Great Eastern Shipping : 4QFY2024 Earnings Call Transcripts

"The Great Eastern Shipping Company Limited Earnings Call

on Declaration of its Financial Results for the Quarter and

Year-ended March 31st, 2024."

May 10, 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

MS. ANJALI KUMAR - HEAD, CORPORATE

COMMUNICATIONS, THE GREAT EASTERN SHIPPING

COMPANY LIMITED

,

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	The Great Eastern Shipping Company Ltd
	May 10, 2024
Moderator:	Good Evening, Ladies and Gentlemen. Welcome to GE Shipping Earnings Call on Declaration
	of its Financial Results for the Quarter and Year-ended March 31st, 2024.
	At this moment, all participants are in the listen-only mode. Later we will conduct a question-
	and-answer session.
	I now hand over the conference to Ms. Anjali Kumar, Head of Corporate Communications at
	The Great Eastern Shipping Company Limited, to start the proceedings. Over to you.
Anjali Kumar:	Thank you, everybody for joining in today and welcome to the Earnings Call for our Q4 & FY'24
	Results.
	I would just like to take a minute to introduce our panel today. The Presentation will be made by
	our Executive Director and CFO - Mr. G. Shivakumar and followed by Questions and Answers
	from all of you.
	To handle the questions, we have of course Mr. Shivakumar, and we also have from the
	Management Team Mr. Rahul Sheth, who will also take questions along with him. So, handing
	over to you, Mr. Shivakumar.
G. Shivakumar:	Thank you, Anjali. Good evening, everyone and thank you for being here for our Conference
	Call for the Q4 and FY'24 Earnings Presentation.
	First of all, a standard disclaimer:
	We are not intending to forecast, and we don't intend to give guidance on future profitability.
	Please keep that in mind when we have our Q&A.
	Highlights are that we had our highest ever reported net profits of 2,614 crores consolidated.
	Our consolidated NAV has moved up to about Rs.1,400 per share as of March'24. We have
	declared a fourth interim dividend of Rs.10.80 per share, taking the dividend for the year FY'24
	to Rs.36.30 per share, which includes a special dividend of Rs.7.50 per share on the occasion of
	our 75th Anniversary.
	You would have seen our P&L. I am not going to spend too much time on it. We are of course
	net cash on a standalone and a consolidated level. On a normalized basis, the last quarter was
	our highest ever quarter in terms of net profit. The previous highest quarter in our history was
	Q4 FY'23 where we had a net profit of Rs.662 crores, this quarter we had a standalone net profit
	of Rs.701 crores. On a consolidated basis also, this is our best quarter at Rs.851 crores net profit.
	Looking at the NAV per share, on a standalone basis, we have gone up from Rs.962 per share in
	March '23 to Rs.1,127 per share in March '24. This is after paying significant dividends during
	the year. On a consolidated basis, as I mentioned earlier, our NAV has moved up from around

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Rs.1,160 per share, mid-point of the range to around Rs.1,400 per share. I will not go through the next slides. This is just the trend of the quarterly EPS.

Looking at what happened during the quarter, just in terms of the rates and then we'll go into what went into those rates as well. Crude tankers, product tankers, even LPG did significantly better than they did in Q3 FY'24. In the case of crude and product tankers it was because of the spot markets being high. In the case of LPG, it's because we went off contract at a certain rate and we repriced that contract at a significantly higher rate. All our LPG ships are on time charter. Dry bulk rates were a little lower than they were in the October-December quarter, but the tankers more than made up for it.

Looking at the year, you can see that crude tankers were marginally better in FY'24 than in FY'23. Product tankers were a little worse, though still at very profitable levels and LPG carriers because of the repricing of contracts to slightly higher level, did a little better than in FY'23, but dry bulk was significantly weaker in FY'24 versus FY'23.

Looking at the standalone NAV, I mentioned that 960 went up to 1127. Rs.190 came from cash profit which is PAT plus depreciation. Fleet value change contribution to this was insignificant. So, a large part of the NAV accretion has come from cash flows and cash accruals. Out of this, we paid out Rs.35 in dividends during the year and therefore the NAV went up by about Rs.165 per share.

Five years movement in standalone NAV. So, we have a CAGR of 25% between March '19 and March '24. If you look at consolidated also it is a similar CAGR because we were at about Rs.450 per share in March '19 and we are at about Rs.1,400 per share in March '24. This does not take into account the dividends that have been paid in the interim.

Changes in consolidated NAV, again Rs.226 per share in cash profits. We had some fleet value improvements on the offshore side, so that contributed Rs.41 per share.

Let's take a quick look at what happened in the shipping markets. As I said, the spot markets were possibly slightly weaker than they were in the previous year. So, in Q4, we had a year-on- year drop in earnings for crude tankers, basically because we had a very strong Q4 of last year. However, it was stronger than in the immediately preceding quarter.

Product tankers earnings were higher year-on-year. One of the factors which came into play was the tension in the Red Sea which led to significant rerouting of global tonnage around the Cape of Good Hope. Red Sea transits for tankers dropped by about 40% in Jan-to-March quarter as compared to the previous quarter, which means more tonne-miles for tankers. Overall, the trade declined slightly for crude tankers, however, made up by the tonne-mile impact. Order book for crude and product tankers have built up but are still quite low and we will see that in perspective in a couple of slides.

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Dry bulk, we saw the markets recovering a little bit for the larger sized ships. So, we saw the capesize going up from $15,000 on average in FY'23 to $21,000 on average in FY'24. You will recall that the previous year was the year of the sub-cape performing well because of the minor bulk commodities doing well. Now, it's large commodities which have done well and therefore the capes have outperformed. So, we saw the Supramax earnings drop from $18,000 a day to about $12,000 a day from FY'23 to FY'24. Again, I must reiterate, these are not our earnings, these are market earnings that I am talking about, these are market indices.

So, we had an unseasonally strong quarter in Jan-March, traditionally a very weak quarter. Typically, the Chinese New Year, Brazilian weather impacts tend to push rates down in Jan-to- March. However, this quarter was very strong and therefore capesize spot earnings. You can see this number, 175% higher year-on-year. Even the sub-capes were much higher compared to the previous year. So, we had significant supply of iron ore coming from Brazil, which moved into China and Chinese iron ore imports continue to be strong. Coal imports into China also continue to grow strongly as a result of lower domestic coal production in China and greater coal demand for electricity generation. So, the Red Sea disruption also impacted here where again you have between 40% and 50% of ships routing around the Cape of Good Hope.

Asset prices here firmed up, 10% to 15%, in line with the growth in earnings. The order book continues to be fairly low at less than 10% of the fleet.

In LPG, just to reiterate, our ships are not in the spot market, they are on time charters, but the market was strong, FY'24 was much stronger than FY'23 and the order book has built up quite significantly; we are at above 20% order book for LPG. Asset prices are at all-time high levels for LPG carriers.

One of the significant factors over the last six months has been the two canal disruptions and two very important maritime potential choke points. As I mentioned, Suez Canal trade dropped by 40% to 50% from a year earlier, while trade through the Panama Canal also has been affected. This happened since October. Drought at the Panama Canal has posed restrictions on the number of ships that can pass through the Panama Canal on a daily basis. So, that came down from about 32 to 34 transits per day, down to at its lowest point, 20 transits per day. Now it's coming back up because they've had some rains and the levels are improving, but you can see the graphs there, if you see the blue line on the right, you can see the increase in transits around the Cape of Good Hope, while the transits through the Suez Canal have dropped off significantly starting in January. On the other side, you can see the gray line, which is the Panama Canal, where you can see from October onwards, the transits have dropped significantly. This mainly affects exports from the US Gulf to the Far East which used to transit through the Panama Canal, especially LPG, which then had big tonne-mile impact and we saw LPG spot rates going up to $100,000 a day in December, January.

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Looking at fleet supply, we have shown this slide very often. As I mentioned, you can see the purple line, the current order book for gas carriers, it is at about 25%, while the order book for the other three kinds of ships are quite low in historical terms.

So, on the flip side, there are only two permanent things in shipping. One is new ships coming into the fleet and the other is ships being removed from the fleet due to scrapping. We've seen scrapping being at very low levels. The average scrapping percentage over the last 5-6 years has been only about 1.5% and a lot of old ships are still around because the markets have been reasonably strong. All of this sort of gives a cushion in a weak market where a lot of these older ships, which are only able to operate because of the strong market will have to go or will tend to go first in a very weak market. And we thought we'd put this in a graph. The Y-axis is the percentage of aging fleet, and here we've defined the aging fleet for bulkers and tankers as those above 20-years of age, and for LPG carriers as those above 25-years of age. So, if you see for instance the crude tanker order book, which is at about 7.5%, but the fleet, which is old is 18%. For dry bulk carriers, the order book and the old fleet are about the same. In product tankers also, you will find that, while the order book is 15%, the aging fleet is also a similar number. It's different for LPG. LPG is a commodity which has seen very strong trade growth and where we've actually seen the fleet going up 2.5x in the last 10-years.

Looking at asset prices, we have mentioned that asset prices have been very high for quite some time now. So, they continue to go up and in recent months we've seen dry bulk asset prices also move up quite sharply.

Looking at Greatship, this is a little bit of background. FY'16 to '21 we had a very challenging period for Greatship and indeed the entire industry worldwide utilization levels across asset classes were very low, charter rates came down to levels which generated basically no EBITDA if you were lucky enough to get a charter and a very large part of the industry went through financial restructuring or reorganization. In our case, we paid down a lot of debt. Thanks to our risk management and having a lot of contract coverage, we were able to come through it unscathed. We had minimal cash depletion. We paid down a lot of debt. And post FY'21 utilization levels have improved, the market bottomed out and E&P activities have started to increase, contracts are getting repriced, every contract gets priced at better than the previous employment contract of that asset. So, if you have a vessel coming off a charter, let's say a three- year charter at X-dollars per day, typically the repricing would happen at $1.5-2x per day. So, the business has now come back to profitability.

Utilization, there's been a gradual improvement. This is up to March. Now in the month of April, we've had a little bit of a setback for the global jack-up market. Saudi Aramco had announced earlier in January that they are scaling back on their target of reaching a 13 million barrels a day production capacity and they're going to take it back to 12 million barrels a day. This has been seen in action in the last month or so where they have either off hired or suspended contracts on

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at last count about 22 jack-up rigs, and leading to a drop in utilization, so that market is in a bit of a state of flux now. It remains to be seen what happens now next to that market.

We will not go through fleet supply. Let's look at what assets we have up for pricing. We have 12 vessels up for pricing. All of them have been bid into tenders and businesses, whether in India or overseas and are in a reasonably good position to win business. The one thing which has happened is that our rig Greatdrill, Chetna which is scheduled to come off contract in end of June, that's end of next month and where we had bid into a tender in India. We have just received news that the tender has been cancelled. So, we will look at what other options are there.

Typically, rigs which are working in India during the southwest monsoon and which are due to complete their contracts during the monsoon period, typically get extended through to the monsoon period because they cannot move during that time. So, let's see what happens with the Chetna and we'll look at what other employment options there are as well.

Coming to financials, we've seen this graph before. We levered up to expand between FY'17 and FY'19 and then we reduced our debt just by sheer cash flows coming in from the business. So, we have about $350 million of net cash currently.

And share price to consolidated NAV, our consolidated NAV as I mentioned is about Rs.1,400 per share and our stock continues to trade at a significant discount to that net asset value.

Just touching on what we do on the CSR front, since 2015 when we started our foundation, we have partnered with 49 NGOs. We've helped reach good education outcomes for more than 1.5 lakh students, we have helped good health outcomes for almost 1,20,000 women and children, and we have provided for around 42,000 women especially providing entrepreneurship training and helping them to set up small businesses. These are a list of our CSR partners. All details are available on our website, and we would invite you to go and check it out. We are very proud of what we have achieved on the CSR front.

The other thing is on our presentation you'll find the link to the coffee table book. We invite you to take a look at that as well. Thank you. And now we can go to Q&A where we'll be happy to take your questions.

Moderator:Ladies and gentlemen, we will now begin the question-and-answer session. We have our first question from Rajesh Khater, an individual investor. Please go ahead.

Rajesh Khater:Sir, your maximum fleet is in product carriers and dry bulk carriers, almost 34 out of your 44 ships are in these two segments. So, I mean, what is the reason that you have positioned yourself more on product carriers and dry bulk carriers so disproportionately especially when you say that LPG trade has been growing significantly over the last many years?

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G. Shivakumar:So, it is not a conscious strategy. We are quite agnostic to what sector we invest in. Actually we entered the VLGC sector specifically and we have three (VLGCs), Very Large Gas Carriers for the first time in 2012. So, we made a start there and yes, we have only four LPG vessels, but they've been very profitable, though it's not that the product tankers have been less profitable than the gas carriers. All I mentioned was that it's been a significantly growing market. And for us, the growing market really doesn't make that much of a difference because we are not that big that we need a much bigger market to grow. There's enough space to grow even when the market doesn't, since we have very small proportion of the overall global fleet. Rahul, do you have anything to add to it?

Rahul Sheth:So, we have seen historically that it's not that one segment has outperformed the other segment materially. At different points in time, different segments have done well. So, whenever we are looking to invest our capital, we are always weighing the decision between one sector or the other. So, it can be a situation where at one point in time you have more crude tankers than product tankers. We are not wedded to one particular sector.

Rajesh Khater:So, going forward also when you decide to invest your capital in buying new ships, will you have any affinity for a particular sector or there's no such thing in mind?

Rahul Sheth:No, we have no particular affinity to one sector over the other. We will always look at relative pricing between the sectors if the capital is limited and it also depends on where you are able to obtain the ships, because in the second-hand market you also have to have deals that you can transact. However, a broad goal which the company always tries to focus on is to be diversified across various sectors. Now, the level at which you're diversified between different sectors may vary from time-to-time, but we have seen that different markets may do well at different points in time and other markets may do poorly at different points in time, therefore, to be diversified is more important.

G. Shivakumar:To answer your question, if you have an opportunity to buy, say, a gas carrier, let's say the markets come to the levels at which we would like to buy. At any point, we will look at which is the ship to buy, which is most likely to give us the best possible return. It's again like a portfolio manager. You have to look at asset giving best possible return when you have scarce capital, you have to try to allocate it accordingly.

Rajesh Khater:Because I think you mentioned that LPG trade has grown about 2, 2.5 times over the last many years, whereas the crude trade has probably come down probably, right. So, -

G Shivakumar:It's not come down. So, again I will reiterate. It doesn't matter whether the trade has grown or not. What matters is the investment returns that you're making from that business. We are an international shipping company. The crude trade not growing does not mean we can't grow. We can be five times our size in crude tankers without being too big in the market. So, the growth of the actual trade is not really a factor here when we are thinking of purchasing. We are looking purely at what is the return that you can make from that asset. Also one more thing, just keep in

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	mind is that when you look at trade, trade is a factor of two things. One is the total amount of
	cargo that has moved and second is the distance that that cargo has moved. So, you can have a
	situation and if you see the tanker market before the war and post the war, the amount of oil on
	water has changed marginally higher. However, the tonne-mile, which is the distance travels
	times amount of commodity carried, has increased substantially because of the war and the
	change in the trading pattern, and because of that you have much higher tanker rates. And also,
	you have to always keep in mind the supply side. You can have higher growth in demand, but
	you can also have higher growth in the supply of ships, which means that net-net you may not
	be better off in a trade that just grows faster. So, you have to look at all the factors to determine
	whether or not the market would be higher or lower.
Rajesh Khater:	And the 12 vessels that are coming up for repricing and you said that one of the tenders where
	you intended to participate has been cancelled. So, what are your plans now and how are their
	prospects looking end of June.
G. Shivakumar:	The vessels that are coming up for repricing have all been bid into businesses and are likely to
	get their next contracts at higher than the previous contracts. These are the offshore vessels.
	They've all been bid into tenders and the market is fairly tight. The one which I referred to the
	tender being cancelled is on a rig where we have just received the news of that tender being
	cancelled and therefore we will now evaluate our options with regard to that rig.
Rajesh Khater:	Sir, this other income of Rs.163 crores, what is it comprising of?
G. Shivakumar:	A lot of it is treasury income. We have a very large amount of cash because we have generated
	so much cash. So, that's treasury income.
Rajesh Khater:	You've mentioned in the slide the order book versus scrapping potential. As an individual
	investor, I mean just can you help me understand the significance of this, for example, let's say
	an LPG carrier which has a high order book and a low aging fleet versus a crude tanker, I mean,
	can you just help me understand the significance of this chart?
Rahul Sheth:	So, let me just go on to the crude tankers and product tankers where the order book is relatively
	low as compared to the scrapping potential. So, when we say, it's potential, the point is that
	largely over the age of 20, tankers find it hard to trade in international markets because either
	charters or terminals have restriction. Having said that, it is not necessary that those vessels will
	be untradeable. We often see that in tight markets, you can have a situation whereby the vessels
	trade longer than age 20. So, as of today you're seeing many vessels above the age of 20 but are
	not being forced to scrap because the rates are very high, owners are earning much above their
	costs on those assets and charters are also willing to accept those vessels because the market is
	very tight. However, if the market comes down and charterers have a lot of choice and those
	owners with older vessels are unable to trade those vessels or they're unable to employ them
	sufficiently well, they may then be forced to scrap those ships and therefore there is a potential
	for the supply of vessels to come down. On LPG, it's the reverse where the order book is high
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	enough and there isn't many vessels that are likely to be scrapped, because even if the market
	comes down and your vessels are relatively young, then you will tend to hold on for a longer
	period of time before you come up with the decision to scrap the vessel.
Rajesh Khater:	By order book, what do you mean here, I mean, you're referring to the order for the supply of
	new carriers?
Rahul Sheth:	That's right. So, if you see the order book of a crude tankers at 8%, it means you take the total
	fleet of crude tankers in the water and 8% of that is on order for delivery generally, over the next
	two to three years.
Moderator:	We will take our next question from Vaibhav Badjatya from Honesty and Integrity Investment.
	Please go ahead.
Vaibhav Badjatya:	So, on this Saudi Aramco changes in the capacity and cancellation of rate, are you also seeing
	some impact on OSV market or it is largely restricted to rigs?
Rahul Sheth:	So, at the moment we are not seeing such an impact on the offshore vessels. One thing to note
	is that the offshore, it's the number of vessels, the number of units are much larger. Also, the
	offshore vessels supply both the jack up market and the deep sea market and we are seeing
	sufficient demand in the deep sea market. So, the offshore vessels are well employed all across
	the globe. So, on that as of today, we are not seeing a major impact.
Vaibhav Badjatya:	And in the context that get repriced in first half '25? If you can help us understand broadly what
	is the extent of repricing both on PSVs and anchor handling supply vessels separately broadly,
	what is the current rate they're earning, which is coming into our financials and what is the last
	pricing which is indication of this?
G. Shivakumar:	We don't give out the rates at which these vessels are earning. Suffice to say that the earning
	rates and the last contract which have happened are between 50% and 100% higher than the rates
	at which these vessels are currently earning. And the markets continue to be there at close to 2x
	what these contracts are running at current. So, there is enough business for offshore vessels.
	That is something I want to emphasize.
Moderator:	We will take our next question from Pritesh Chheda from Lucky Investment. Please go ahead.
Pritesh Chheda:	On the Greatship side, what will be the incremental EBITDA addition that Greatship would have
	seen, the subsidiary?
G. Shivakumar:	Are you talking about in the coming year or you're talking about the past year?
Pritesh Chheda:	No, just the quarter gone by.

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G. Shivakumar:	So, if a couple of contracts got repriced you would have had an impact of $8 million to $10
	million additional EBITDA that is year-on-year Q4.
Pritesh Chheda:	So, standalone minus consol is largely Greatship EBITDA?
G. Shivakumar:	No, we will have the segment results there to see that. But we also have a trading subsidiary
	which does chartering and freight derivatives that also comes in the consolidated, it does not
	come in the standalone.
Pritesh Chheda:	Is it fair to assume that when I was listening to your last call or let's say the last couple of
	presentation had talked about 7 vessels to be repriced in H2 FY'24. So, those would have flown
	into your EBITDA in the second half of FY'24?
G. Shivakumar:	Yes, most of them would have flowed through to the EBITDA again for short periods of time.
	Because all the vessels that were employed as of April.
Pritesh Chheda:	Incrementally, we'll keep seeing build up on this EBITDA because there are another 15 vessels
	to be repriced in FY'25?
G. Shivakumar:	That is correct where the market stands currently, yes.
Pritesh Chheda:	At whatever the current market and the market stands in, these contracts are usually three years,
	right?
G. Shivakumar:	Yes, These OSV contracts usually are for three years. The rig contracts are also three years.
Pritesh Chheda:	My other question is, in the first two months of the current financial year on the commercial
	shipping side or the merchant shipping what are the rate increases, what are the Q4 averages?
G Shivakumar:	Product tanker rates have stayed around the same level or they've marginally been stronger. The
	crude tanker rates may be marginally weaker, but not that much, maybe a little bit weaker than
	they were in the previous quarter, but again this is as of the last one week and this changes from
	day-to-day.
Pritesh Chheda:	And the bulk?
G Shivakumar:	Bulks have been getting much stronger in the last week to 10 days, especially the smaller vessels.
Pritesh Chheda:	So, Saudi off-hiring 20 rigs means about 5% incremental supply. Do you see that's significant
	enough to change the mood in the rig market? Because what I heard was the ONGC were looking
	for rigs and ONGC had this 26 rig plan. So, does it change the dynamics of the rig market, which
	is in such a short supply and there is no incremental rig getting added.

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