Great Eastern Shipping : 3QFY2023 Earnings Call Transcripts

"The Great Eastern Shipping Company Limited's Q3FY23

Earnings Conference Call"

February 1, 2023

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

MR. BHARAT SHETH - DEPUTY CHAIRMAN & MANAGING DIRECTOR, THE GREAT EASTERN SHIPPING COMPANY LIMITED

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The Great Eastern Shipping Company Limited

February 1, 2023

Moderator:Good evening, ladies and gentlemen. Welcome to The GE Shipping Earnings Call on Declaration of its Financial Results for the Quarter-ended December 31, 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 press '*' and '1.' I now hand over the conference to Mr. G. Shivakumar -- ED and CFO at The Great Eastern Shipping Company Limited to start the proceeding. Over to you, Mr. Shivakumar. Thank you.

G. Shivakumar:Good afternoon, everyone, and thank you for joining us for this conference call. Mr. Bharat Sheth - our Deputy Chairman and Managing Director is here to take questions; we are very happy to take your questions on the company and what's been happening in the markets.

So, let's go into the "Presentation." Again, we might make forward-looking statements. It is not our intention to give any predictions or focus on profitability. For the first time ever, our profits have crossed Rs.1,800 crores; our previous highest was in the super cycle where we were just short of Rs.1,400 crores, so in the nine months, we have a consolidated profit of Rs.1,800-plus crores.

Our consolidated net asset value has moved up and crossed Rs.1,000 per share; a year ago, this was about Rs.600 per share, and that just shows you what can happen in our business.

Also, we have declared three interim dividends in this financial year, totaling to Rs.19.80 per share, again, the highest dividend in our history. These are the reported highlights, you would have seen this, I'm not going to go much into the numbers unless you have specific questions.

We also have the normalized financials as usual. They are not too different from the reported numbers. The effect of the currency has not been very dramatic on our results, because the business results have outweighed everything else by such a big margin.

So, we have the net asset value per share and I mentioned on a consolidated basis we are in excess of Rs.1,000. Here, on a standalone basis, a year ago that was in December '21, we were at Rs.576 per share, now, we are at Rs.890 per share. We'll come to the NAVs what has caused them to go up in this period. And remember, that this growth of Rs.300-plus in net asset value is after having paid out dividends, between May and November, we paid out about Rs.16- 17/share in dividends. These are the key ratios and we'll leave this aside, these are the EPS, etc.,

Broad management commentary from our Managing Director. Also, we have our highest ever quarterly profit. In nominal terms, the previous quarter was higher, but there we had the advantage of significant profit on sale, which was about Rs.115 crores. If you take out that impact, this quarter's results are higher, because the rates have been higher and we'll look at that as well.

The consolidated net asset value per share, as we mentioned earlier, has crossed Rs.1,000, because in offshore we get a range of values for the assets; it's between Rs.1,012 and Rs.1080

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The Great Eastern Shipping Company Limited

February 1, 2023

per share. So, the markets are interestingly poised. Tankers have had a very good run in the last three quarters or so, crude tankers even more so in the last quarter.

The one thing that we've been pointing out for a few quarters now is that the order book is dwindling. And therefore, at least one side of the equation that you have to worry about has been taken out. There is not much new capacity coming in and we'll look at the order book statistics. So, from here on, it will depend on what happens to demand picking up and what happens when China comes back, because China is a significant demand driver both for oil and for dry bulk commodities.

On the offshore market, again, this is something that we pointed out for a couple of quarters now. The market is recovering with oil prices continuing to stay at decent levels where oil exploration/production companies can make a profit and can afford to invest at least in production if not in new exploration. The market has shown signs of significant strength. The effective utilization rates for jack up rigs, if you take out the rigs, which have been cold stacked for quite some time, now we are getting close to 90% for the first time since 2014 when the oil prices collapsed.

On the balance sheet front, these cash flows have been exceptionally strong and we've used the cash flows to pay some dividends. We've also prepaid debt whereever possible.

Just looking at differences between last quarter, that's Q2 and Q3, you see what's happened to crude tankers; 33k has gone up to 60k, product tankers and LPG have been more or less the same, dry bulk has dropped off in Q3 versus Q2. But, the crude tankers outperformance was so high that it's more than compensated for the drop in dry bulk earnings.

This is how and why our NAV changed. This we are comparing versus March, so this is a nine month change in net asset value standalone. We had a change of little under Rs.300 per share where we've got equal contributions from the cash profit, the cash flows which have been produced by the business and the increase in fleet value. Again, the reason why we put this here is that this is different from the NAV from other NAVs that you may look at. So, you should not look at it like the NAV of say a mutual fund, which if the stock prices fall, you lose what is there in the NAV. Here, when the earnings are strong, a part of that net asset value is converting into cash flows on a daily or a quarterly basis. And that's what we wanted to show you here. It's not just an increase in asset values, it is actual real cash that has come in here. Again, asset values you never know what happens to them… they could go up further, they could come down, but Rs.147 per share is actual cash which is accrued to us. This is the five-year movement in standalone net asset value; in March 2017, we were at Rs.337 per share, now we are at just shy of Rs.900 per share. Again, just to remind you, we have been paying significant dividends through this period.

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The Great Eastern Shipping Company Limited

February 1, 2023

On a consolidated basis, the story is somewhat similar. We had an increase of about Rs.350 per share in the net asset value which has contributed about 50:50 between the cash accruals and the fleet value.

Looking at what happened in the shipping markets, again, we have gone through this many times in the past. We've had exceptionally strong product tanker markets since early in the year. So, that outperformed for a significant period. The Suezmaxs took some time to catch up, but they had a very good Q4 of calendar 2022. This is a commentary and we can rather than read this commentary or go through it, we can discuss it in the Q&A.

The main cause, of course, for the tanker markets growing up was the war in Europe… the Russia-Ukraine war, which resulted in a trade dislocation, which came on top of a fairly tight- ish market, and that's what really took the markets up in a big way. And it illustrates what happens in our business, which we have said in the past, which is that, it takes these events to suddenly take the markets up or down. And basically you need to be positioned with your fleet to be able to take advantage when the markets go up. And that's why we have a significant spot market exposure most of the time.

Looking at dry bulk, the dry bulk was a different story; we had a very strong period in FY'22 especially for the smaller vessels, which is the Supramax/Kamsarmax, this year has been quite poor, the capesizes have suffered a lot versus the previous year. And now we've seen over the last few months that even Supramax and Kamsarmax earnings have come off very significantly, which is the black market.

Again, steel production, which is the biggest driver of demand for bulk carriers, was down, and had negative growth. We look forward to it coming back in CY'23. Unless you have a very significant global recession, you should have positive steel production growth, which means that you should have some dry bulk trade demand growth.

LPG earnings have been strong again. We don't get much affected by the spot market, because we are on time charter. So, we don't get affected on a day-to-day basis. Of course, if the spot market is strong when our ships come up for repricing, that comes into the pricing that we receive.

Looking at fleet supply, the current order book is an exceptionally low level, so, we are talking of below 5% for both crude and product tankers, we're looking at about 7% for bulk carriers. All of which are historically very low numbers. And as I said, this gives us at least one comfort that the supply side is not challenging. You can see that, in 2008-2009, these order books went up in excess of 50%-70%. And that was really a worrisome market. Single digits like this, this is a positive for the market going forward. As I said, you still need demand to help in the overall equation, but at least one side is taken care of.

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The Great Eastern Shipping Company Limited

February 1, 2023

The LPG order book is significantly higher than this; LPG carriers order book is about 21%. So, not as comfortable as this, but still, we have significant trade growth there, which hopefully should take up some other ships.

Looking at asset prices, obviously asset prices have moved and we saw the impact on the net asset value. Asset prices have moved significantly over the last couple of years especially for the tankers, dry bulk asset prices have come down in between 20% and 30% from the peak early this year.

Scrapping has been very poor. Again, all of this is creating an overhang of scrapping, which is a little bit of a safety net for us. If the markets are very weak, you have a chance that there will be significant scrapping which takes out some of the fleet and therefore brings demand/supply back into balance.

Looking at the offshore business, the Middle East has been a big driver of incremental demand, and there are a lot of rigs which have been going in there, there's a lot of demand for jack up rigs there. So, Saudi Arabia and UAE have taken in a lot of rigs. They have publicized their targets for increasing production capacity, and they are taking in rigs in order to try to meet those targets. So, rig utilization is now close to 90% on an effective basis… and when I say effective, I mean, if you take out the rigs, which are cold stacked, and you take into account the rigs which have already received contracts and are waiting to go into contract. For instance, today, you have 358 rigs under contract, you have another 35 rigs or so which are waiting to go into contract, they've already received contracts, and they will go into contract within 2023. So, that's a little above 390 rigs. Of the 490 rigs that you have in the fleet, about 60 rigs are cold stacked, 45 cold stacked for more than three years, and therefore will not be really in a position to compete actively in the market unless the market moves up along. And therefore, we say that the effective utilization has now come close to 90%.

It's sort of similar, though not exactly so for the vessels. It's not a 90%, but you've seen on term contracts that you moved up from the low 40% to somewhere around 54%-55%. If you take into account again cold stacked vessels, you're probably up to 70% or more. And we have seen significant pricing improvements for vessels and for rigs recently. This is just a depiction of the utilization on a chart.

We have two rigs coming up for repricing, but that's only next year. So, our repricing we had the Greatdrill Chaaru coming off contract. In this year, she has been awarded a three-year contract in India and she will go on to that contract sometime probably in the middle of FY'24.

Vessels, we have quite a few coming up for repricing, which is a positive in this market, because repricing when they come for contracts will be better than the previous rates.

In the last quarter itself, we had come down to net cash on a standalone basis and also just about net cash on a consolidated basis, now, we are significantly net cash. So, on a standalone basis,

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