Great Eastern Shipping : 2QFY2025 Earnings Call Transcripts

"The Great Eastern Shipping Company Limited Q2 &

H1 FY25 Earnings Conference Call"

November 11, 2024

MANAGEMENT: MR. G. SHIVAKUMAR - EXECUTIVE DIRECTOR &

CHIEF FINANCIAL OFFICER, THE GREAT EASTERN

SHIPPING COMPANY LIMITED

MR. RAHUL SHETH - 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 declaration of its Financial Results for the Quarter Ended September 30, 2024.

At this moment all participants' 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 CFO at The Great Eastern Shipping Company Limited to start the proceedings. Over to you, sir.

G. Shivakumar:Thank you, Yashashri. Good afternoon, everyone, and welcome to the results call for Q2 & H1 FY25.

We will do a quick run through the presentation. I am joined by Mr. Rahul Sheth and we will be happy to take Q&A after that. usual disclaimers, we are not forecasting earnings. We have a large exposure to the spot market, so we are also not giving any guidance on our earnings.

We had a net profit of Rs. 576 crores on a consolidated basis for Q2, higher than the Q2 of last year, but slightly lower than Q1 of this year. The consolidated NAV is at 1,463 per share at the midpoint of valuations. And we have had the 11th consecutive quarterly dividend of Rs. 7.20 per share for Q2 FY25. With this, now we have paid out about Rs. 80 in dividend over the last

2.5 years and if you consider that our stock price was about Rs. 340, we have paid out almost a quarter of that in dividends in a period of 2.5 years.

You have seen the results. I won't go too much through the results. And we will go through the markets really rather than what the numbers are looking like for the results. Of course, you can always ask questions in the Q&A.

We continue to be significantly net cash. We are about $400 million net cash as of 30th September and after that we have become even more net cash. The net asset value is around the same levels as it was in June, so we are at 1,184 per share standalone and as I mentioned earlier about 1,463 per share on a consolidated basis. Not going to go through these numbers.

Profitability continues to be very strong. This is what has happened to TCYs and why we see the difference in performance. While we had crude tankers dropping off versus Q2 last year and versus Q1 of this year, we had product tankers slightly better than Q2 of last year, but significantly below Q1 of this year. A lot of it was made up by LPG, where all our four vessels were repriced during the last year or so, and have got repriced at significantly higher rates than their previous contracts. So, that compensated significantly for the drop in earnings from last year for the crude tanker. And dry bulk also was significantly better than in the year-ago period.

Changes in standalone NAV:

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We had about a little less than Rs. 200 increase and Rs. 200 came from the cash profits that we made during the 12-month period and of course we paid out a significant dividend in this period as well. Over the last five years, we have seen our NAV move up very steadily and with a CAGR of 23% over the last 5.5 years from March '19 to September '24.

On a consolidated basis also, it's a similar story. The increase in the NAV in the year is due to the cash profit and not due to the fleet value and the drop, if any, is due to the dividend and a minor change in fleet value.

Coming to what happened in the market which led to the results you saw. We saw Suezmax earnings around the same levels as last year. We also saw product tanker earnings significantly lower than the year-ago period. This is for the 6-month period that I am talking about.

And what were the fundamentals like? Of course, in Q2 of the financial year, you typically have a seasonal softness, the summer season in the Western Hemisphere. Crude trade itself declined by about 3%. Refining margins were very weak through the quarter. They have now started recovering a little bit in the last couple of weeks. In Singapore, refining margins are back to their 10-year averages. So, hopefully that should have some impact on rates going forward. A significant factor again was Chinese crude imports falling 8% year-on-year. For the first nine months of 2024, we are seeing a drop of 0.9 million barrels a day in crude oil imports into China. And that's a significant factor. While of course, the crude tanker fleet hasn't grown, it's more or less flat compared to the year-on-year levels. Product tanker earnings were also weak as I mentioned and seaborne product trade did decline, again, the same factors, refining margins. While the product tanker fleet saw a small growth of 2% year-on-year.

What has also happened and interestingly we have seen this happening in the last couple of quarters, is that while the conflict in the Red Sea contributed to ton-mile growth for the larger product tankers LR2s which typically carry diesel from the Middle East or from West Coast of India to Europe. And they had to divert all the way around the Cape, around Africa. We saw now VLCCs and Suezmaxes cannibalizing some of those cargoes, which resulted in weakness in the product tanker rates.

What we are also seeing is that as crude tanker rates move up, and these have moved up a little bit, not very sharply, you should hopefully see VLCCs going back to the crude trade and therefore freeing up those cargoes for the product tankers. Asset prices have remained firm. Order books have increased, and we now have almost 10% order book for crude tankers and 21% for product tankers as the order book. We will see the delivery profile of those towards the end of this presentation.

On dry bulk, we saw the rates for Capesizes doing significantly better than in the previous year. So, you are 60% better in the 6-month period than in the previous year. I think the Q-on-Q was even more spectacular in the difference. While the subcapes were not doing that well, they also did a little bit better than the previous year. So, the main factor driving dry bulk earnings and

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trade was strong bauxite imports into China, which grew at 15% year-on-year in Q2. Iron ore imports also were steady. While not seeing spectacular growth, they grew by 2% during the quarter. Coal did not contribute much and grain trade also was flat. While dry bulk hasn't had much of an impact from the Red Sea disruption, that whatever small disruption, which was estimated about 2%, continued as vessels traveled around the Cape of Good Hope. The fleet grew by 3% year-on-year. The order book continues to be fairly subdued at about 10%. Asset prices for the smaller vessels declined by about 10% to 15% during the quarter. But capes remain steady because their earnings have been supporting asset prices.

LPG, all our ships, as I mentioned, are fixed on the time charter. The spot market has come off significantly. So, you can see that difference, in the first 6-months of last financial year, the average spot rate was almost $90,000 and now it's dropped to below $45,000 a day. So, that's more than a 50% drop. Asset prices continue to stay at all time high levels and the order book is also very high at about 25%. Here the Panama Canal disruption which took rates up towards the end of last year and early 2025 has now completely normalized and so that is no longer a factor.

Coming to fleet supply, we already spoke about the order book here, so I won't go into that. But the significant factor is this. The most of the order book is rear ended, so there are not too many ships while you order book, for instance, for product tankers at 21% looks quite heavy. Most of those are coming in 2026 and beyond. The growth in calendar 2025 is fairly subdued. It's about 6% for product tankers and less than 2% for crude tankers. For dry bulk, again it's about 2% to 3% percent while rest is for 2026 and later, it's about 6%. LPG also in the first year, which is in calendar 25, it's less than 5% delivering during the year. Most of it is delivering in 2026 and 2027.

Scrapping continues to be very low. All the sectors are making reasonable earnings and therefore scrapping continues to be extremely low.

We showed this earlier, so just to give some sense of perspective on the order books versus the old fleet, the old fleet continues to be pretty high, especially in crude tankers. And if you just balance that versus the fleet which is to be delivered, then you'll see that the order book is not too much of a concern.

Looking at asset price movements, asset prices continue to be strong but they've come off marginally in the case of crude and product tankers. These are marginal changes in the prices, not significant. In dry bulk, they came off a little bit in the last quarter. In the slightly older and in the smaller dry bulk ship, that is the subcapes.

Coming to Greatship, the oil field services subsidiary, jack up utilization globally continues to be okay, though you had a small shock happening in the middle of the year. You can see that downward turn it took in the middle of 2024, after those rigs were all fired by Saudi Aramco. But it stabilized from there. We of course, in the last two quarters had those unfortunate situations where two of the rigs we had bid into tenders in India, those tenders were cancelled.

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So, we have the rigs coming off contract. So, one rig has come off our earlier three-year contract, but she has now obtained the business. It's a short-term business with a minimum of 4.5 months going up to approximately a year. This is in India itself. So, that's one rig. The second rig will probably come off sometime in the next three months or so and we will be looking for work for

	her.
	There are a couple of businesses that are out. One is a short-term business and one is a three-
	year business. We will be, these are both in India, we will be bidding for those businesses. In the
	meantime, we are also looking outside, but there are not too many prospects as of date that we
	can talk about that are anywhere close to getting awarded. We also have five vessels coming up
	for repricing in this 6-month period.
	Our CSR Foundation continues to do a great work. We have affected the lives of many, many
	people through these NGOs that we partner with. For more details, please visit our website.
	Thank you. That brings me to the end of the presentation. Now we are happy to take any
	questions.
Moderator:	Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer
	session. We will take our first question from Nirvana Laha from Badrinath Holdings. Please go
	ahead.
Nirvana Laha:	Sir, actually my questions are all regarding Greatship. So, the first question is regarding the two
	rigs which could not be bid in with ONGC. The first rig that you said that had already obtained
	work, if you could give us an indication of the day rates there? And for the second one, the three-
	year contract that you are evaluating, if you can let us know whether that is with ONGC or with
	somebody else?
G. Shivakumar:	The day rate, on the second one, we won't get into too much detail, but it's around the rate that
	we last got a three-year contract from ONGC, the last awarded rate for a 3-year contract with
	ONGC. That's the day rate at which we are working in this short-term contract as well. Now
	your question on the other 3-year contract was, sorry, I didn't quite get that.
Nirvana Laha:	The question was, was it again ONGC who was taking out the tender or is it some other client?
G. Shivakumar:	Yes, that is correct.
Nirvana Laha:	Actually, I just wanted to understand what you think is happening with respect to ONGC because
	as with regards to the global market for jack ups, I think the market continues to remain tight
	and there's no absolutely no new builds happening. That is my understanding. So, what do you
	think is happening with ONGC in the Indian market and how do you see utilization of your rig
	assets especially going ahead and would you be exploring international waters as well, if you

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feel that ONGC is not, for some reason, not working out? So, just want to understand your views on the overall jack up market and what's happening with respect to ONGC in India?

G. Shivakumar:We don't know. We are not privy to the thoughts as to what's happening with these tenders and why they got canceled, etc. So, we won't get into that because that would be speculation. They do require rigs for doing their work. They have quite a few rigs coming off contract apart from ours. They will have quite a few rigs coming off contract within the next 12 months. So, presumably if they want to retain that drilling capacity, they will need to come out with tenders shortly. So, that's one. With regard to the international market, yes, in principle we would like to go international, but it takes time to get pre-qualified in any of these regions. You mentioned that the market is tight. It's not that tight. There are still quite a few rigs that were suspended from Saudi Aramco contracts, which are there in the Middle East, while some of them have got alternate contracts. There are a few which are still looking for work. So, there is some capacity out there. Some rigs are available out there and always, somebody who's always in the region, a rig which is in the region already, is of course in the front runner position to land a contract in that region because of the cost of moving and setting up in a new region.

Nirvana Laha:The final follow up on that, those rigs which were in the Saudi area which are available, they have the necessary fit outs to start work with ONGC or you think that that's a long process? So, just trying to understand the supply that can come in.

G. Shivakumar:Typically they wouldn't have the fit outs required. But the spec of the rig itself might be not compatible with what ONGC requires. So, typically, every contract requires different equipment. And these are the little nuances of each contract. And so, but that can be procured. So, that is not the constraint really. It's more on the design of the rig itself. ONGC has a specific requirement when working on the West Coast on Padmawhich is a footprint of the rig and if the rigs are not able to meet those then they will not be able to bid into ONGC typically.

Moderator:Thank you. We will take a next question from Shantanu Pawar, an individual investor. Please go ahead.

Shantanu Pawar:My question is regarding this recent news article that had come out which was stating a rule requiring international container line operators operating on Indian sea routes to allocate at least 5% of their volumes for domestic operators. So, is GE Shipping entering into the container shipping business and if yes how feasible is it to acquire secondhand container ships at current prices in terms of profitability. And lastly, do you think there is any preferential treatment that PSUs could get while getting allocated those 5% volumes?

G. Shivakumar:One is, I'm not sure how this 5% works. I've seen that article as well. We are not quite sure how that 5% will work. But coming to your question on what we can do, it's not difficult to acquire a ship. Ships are always transacted. It's not difficult to acquire. Ship prices are pretty elevated now because the markets are quite strong. Container ship markets are quite strong. And therefore, we will wait for the right opportunity for an entry into the container ship business. But

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	on the 5% thing, we don't know how it will work and how it can affect someone who's operating
	container ships.
Shantanu Pawar:	And what about the preferential treatment? Do you think the government could perhaps allocate
	more towards the PSUs?
G. Shivakumar:	Again, we just don't understand that business enough to comment on how that could work. So,
	I won't get into it.
Moderator:	Thank you. We will take our next question from Mohammed Farooq from Pearl Capital. Please
	go ahead.
Mohammed Farooq:	Our Company has consistently delivered the quarterly average profit exceeding Rs. 600 crores
	for the past 10 quarters. And with over 70 years of experience and solid management and the
	cash reserve exceeding Rs. 6,000 crores. Now the Company operates in a sector that has
	experienced a turnover in the last four years. However, despite all the strong fundamentals,
	Company's valuation remains notably low with the PE just of 6. Now given this, I would like to
	understand whether the management views the current valuation is a concern or it is not a priority
	at this stage. Would you please outline the steps being taken?
G. Shivakumar:	We don't put targets on the valuation. We are not experts in stock market valuation. We have
	some views on what ships should be priced at and at what levels one can buy ships. So, we focus
	on that. As far as taking steps on the valuation is concerned, because we don't have necessarily
	a view on that, we are not going to say that this is, to push saying that this is the price at which
	it should be. However, we will, and this is what we endeavor to do in our communication with
	any investors, is to put our record, as you mentioned it so well, put our record of delivering the
	results and let the investors judge for themselves.
Moderator:	Thank you. We will take our next question from Surendra Yadav, an individual investor. Please
	go ahead.
Surendra Yadav:	I have some question on the financials. So, I could see a quarter-on-quarter drop in other income.
	And this is on back of increased cash and bank balance. If you could provide a breakup of this
	and the reason for decline in that? I'm speaking of console financials.
G. Shivakumar:	So, yes. You are talking about drop in other income from Q1 or Q2 of last year?
Surendra Yadav:	From Q1, so Rs. 127 crore in Q1 and 97 ...
G. Shivakumar:	This is a contribution which comes from our overseas subsidiary which does investment in
	various instruments, basically equity shares of listed shipping companies overseas. This is our
	chartering subsidiary and investment subsidy which is based in UAE. There the prices came
	down and therefore their contribution to the results came to the other income came down.

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Surendra Yadav:	So, I mean, this is kind of a chunky income. It is recognized whenever the investments are kind
	of liquidated?
G. Shivakumar:	This is recognized on a fair value to P&L basis. So, mark-to-market is also recognized.
Surendra Yadav:	And just a couple of questions on the P&L as well. I could see that quarter-on-quarter increase
	in finance cost despite again, a decrease in debt. So, has there be any repricing in the debt that
	we were doing?
G. Shivakumar:	Yes, this is consolidated you are talking about, I presume?
Surendra Yadav:	On the standalone basis, it seems quite flat.
G. Shivakumar:	So, in the offshore business, that's Greatship, we refinanced a loan, which is about $100 million
	in March of this year. The earlier loan had been partially swapped into fixed rates when rates
	were low, and therefore that interest cost was lower. Now the entire loan is exposed to floating
	rates, which are obviously higher than the swap rates at which we had swapped earlier. And
	that's why the interest cost is higher versus the last year. So, for instance, just to give you an
	example, it may have been swapped at 1.5% LIBOR or the equivalent benchmark. And that part
	is gone now. And the current spot benchmark rate is 5%. So, therefore, the interest cost is higher.
Surendra Yadav:	Can I assume the logic would be that we are expecting a decrease in benchmark rates, so
	probably that would help us going forward?
G. Shivakumar:	Yes.
Surendra Yadav:	And just one last question on the other expenses line item, again this saw jump of Rs. 20 odd
	crores. So, was any dry docking or something like that which came during the quarter?
G. Shivakumar:	No, dry docking doesn't come into other expenses. What happens in other expenses is, when you
	in charter a vessel that goes into other expenses. When we take in ships on charter, that goes into
	other expenses. So, we took in a ship on charter during the quarter, and that resulted in an
	increase in the other expenses line.
Surendra Yadav:	And just one last question, and I will join back the queue after that. I could see some investment
	in subsidiary loan to subsidiary in the standalone cash flows from Rs. 90 odd crores. So, could
	you please provide the details on the nature of the investment and to which subsidiary this was
	given?
G. Shivakumar:	We set up this subsidiary in the GIFT City. The government has come out with a scheme for
	ship finance and leasing in the Gandhinagar Gift City, under which we set up a subsidiary, which
	has started operations in the last 4-5 months. So, some of this capital has gone towards
	capitalizing that subsidy. There was some equity capital and over and above that, we also put in

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	some debt. Now, what is the business of this subsidy? I just mentioned to you that we in-
	chartered a ship. This subsidiary is in-chartering ships. So, it is taken in one product tanker on a
	4.5-year charter and one crude tanker on a 3-year charter. So, that is the business of this
	subsidiary and this fund which has gone into the subsidiary from Great Eastern Shipping
	Mumbai, is to fund the working capital. One is equity and then there is a loan to fund the working
	capital.
Surendra Yadav:	If you could just say the benefit of doing it via subsidiary and not through the main entities?
G. Shivakumar:	It is a beneficial tax and regulatory regime, which has been set up in the Gift City in Gandhinagar.
	So, that's the benefit of doing it through the subsidiary. We were actually doing this activity
	through our chartering subsidiaries in Sharjah and Singapore earlier. And now that these benefits
	are being given in the Gift City in Gandhinagar We decided instead of doing it from the overseas
	subsidies, to do this activity from Gandhinagar.
Moderator:	Thank you. We will take our next question from Shivan Sarvaiya from Humiviction Investment
	Advisers LLP. Please go ahead.
Shivan Sarvaiya:	I had a couple of questions. One was on slide number 12, where you have shown the revenue
	days that are done in Q2 versus Q2FY24. So, there has been a reduction in the offshore logistics
	segment. So, just wanted to know the reason for that. And in continuation to that, on slide number
	17, you also shown the MPSVV offshore vessel having a coverage of only 14% for this quarter.
	So, if you could just clarify on that?
G. Shivakumar:	The revenue days, there are two factors there. We had several dry docks during the quarter,
	which is a reduction in the revenue days. The two MPSSVs, one of them underwent a dry dock
	for a significant part of the quarter. The other MPSSV and typically these MPSSVs have worked
	on short-term contracts because that's where we get maximum value. They are extremely
	marketable in the international market and we get best value from short-term contracts there. So,
	therefore we have those vessels typically will have very limited coverage at any point in time.
	However, also this time, one of these vessels is operating on a very short-term contract. And the
	other one is waiting for a business.
Shivan Sarvaiya:	Sir, if you could kind of say what has been the average coverage over the last few quarters and
	is this little lower than your that, but if you could….
G. Shivakumar:	This is a little lower than that. Of all our ship types in the offshore business, this always has the
	lowest coverage. But this is lower than the normal. This is lower than it used to be before. Again,
	because one of them is sitting without business. So, it has 0% coverage.
Shivan Sarvaiya:	Sir, are we expecting anything? Hasn't done some bidding or?

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G. Shivakumar:	We are bidding into contracts all the time. So, it's just a question of time. The thing with the
	offshore businesses, the business only comes when there is an offshore asset in operation and
	you require the support from the MPSSV. So, it's like a project-based business for these high-
	end vessels. And that's why you have these gaps in between.
Shivan Sarvaiya:	And there aren't any dry docks in this particular quarter and maybe the next quarter, right? Or
	are we expecting some more dry docks?
G. Shivakumar:	No, we actually have some dry docks coming up now also in the offshore business. This is going
	to be a fairly busy period.
Shivan Sarvaiya:	So, basically we can expect a better revenue day moving ahead right?
G. Shivakumar:	In the vessels, hopefully yes.
Shivan Sarvaiya:	So, then in the one rig that is going to be coming for repricing in this current half are we expecting
	any idling or it's going to be a straight away shift to the next one?
G. Shivakumar:	We don't know because we still have to bid in that tender and we don't know when it will be
	awarded also. So, it's anybody's guess.
Shivan Sarvaiya:	So, the difference between the time in which it is awarded and the time when the current rate
	goes off of charter, do you all get an extension? Are you expecting an extension?
G. Shivakumar:	Not between the time. Sorry, I didn't get that.
Rahul Sheth:	Just keep in mind that even if we bid and we win in ONGC, the two contracts are separate. So,
	it's not like ONGC is going to take the previous contract, extend it, and roll it into the second.
	Secondly, between contracts, when the rigs finish their work, when they've taken off contract,
	we generally have to spend a certain amount of time repairing, upgrading those rigs. It's like
	similar to dry docking. So, you have to have a gap between the two contracts, especially when
	they're long-term contracts.
Shivan Sarvaiya:	I had another question. We have seen like the asset prices as you all have covered in the
	presentation that they have come off a bit in certain categories of business and for certain
	categories they have kind of plateaued. So, if you could give some understanding in terms of
	how far are we or are we in that 15% IRR return that we keep targeting for in terms of asset
	acquisition? And how close are we from that?
G. Shivakumar:	If you look at the other aspect, you have to remember one thing. When you are looking at what
	kind of return you can get, it's a function of what you pay for the ship and what you expect to
	earn. And your earning expectations will keep changing from time-to-time. So, it's not a static
	number that helps one buys ships. However, having said that, the tanker prices have only fallen

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