meantime, we are also looking at other options,
	including short-term contracts with other customers.
	In terms of vessels, we have 5 vessels coming up for repricing in the next 3 months itself. And
	we will see -- typically, repricing have been happening at higher rates than the previous
	contracts. The debt repayment schedule for great ship is that they have a very steady repayment
	schedule. Now they have done a refinancing of their debtt, and this is to be paid over the next 3
	to 4 years.
	Looking at the financials, and this is again one of our standard slides. This is Great Eastern's
	stand-alone. We went up to $360 million of net debt. We are now down to net cash of $350
	million. There is a $700 million swing in the last 5 years. So we peaked in March 2019. And so
	in the last 5 years, we've had this $700 million swing. And remember that this is after paying out
	dividends over this period of about $160 million to $170 million.
	And this is, again, a chart of share price to consolidated net asset value. We have now moved
	close to the consolidated net asset value. This is the details of our CSR activity. We have
	partnered with 53 NGOs since 2015 -- mainly in the areas of education, health and livelihoods
	and we are proud of the activities that we have done here. One of them is somewhat in the newss
	these days, Olympic GoldQuest, with whom we've been associated for quite some time.
	That brings me to the end of the presentation, and we welcome questions from you.
Moderator:	We have a first question from Rajesh Khattar, an individual investor.
Rajesh Khattar:	You had formed a subsidiary in Gift City, I think, a quarter ago. So what business do you intend
	to do in this subsidiary? Can you give some details on that?
G. Shivakumar:	Yes, I'll ask Rahul to take that. Rahul?
Rahul Sheth:	Yes. So we just set up this subsidiary. The purpose of this was as everyone is aware that the
	government has given a lot of benefits to set up companies in Gift City and the main intention
	of that company is to conduct in-chartering activities at the moment. We currently have 2 ships
	in-chartered.
Rajesh Khattar:	Okay. So you plan to expand into this line of business significantly over the next few years?
Rahul Sheth:	So we will have to see how this develops. At the moment, we've just made a small start by taking
	2 ships in. And this is a direct derivative of our existing business because when you are buying
	ships to just give an example, if I buy a ship, which is 15 years old and she has 5 years of life
	left. If I in-charter a ship for 5 years, I've created the same exposure in the market for 5 years
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	because I've got a fixed rate, and then I may play the spot market. I can also fix it out. But if I
	play the spot market, then you make the spread over and above the in-charter rate and the spot
	market or if I buy a ship, I make the spread between the spot rate and the breakeven rate of that
	asset..
Rajesh Khattar:	Okay. So that's great to know. I mean, I think it's after several years that GE ship is venturing
	into a new line of business, even if it's an adjacent line, so that's great to know.
Rahul Sheth:	I can't really call it a new line of business, and we have done in-chartering activities in the past
	as well. At times, we have also won a contract with an oil PSU, where we've had a COA, where
	basically we make a commitment to conduct a few spot voyages for which we, at times, in-
	charter vessels for 1 voyage at a time to facilitate that COA. It's just a different way of serving
	our customers. You can either own a ship and provide those services or you can charter in a ship
	for a longer period and use those to provide those services to the customers. So again, it's not
	new. We've been doing it. We used to do it sometimes through overseas subsidiaries sometimes
	directly. And so it's not a new line of business for us. That's the only thing that we want to plan.
Rajesh Khattar:	All right. But do you have any plans to expand into any adjacent businesses? Do you have any
	such thing on the drawing board?
Rahul Sheth:	No, not at the moment.
Rajesh Khattar:	Okay, fine. My next question is last quarter, in response to your question, you had said that it is
	difficult for you to find business with old ships and that is why you are swapping them for
	relatively less old ships. But I just wanted to understand then how does the buyer of your old
	ships employ them?
Rahul Sheth:	So what happens is that you have a large international market where let's just take the oil trade,
	right? You've got a lot of oil majors such as Exxon, Chevron, Shell. You've got many prominent
	ports in the Middle East and East Africa and India. For a large percentage of the trade you will
	find that they have age restrictions on the vessels they are willing to take.. That does not mean
	that there are not any section of ship owners who are willing to take older ships.
	If we like say, for example, on the coast of China, there is more leeway you can get. So say, a
	20-year-old tanker may be difficult to apply on the international trade. But on the coast of China
	or certain other trades, you may be able to run them for a few more years. So the buyers that buy
	from us will take those ships and apply them on those trades. But those trades are not available
	to players like us.
G. Shivakumar:	And it's also that we have decided what our market segment is. Our market segment is that we
	want to be able to operate our ships internationally without restriction. And we don't want to
	have a significant part of the fleet facing these restrictions due to age. And therefore, we all say
	that we are out of there. Other players may feel -- that they feel happy operating under those
	circumstances. And that's each individual company strategy. It's possible to run them. It's just
	that we don't want to be in that market or we can have access to the market as Rahul said.
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Rajesh Khattar:	Okay. And my last question is, what are the triggers for further NAV increase from here? So do
	you see earnings remaining firm across all types of ships, at least in the foreseeable future? Can
	you give some guidance on that?
Rahul Sheth:	See, we don't give guidance because we frankly don't know. There are so many events that can
	actually bring down the market or take up the market. So at this moment, earnings by and large,
	are quite strong, but we can't really say much more than that because frankly, we don't know.
Rajesh Khattar:	Okay. But your offshore business, I mean as soon as the rigs and vessels are repriced, they should
	contribute significantly to your console earnings, isn't it?
Rahul Sheth:	So the offshore vessels, we have repriced many vessels at substantially higher rates compared
	to the previous, meaning the outgoing rate. They're all up 80% to 100%, and the market is
	holding quite firm. We have gotten coverage of approximately 70-ish percentage for this
	financial year. And we hope that the remaining coverage that we still have to get remain at the
	same rate. On the rigs, like Shiv just mentioned, we've got 2 rigs to price. So it depends on what
	pricing we get for those rigs.
G. Shivakumar:	Message is that they will start contributing much more to the profitability than they have in the
	last 4 to 5 years because they've been going through a bad patch, and the market is turning
	around.
Rajesh Khattar:	The vessels that you have already repriced. If I were to take them as a factor or as a percentage
	of your console earnings for the year that has went by, how much of that would be? Will it be
	like 10%, 20% or less normally?
G. Shivakumar:	No, it's small. So their contribution because the numbers in the shipping business are so high, so
	let me just give you one set of numbers just to illustrate. The average earned by the shipping
	fleet over the last year is probably $30,000 a day, something there, okay, close to $30,000 a day.
	over 40-plus ships. And when we're talking about the repricing of the offshore vessels, we are
	talking about a fairly low base. And they were talking of repricing of $4,000 to $5,000 a day and
	across a total of 19 vessels. So it's not a huge amount, too. In the context of the overall. It's just
	a contribution on the margin, and it will be a significant contribution. But if you look at it in the
	context of today's earnings of the shipping business, it's not very high.
Moderator:	We have a next question from Shantanu Pawar, an individual investor.
Shantanu Pawar:	My first question was about what kind of incentives are you expecting the government to provide
	for local shipping companies? And do you think these incentives could be structured towards
	creating a national champion as mentioned in the newspapers a while back?
Rahul Sheth:	I think at the moment, all of this is not very clearly defined. So I think we should just wait for
	the government to come out with something more cconcrete before we comment on anything.
Shantanu Pawar:	Right. And my second question is about the freight rates and our PSU clientele. So given that
	the freight rate...
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Rahul Sheth:

Could you just speak was up slightly because it's a bit faint for us.

Shantanu Pawar:Sorry, yes. So my next question is about freight rates and our PSU clientele. So given that the freight rates have been quite buoyant lately, do you think our PSU clientele will agree for any long-term contracts after their current contracts have ended at these current prices?

Rahul Sheth:So are you talking about the shipping business?

Shantanu Pawar:

Yes.

Rahul Sheth:So all our ships are -- or most of our ships are on the spot market and our business model isn't to rely on PSUs coming up with long-term contracts to keep our utilization up. So at the moment, we're not relying on them. So if they come out with the tender for a longer-term contract, that's up to them. As of now, we have not seen them coming up with many tenders.

Shantanu Pawar:

Just a quick follow-up.

Rahul Sheth:	And the long term in this business is generally a year or 2, so not looking for something where
	there is fixed coverage for the next 5 or 10 years. . And from Great Eastern's perspective, it's not
	necessary that we may even participate in those. We will look at what comes across.
Shantanu Pawar:	So currently, the 1- to 2-year time frame is something that our company is looking at?
Rahul Sheth:	No. I'm saying that if in our business, whenever oil PSUs or any other company comes up with
	contracts. They are generally 1 year or 2 years. At the moment, there is no active tender that we
	are participating.
Moderator:	We have next question from Himanshu Upadhyay from Bugle Rock PMS.
Himanshu Upadhyay:	I have a question. It means a few data points from the presentation itself, okay? We see order
	book is low and it is all backended. Secondly, scrapping potential and order book are at similar
	level. How do you look at spot versus period charter, okay? And at what point of time would
	you like to move to more period charter, let's say, even 1 year or 1.5 year type of contracts on
	the crude, product and dry bulk or what would be the metrics which you will like to use to move
	to more period charters? Any thoughts on that?
G. Shivakumar:	Again, this will be dependent on the view that we take at the time. We have fixed a couple of
	our product tankers over the last 6 to 8 months on 1- to 2-year charters. So we had fixed out a
	few ships. Again, this will be again, opportunistic. You'll find some rates to be tempting and fix
	them. So there is no particular metric that we are looking for saying that, okay, if this number is
	crossed, we will look at it.
Rahul Sheth:	Because one thing you have to remember that the spot market is very volatile, right? So just to
	give an example, if the spot market is at 100, you may get a rate to fix out for 1 year at 70. so
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then your whole call becomes that, do you want to take that backwardation and the rate to fix out and give up the 30. And then sometimes maybe for a 2-year contract, it's at 60.

So it may not be as stark as I'm giving, but just to illustrate the example. What exactly happens is that there is always a push and pull on what is the time charter rate that oil companies or dry bulk companies are willing to offer you. And at points in time, if their view is negative, they may drop the rate, and therefore, the temptation is to still to take up. So we always take a bit of a call between spot and TC to take, but we are completely comfortable even if we remain very close to 100% spot..

Himanshu Upadhyay: Even if, let's say, the order book comes and it becomes much more forward we like to be in spot only this hypocritical case. Currently, it is all later dated. But if such a scenario happens, how will we react?

Rahul Sheth:So see, we'll have to see it at that point in time because you have to also put in context the demand side and see how we are looking at that. If we believe that even the demand side may not hold up and if the order book is at 30%, - even the oil charterers are going to see the same order book. They may cut the rate even further. So there will be a bit of a give and take over there. And then at that point, we'll have to see what rates also we're getting. And then based on that, we will decide whether or not it's worth taking cover. Although we are seeing historically you are better off in the spot market, over the time charter market. So we are always evaluating. And like Shiv mentioned, we have taken some cover, but we do prefer to remain on the spot market.

Himanshu Upadhyay: And one more thing. We have stated that we want to replace our 20-year-old ships, okay? But it looks fine currently, based on demand supply and order book, the only place where valuations will keep unattractive. But at what point of time or thought process will we think about not of replacing our old ships or, let's say, only selling, not buying. So any thoughts on that?

Rahul Sheth:Sorry, did you mean of a growing…

Himanshu Upadhyay: No, no, no. I'm saying that currently, the prices are high, and we see the order book is not very high. And again, it is backended , it is much later '26 onwards, okay? But what would be the situation when you would like to not replace the old ship only, you would like to only sell the ships, okay? Like in crude, we only sold. We did not add much of it. So what would be the thought process when you think only of selling not buying? What would be the thought process or metrics, which you would like to use?

Rahul Sheth:So firstly, on capacity, we have already shrunk. I think we peaked at about 48, 49 ships now, we're down to 42 to 43. So we have -- as of now, we've taken a call not to go much below this. So we have started some replacements. But you have to remember one thing that when you're doing a replacement, you're selling an older ship at a relatively high price and you're then buying a ship, which is also at a high price. So therefore, you're paying a premium, a spread between the younger and the older share.

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	If that spread increases beyond the point we think it makes sense we may decide to be a net
	seller. At the moment, at least for the deals that we've already concluded, clearly, we wanted --
	we thought that the pricing makes sense to do the switch. But before we do any deal, we look at
	the premium people are asking for a newer ship vis-a-vis the older ship.
Himanshu Upadhyay:	Okay. And can you repeat it to the premium, what you -- how did you judge means -- the newer
	versus old?
Rahul Sheth:	Yes. So for example, let us take that the older ship, right? I'm just simplifying the numbers. But
	let's just say the older ship is at 100, right? Now the ship is close to the end of its economic life,
	right, at least in the international market. So as time progresses, maybe the 100 doesn't really go
	up, maybe it goes to 100-105. but the younger ship, which is say at 200, the spread may have
	increased, whereby instead of paying 200, it may have gone up to 250. So now I have to put in
	an incremental 150 to get a younger ship versus the envisaged INR100.
	Now at INR100 of incremental capital, I may be happy to go and do the switch. But at INR150,
	I may think that its price is high. So we always have to look at what that spread is to modernize
	and then decide whether it is better to shrink or to modernize. Because there will be a price point
	that we should match for the older ship and then we may say it may not make sense on paper at
	least to do the deal.
Himanshu Upadhyay:	Okay.
Rahul Sheth:	Shiv covered the chart on asset prices. So if you look at the last 6 months, there has been a
	greater increase in the younger ships in the prices of the younger ships and not so much for the
	older ships. So the spreads have increased.
Moderator:	We have a next question from Jeet Gala from Centra Insights LLB.
Jeet Gala:	So, again, I would want to ask you again on fixation. I mean, like you clearly explained,
	remaining on the spot market still makes a lot of sense given we have backwardation to the
	extent of 30%-40% discount over a 2-year long contracts. But the same situation was, again, the
	same payback 3-4 years back when we used to do, say, INR1,200 crores, INR1,400 crores of
	EBITDA.
	Now that our EBITDA has jumped to, say, INR3,000 crores only for shipping business. I mean,
	does it now at least make sense to have our proportion more -- I mean, to start fixing more of
	our ships because earlier we used to operate at 15% to 20% fixed versus 80% on spot market.
	So when is the time then we really start switching -- start fixing more of our ships onto long-
	term contracts and start giving away your spot markets because the backwardation is always
	going to be there, right, in the market. So I mean so how do you really think about this particular
	thing? Because like you said, backwardation, again, INR100 earnings is available for INR70, if
	you start talking about, say, 1- to 2-year contracts.

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