Shipping SR 240610

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Sector Report Shipping

Shipping: Range bound for now

June 24, 2010

SECTORSECTORSECTORSECTORSECTOR

REPORTREPORTREPORTREPORTREPORT

Bottom behind us but a "new normal" to persist

The bottom of the shipping cycle is behind us but we expect the earnings scenario to remain depressed in the next couple of years. The shipping sector

now reached a new normal where we expect the rates to remain rangebound which we expect to range around the 10% IRR level rates for the curr

second hand asset prices (US$ 29,000/day for VLCCs and US$ 25,000/day for Capesizes). The peak witnessed in FY08 is unlikely to be repeated ag

in the medium to long term.

Figure: Tanker charter rates Figure: Dry-bulk charter rates

Source: GE Shipping and Fearnleys Source: GE Shipping and Fearnleys

What made the charter rates go up?

Steel production in China grew by 21% YoY since 2001 (approx 75% of world steel production growth over the period). Seaborne trade growth for

bulk goods was around 3%YoY before 2003 but has been close to 6% per year since then.

Growth in tonne mile due to Increase in Brazil's share in iron ore exports which is about 11,000 miles as compared to 4,000 miles for Australia from the m

importing nation: China.

Shortage of shipyard capacity drove up the rates of new buildings.

Substantial speculative activity also contributed to the increase in the new building rates.

What brought it down?

Credit freeze across the world which led to a collapse of global trade

With the commencement of deliveries of the enormous orderbooks (at the peak almost 70% of existing fleet in case of dry-bulk) the situation worsen

What from here:

Medium term: Rates to remain depressed,

Long term: Tankers to recover, dry-bulk remain depressed

We expect rangebound charter rates with a down ward bias in the next two year period. Though we expect the Tanker segment to indicate better ratesthe end of FY11 the dry-bulk sector will persist with its long term bearish phase. Other segments like containers and LPG segment having more oligopoli

markets may show recovery due to application of certain floor rates.

0

50000

100000

150000

200000

250000

Sep-07

Nov-07

Feb-08

Apr-08

Jun-08

Jul-08

Sep-08

Nov-08

Jan-09

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Feb-10

Apr-10

(US$)

VLCC Charter Rates Median Charter Rates

Charter Rates for 10% IRR

93000

246000

50000

100000

150000

200000

250000

300000

Jan-0

7

Mar-07

Apr-07

Jun-0

7

Aug-0

7

Oct-07

Dec-0

7

Feb-0

8

Mar-08

May-0

8

Jul-08

Sep-0

8

Nov-0

8

Jan-0

9

Mar-09

Apr-09

Jun-0

9

Aug-0

9

Oct-09

Dec-0

9

Feb-1

0

Apr-10

May-1

0

(US$)

C apesize Charter R ates Median C harter R ates

10% IRR Charter Rates

Table: Financial snapshot (Rs m

Reco Revenues PAT EPS (Rs) NAV# (Rs) P/E(x) EV/EBIDTA (x) ROE(%)FY11E FY12E FY11E FY12E FY11E FY12E Current FY11E FY12E FY11E FY12E FY11E FY12

SCI* HOLD 41,315 46,030 6,443 7,312 15.2 17.3 135 10.8 9.6 6.2 5.2 10.0 11.0

GE Shipping BUY 28,499 32,684 6,226 7,429 40.9 48.8 287 7.4 6.2 7.3 6.2 10.4 11.4

Mercator HOLD 24,352 25,321 711 1,142 2.9 4.7 20 16.2 10.0 5.3 3.6 2.5 3.3

Varun Shipping Not Rated

Source: Company reports; IDBI Capital Market Services * Standalone; # Shipping fleet as on March 2010

Chetan Kapoor +91-22-4322 1232 [email protected]

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Contents

Page

Shipping Sector

Tanker markets: Recovery in sight only by 2012 ........................................................ ........................................................... ....................... 5

Dry-bulk markets: Charter rates likely to settle down..... ........................................................ .......................................................... ........... 10Container Shipping: Rates gaining ground on a weak foundation ................................................... .......................................................... ..... 14

Indian Shipping Scenario ....................................................... ........................................................... ....................................................... ... 17

Companies Covered

Great Eastern Shipping Ltd.

Summary ........................................................ ............................................................... .......................................................... .................. 19

Investment Highlights .................................................... ........................................................ ....................................................... .............. 19

Background........................................................ ....................................................... ........................................................... ..................... 20

Operational Highlights.................................................... ........................................................ ....................................................... .............. 21

Valuations .................................................. ........................................................... ..................................................... ............................... 23

Financials. ........................................................... ........................................................... ...................................................... ...................... 24

Financial Summary .................................................................. ...................................................... ........................................................... . 26

Shipping Corporation of India Ltd.

Summary ........................................................ ............................................................... .......................................................... .................. 29


Background........................................................ ....................................................... ........................................................... ..................... 30

Operational details ......................................................... ........................................................... ...................................................... ............ 31

Valuations .................................................. ........................................................... ..................................................... ............................... 33

Financials. ........................................................... ........................................................... ...................................................... ...................... 34


Mercator Lines Ltd.

Summary ........................................................ ............................................................... .......................................................... .................. 37


Background............................................... ....................................................... ........................................................... .............................. 38

Valuations .................................................. ........................................................... ..................................................... ............................... 40

Financials. ........................................................... ........................................................... ...................................................... ...................... 41


Varun Shipping Ltd.

Summary ........................................................ ............................................................... .......................................................... .................. 43


Background............................................... ....................................................... ........................................................... .............................. 44


Appendix 1: Shipping Sector Stats ................................................... ....................................................... ................................................... 46

Appendix 2: Global Peer Set .......................................................... ......................................................... ................................................... 47

Disclaimer .................................................. ........................................................... ...................................................... ............................... 48

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0

1

2

3

4

5

6

7

8

2001 2002 2003 2004 2005 2006 2007 2008 2011E

(%)

Cargo movement grow th(bn tonnes) World tonnage grow th (mn dwt)

Shipping markets have traditionally suffered long term cycles

Shipping markets have historically shown very long cycles which extend into decades. The imbalances, created due to

substantial growth in trade and subsequent shipbuilding bubble, inflates the fleet build-up. This leads to a drop in charter rat

which when goes down the breakeven cost per vessel (consisting of opex+capital cost). This leads to scrapping of vessels wh

again balances the demand supply gap. In the 1970s, the last shipbuilding bust period, had a very similar resemblance to t

bust seen recently in 2009 though the magnitude was different.

Fig.: Sea trade growth at ~1.3x world GDP growth Fig.: Deliveries have historically fal short of orders plac

Source: Clarkson Source: Clarkson

The boom in the shipping tonnage addition was led by the demand for commodities by Japan and Europe in the 1960s. T

demand push for Tankers was further amplified due to growth in oil imports by US. This led to an order of 129.5 mn dwt by 197

Remarkably, the historical data shows us that the deliveries lagged the ships on order so much so that only 60 mn dwt of tonna

was delivered. We expect a re-run of the 1970s wherein the delivery of the tonnage can show a shortfall of ~40% from the act

orders.

Cargo movement growth and shipping tonnage growth

In the initial part of 2000's we had seen a brief period when the world shipping tonnage addition had fallen short of the grow

in the cargo movement. Later on during the decade the shipping tonnage addition exceeded cargo movement growth but still t

charter rates improved mainly because of the growth in the miles aspect of the trade. We expect the shipping tonnage to contin

to overshoot the demand on the gross basis.

Figure: Cargo movement and shipping tonnage growth: spread to widen

Source: CESA and Intertanko

Historically long

cycles

Tonne mile growth

supported by growth

in miles

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The world merchant fleet which on a consolidate basis stands at about 1,234 mn dwt and has seen an average growth of 6.9

pa is expected to see a substantial addition in excess of 9% in the next couple of years.

Figure: Worldwide tonnage growth since 2006: substantial growth

Source: ISL - LR Fairplay

Figure: Total seaborne cargo: Crude oil forms the major share

Source: ISL - LR-Fairplay

Bauxite

13%

General

cargo, ro-ro

10%

Crude oil and

gas

37%

Container

15%

Iron-ore,coal

and grain

25%

LNG

7%

Reefer

2%Chemicals

6%

RoRo

5%

Cruise

1%

Car

5%

LPG

2%

Tankers

25%

Container

23%

Bulk

24%

1234.26.4105.8451.240.88.5452 169.5

6.9

1.72.1

117.213.9

-4

6.3

0

200

400

600

800

1000

1200

1400

Oiltankers

Chemical

tankers

Liquidgas

tankers

Bulk/OBO

carriers

Container

ships

General

cargo

ships

Passenger

ships

Total

(mndwt)

-15

-5

5

15

25

35

45

(%)

m n dw t 2010 Av . Yearly grow th (%) 2006-10 - dw t

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30

35

40

45

50

55

60

65

70

75

80

85

90

95

2003 2004 2005 2006 2007 2008 2009 2010 2011

-2

-1

-0

0

1

2

3

4

5

China United States Other Countries

Total consumption

Annual growth

Forecast

million barrels per day million barrels per da

Tanker markets: Recovery in sight only by 2012

Crude oil forms one-third of the commodities transported by sea from the producers to the consumers by a dedicated fleet of over 2,6

tankers with a capacity of more than 452 mn dwt (including crude and product). Crude oil shipping demand is primarily affected by t

crude oil demand which in turn is derived out of worldwide energy requirements.

Energy requirement is one of the major factors affecting crude oil shipping rates. Hence the demand side comprises key variables athe crude oil demand growth and the location of refinery capacity/storage capacity. On the supply side net fleet addition is the ma

factor affecting rates.

Major trade movements 2009

Source: BP Energy Review 2010

Demand scenario: Headline projections encouraging

Tonne mile demand is estimated to have fallen by 4% in 2009 compared to global oil demand declining by 1.5%. It is estimat

that tonne mile demand will increase in 2010 with oil demand expected to grow by 1.9%. A mild recovery in the crude oil dema

is anticipated on the back of estimates by EIA and IEA, which expect a 1-1.5 mnbpd growth in crude demand to stand at ~86

mbpd for 2010.

We expect a tonne mile growth of 4% in the tanker segment in 2010 and 2011, where the average distance traveled is expect

to increase post long haul trade growth of crude from Latin America and West Africa to the BRICS nations. Among the BRICS t

Chinese demand has shown a steady growth over the last decade with average demand for crude increasing by 9% CAG

China, currently consumes less than 10% of global oil but has absorbed the equivalent of more than 40% of every extra bar

produced since 1999. The tonne mile distances are hence expected to increase which currently stands at ~5,200 nautical mil

Figure: World liquid fuels consumption: on a recovery path

Source: BP Energy Review 2009

Crude demand to

recover

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Figure: Demand side projections: Tonne mile growth to clock ~4% CAGR

Source: IMF, IEA, Fearnleys

Ex-OECD countries to corner a bulk of incremental imports

There has been a marked change in the crude oil import share by the different regions in the world with the rest of the wo

mainly comprising of the developing Asian economies like China gaining prominence. This development is expected to furtimpact the trade patterns in the long run once the newly developed fields in the Latin American regions start producing crude p

2014.

Fig.: Importers: Share of ex-OECD countries increasing Fig.: Exporters: Middle-East predominates

Source: BP Energy Review 2010; IDBI Capital Market Services

but US inventories remains key indicator

US imports still constitute a major chunk of oil imports. The crude oil movement on the AG to US route constitutes about 40%

the total seaborne crude imported by US which is the largest importer of crude. The VLCC charter rater rates have historic

shown a keen correlation between the fall in the inventories and increase in the charter rates.

Figure: US inventories vs VLCC charter rates: inverse correlation

Source: EIA, GE Shipping and IDBI Capital

-30

-20

-10

0

10

20

1980 1984 1988 1992 1996 2000 2004 2008 2012

(%)

Tonne mile grow th % World GDP grow th

World oil demand grow th

0

1000

20003000

4000

5000

6000

7000

1980 1983 1986 1989 1992 1995 1998 2001 2004 20

(m

iles)

Av erage Distance mil

0%

20%

40%

60%

80%

100%

1980 1990 2000 2009

US Europe Japan Rest of World *Middle East

35%

North Africa

5%

West Africa

8%

Former So

Union

17%

South & Centra

America

7%

North America

11%

Europe

4%

Rest of World *

3%Asia Pacific

10%

1550000

1600000

1650000

1700000

1750000

1800000

1850000

1900000

Nov-0

6

Dec-0

6

Jan-0

7

Feb-0

7

Mar-07

Apr-07

May-0

7

Jun-0

7

Jul-07

Aug-0

7

Sep-0

7

Oct-07

Nov-0

7

Dec-0

7

Jan-0

8

Feb-0

8

Mar-08

Apr-08

May-0

8

Jun-0

8

Jul-08

Aug-0

8

Sep-0

8

Oct-08

Nov-0

8

Dec-0

8

Jan-0

9

Feb-0

9

Mar-09

Apr-09

May-0

9

Jun-0

9

Jul-09

Aug-0

9

Sep-0

9

Oct-09

Nov-0

9

Dec-0

9

Jan-1

0

Feb-1

0

0

5000

1000

1500

Crude inv entory VLC C charter rates(U S$/day )

Seasonal drops in US inv entories helps rates

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163.4

61.6

88.3

27.9

98

439

.1

59.4

21.5

17

62

4.6

128.5

23.2

8.1

9.4

2.4 1

5.7 5

8.8

29

10

6.1

3.3

7.1

55.4

7.3

3.4

1.5

0.3

1.8 1

4.3

0

100

200

300

400

500

600

VLCC Suezmax Aframax Panamax Small Total

(mndwt)

Ex isting Fleet Order book 2010E 2011E 2012E

0

20

40

60

80

100

120

140

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

(Nos.)

VLCCs Suezmax LR2/Aframax LR1/Panam ax

Storage demand provide little respite

The storage demand for tankers has been increasing though it impacts only about 6-7% of the shipping floating tonnage and

not sufficient enough to provide a long term support to rates. The demand for storage had received prominence post the fal

charter rates which brought the rates below the breakeven levels.

Figure: Number of vessels utilized in storage

Source: Intertanko

Supply side

The tanker supply has seen a growth of 6.6% CAGR over 2006-2010 which expected to increase to approach double di

numbers by 2010. By the end of 2009, the world tanker f leet (crude and products) reached 452 mn dwt which is 37% of wo

shipping fleet. According to minimum phase-out estimates even if all the tankers are phased out by 2010 and assuming 4

increase in tonne mile demand we have a scenario of oversupply in tanker tonnage.

Figure: Projection tanker fleet based on current orderbook and phase out (above 25,000 dwt)

Source: Intertanko and ISL Fairplay

Figure: Tankers delivery schedule

Source: Industry

27

0

278

2

95

311

326

341

360 4

05

423 4

67

471

470

468

464

0

100

200

300

400

500

600

2002 2004 2006 2008 2010 2012 2014

(mndwt)

Fleet

050

100150200250300350400450

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

VLCC Suezmax Aframax Panam

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Tanker delivery still onerous

Considering the tanker deliveries at various levels of trade growth and assuming a maximum phaseout of single hull tonnage

2010. Even considering a 4% growth in tonnage the tanker tonnage supply seems overbearing. We may see a balancing o

post FY14 in most optimistic of the estimates.

Figure: Tanker delivery: surplus to sustain

Source: Intertanko

Single hull tanker scrapping

About 13% of the existing single hull tonnage tonnage is yet to be scrapped. This tonnage we expect to be scrapped in the ne

two years. Less than 70000 dwt segment of the tanker fleet has the maximum share of the old tonnage which stands at ~17%

the existing fleet. This further indicates at the likely tough times for the large sized vessels which are relatively young.

Figure: Share of single hulls not significant Figure: Older vessel fleet relatively younger

Source: Intertanko and RS Platou Source: Intertanko and RS Platou

Net tanker fleet development

We expect reduction in surplus tanker tonnage only after CY11 provided all the single hulled tankers are scrapped and there

in nil addition in order book. Hence there is a likely sustained recovery in the tanker tonnage post 2011. This view can definit

undergo a change in case of higher than expected scrapping.

Fig.: Net tanker fleet development Fig.: Conclusion: Tanker tonnage growth & cargo grow

Source: Intertanko Source: CESA; Intertanko; IDBI Capital Market Services

-40

-20

0

20

40

60

90

92

94

96

98

00

02

04

06

08

10

12

14

Year

(mndwt)

Demolition Deliv eriesConv ersion Phase Out

Deliveries Deletion

Age Profile of tankers

45% 44% 40% 31% 39%

19% 25% 27% 34% 27%

11% 13% 16% 19% 15%8%

14% 16% 13% 12%17%7%5%

2% 3%

0%20%

40%

60%

80%

100%

10K-

70K

70K-

120K

120K-

200K

200K+

Total

0-5 y ears 5-10 y ears 10-15 y ears

15-20 y ears 20+ y ears

-40

-20

0

20

40

60

80

100

1970

1975

1980

1985

1990

1995

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2011

(%)

Tanker tonnage grow th Cargo grow th

Tanker Phase Out, Deliveries, Sc rapping Tankers 25,000 dw t+ assum ing various demand Increases

-50

0

50

100

CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 FY15

(mndwt)

Deliv eries Deletions Max Phase Out

Surplus Zero Trade Grow th Surplus 2.5% Trade Grow th Surplus 4% Trade Grow th

Removals in addition to phase out

Assumed market balance end 2008

Minus 2% grow th in 2009

Tanker Singe Hull Fleet, Orderbook & Total Fleet

0

100

200

300

400

SH - 13% Orders - 30% Fleet - 100%

(No.)

Small Panamax Aframax

Suezmax VLCC

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IRR sensitivity to charter rates

At the current value of secondhand ships we worked on the various IRR generated by the vessels at different charter rates. T

graphs thus generated in our model can hence be utilized to find out the likely charter rates which may provide feasi

operations. We believe that in case of the low utilization of the shipping fleet the charter rates will revert back to the "least feasib

charter rates.

Figure: Sensitivity of IRR with change in charter rates

Source: IDBI Capital Market Services

We have worked upon the following assumption:

TCE & OPEX remain constant

5 yr old Second Hand Vessels are bought Vessels are used for 15 years and then sold/salvaged

Insurance cost @1% of Book Value

Loan Repayment is EMI Based, payable quarterly for 8 years

Table: Charter rates for 10% IRR

Second hand

Tankers Price ($ mn) For 10% IRR Charter Rates as On 31-Mar-2010

VLCC 76 29153 22096

Suezmax 52 21734 22412

Aframax 38 17625 19554

Clean 22 12902 3620

Source: BRS; IDBI Capital Market Services

-0.05

0.15

0.35

0.55

0.75

0.95

1.15

9500

12000

14500

17000

19500

22000

24500

27000

29500

32000

34500

37000

39500

42000

44500

47000

49500

52000

54500

(US$/day)

IRR - Suexmax IRR - Clean IRR - VLCC IRR - Aframax

US$ 22 mnUS$ 38 mn US$ 52 mn

US$ 76 m

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Dry-bulk markets: Charter rates likely to settle down

Dry bulk segment which had witnessed all time high charter rates in 2008 are also similarly plagued by excess capacity as the tan

segment but the situation is much grimmer in this case. The current newbuilding orderbook is in excess of 53% of existing fleet. T

tonne mile growth has hovered between 6.2-8% over 2004-08 but going ahead we believe there will be slowdown in growth. T

slowdown will be mainly due to a flattening of iron-ore import growth by China which has been the main driver for the dry-bulk tra

A grim fleet addition scenario with fleet addition in double digits will continue to affect pressure on rates.

Major Dry Bulk Seaborne Trade Routes

Source: Dryships

Demand drivers: China all the way

Iron ore, coal and grains constitute ~70% of the total commodity being transported by the dry-bulk carriers. It is predominairon-ore and coal which decides the fate of charter rates in the dry-bulk sector. In this, China plays a significant role, at a t

when the world was cutting back on iron ore imports; Chinese consumption of iron-ore had a profound effect on dry bulk tra

In 2009 Chinese iron ore imports alone accounted for 67.9% of global iron ore trade and 20.6% of world dry bulk trade.

Chinese Iron-ore imports from Brazil recovered in FY10 which helped provide support to the dry-bulk charter rates in 200

Figure: Scorching growth in Chinese ore and coal imports helped support rates in FY11

Source: Bloomberg

208 275 326 384 444 628

16%18%

32%

42%

19%

0%

10%

20%

30%

40%

50%

2004 2005 2006 2007 2008 2009

0

100

200

300

400

500

600

700

China Iron Ore Imports, mn tonnes Growth, %

China Coal Imports

26%38%

51%38% 113%

46% 33%-25%

196%

0%

20%

40%

60%

80%

100%

120%

2005 2006 2007 2008 2009

-5

0%

50

10

15

20

25

Chinese Coal Import, mn tonnes Growth,

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Chinese Iron Ore Inventory

0

20

40

60

80

Ju

l-06

Dec

-06

May

-07

Oc

t-07

Mar-

08

Ju

l-08

Aug

-08

Sep

-08

Oc

t-08

Dec

-08

Jan

-09

Fe

b-0

9

Mar-

09

May

-09

Jun

-09

(mn

tonnes

)

CIOITTAL Index

Figure: Chinese Iron ore imports Figure: Iron-ore import growth from various sources

Source: Bloomberg Source: Bloomberg

China growth story showing a slowdown?

China has shown a CAGR of 12% in consumption of steel over the period FY03-10. For FY10, the Chinese steel consumptio

increased by 19% YoY. Close to 50% of steel consumed in China is for construction projects. With the increasing stress by t

Chinese authorities towards cooling off the economy we expect a moderation in growth in the Chinese iron-ore imports. T

contraction in M1 growth and moderation in PMI indicates at a lower growth in Chinese iron-ore consumption arising out

slower growth in economy. According to the WSA the Chinese steel consumption will show a slowdown in growth to ~5% Yo

for 2010.

Figure: Iron ore inventory at Chinese ports has been growing indicating at a reduction in demand pull

Source: Bloomberg

Steel consumption forecast

According to the World Steel Association (WSA) the world steel consumption is expected to increase by 10.7% in CY10E an

5.3% in CY11E. In case of China growth is expected to taper down substantially to 6.7% and 2.8% for FY10 and CY

respectively. This we believe is a negative for the dry-bulk shipping business which is now largely dependent upon the Chines

iron-ore demand.

Table: World steel consumption forecast: posting a grim picture for China

CY09P CY10E CY11E CY09P CY10E CY11E

World 1,121 1,241 1,306 -6.7% 10.7% 5.3%

China 542 579 595 24.8% 6.7% 2.8%

India 55 63 72 7.7% 13.9% 13.7%

BRIC 641 692 721 17.5% 8.0% 4.1%

World (excl China) 579 662 711 -24.5% 14.4% 7.4%

World (excl BRIC) 480 549 586 -26.8% 14.3% 6.7%

Source: WSA

010000000

20000000

30000000

40000000

50000000

60000000

Apr-04

Jan-

Oct-05

Jul-06

Apr-07

Jan-

Oct-08

Jul-09

(Tonnes)

CIRIIQSA Index CIRIIQAU Index

CIRIIQIN Index CIRIIQBZ Index

-100

102030405060

FY06 FY07 FY08 FY09 FY10

(%)

Total import grow th Import grow th from Brazil

Import growth from India Import growth from Aus tra

China monthly M1 S upply growth

010

20

30

40

50

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

(%)

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Tonnage supply

Effective tonnage supply growth

The dry-bulk tonnage which currently stands at 463 mn dwt is expected to see significant additions in CY10. We expect

effective tonnage supply for the year 2010 and 2011 which is in excess of 10.8% YoY. But slippages are more rampant in ca

of the dry-bulk segment and a repetition of 40% slippage seen in CY09 cannot be ruled out.

Figure: Dry-bulk tonnage addition schedule

Source: Industry

Figure: Significant mismatch expected in effective supply growth in tonne mile growth

Source: CESA; IDBI Capital Market Services

Table: Slippages can help to an extent

Total Dry Bulk Fleet (mn dwt) No of ships

Current Orderbook 277.8 3,165

Orderbook beginning of 2009 for delivery 2009 71.3 964

Delivered in 2009 42.5 531

'Slippage' for 2009 40% 45%

% of '09 Orderbook actually delivered 60% 55%

Current Orderbook for 2010 118.6 1,438

Expected deliveries Jan Feb 2010 (as at 01/01/10) 18.4 218

Actual deliveries Jan Feb 2010 9.9 119

'Slippage' for Jan Feb 2010 46% 45%

Source: Dryships

172

122

92

77

463

144

60

47

27

278

62

23

27

13

123

46

23

17

9

94

37

14

7 6

1

0100200300

400500600700

Capesize

Panamax

Handymax

Handysize

Total

(mndwt)

Ex isting Fleet Order book 2010E 2011E 2012E

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E

Effective supply growth Tonne mile growt

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IRR sensitivity to charter rates: Drybulk

At current value of secondhand ships we worked on the various IRR generated by the vessels at different charter rates. T

graphs thus generated in our model can hence be utilized to find out the likely charter rates which may provide feasi

operations. We believe that in case of the low utilization of the shipping fleet the charter rates will revert back to the "least feasib

charter rater rates.

Figure: Sensitivity of IRR with change in charter rates


We have worked upon the following assumption:

TCE & OPEX remain constant

5 yr old Second Hand Vessels are bought Vessels are used for 15 years and then sold/salvaged

Insurance cost @1% of Book Value

Loan Repayment is EMI Based, payable quarterly for 8 years

Table: Charter rates per 10% IRR

Second hand

Dry-bulk Price ($ mn) For 10% IRR Spot Charter Rates as On May-2010

Capesize 57 24,613 83,800

Panamax 38 16,545 43,000

Supramax 28 11,960 35,500


0.1

-0.05

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0.75

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34500

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47000

49500

IRR - Capesize IRR - Panamax IRR - Suprama

US$ 57 mUS$ 38 mnUS$ 28 mn

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Container Shipping: Rates gaining ground on a weak foundation

Container shipping which forms a part of the liner shipping segment also suffered from severe rate pressures in 2008 and 20

Excess capacity and slowdown in trade had taken its toll. We expect a slight improvement in situation in the container shipping segm

post greater co-operation between the container shipping players. The players have successfully tried to enforce a floor rate

container shipments on certain routes so that they can cover their operating costs. About 25 large liner companies dominate

container industry worldwide controlling about 85 percent of the container capacity.

A 6,500 TEU 5-years old vessel in 2007 commanded a daily hire of about US$ 40,000 for 3 years and only US$10-12,000 in 20

for about one year, as no owner was willing to charter his vessel for a longer period. That vessel would cost in excess of US$ 100

in 2007 and US$ 43 mn in 2009. Operating expenses are in the region of US$ 7,500 per day for such a ship. In May 2010, the d

hire for a one year charter would be in excess of US$ 24,000/day.

Today, about 90% of non-bulk cargo worldwide moves in containers stacked on transport ships; 26% of all containers originate fr

China. Current liner shipping capacity stands at ~14.1 mn TEUs with ~5,900 ships active.

Figure: Container shipping charter rates: Showing recovery

Source: Bloomberg

Improvement in fleet addition scenario

There has been a marked reduction in the orderbook position with outstanding orderbook standing at 34% of existing flee

TEU terms and about 22% in mn dwt terms. The idle capacity which is a good indicative of current fleet demand supply situa

has reported an improvement. The idle capacity has reduced from 1.03 mn TEUs in March 2009 to 0.63 mn TEUs by Ma

2010 which is ~5% of the total fleet. It is a significant improvement as compared to peak layoff of about 12% of capacity at the p

of the crisis.

Figure: Fleet addition estimates

Source: Alphaliner

CTEX I NDEX

0

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On the supply side, in 1QCY10 only about 17% of scheduled deliveries materialized, which, if replicated for the rest of the ye

suggests that only 60-70% of scheduled deliveries will actually happen in 2010.

Figure: Recovery in container trade

Source: Bloomberg

All is not lostDespite such a gloomy scenario we believe that all is not lost and there is ray of hope at the end of tunnel. There has been a substan

slowdown in capex over the last year, 2009. A spate of cancellations and deferments came as a respite to the dry-bulk sector in 20

The contracts are much more water tight in case of tanker segment but here too we saw slippages/cancellations of about 24.2% of

orderbook. Almost 40% of the orderbook in case of dry-bulk was deferred or cancelled in 2009.

Figure: Investment in shipping tonnage has reduced

Source: Clarkson World Shipyard Monitor

Substantial increase in scrapping

The scrapping of vessels has increased threefold the over 2009 on a YoY basis. Though it is still less than the scrapp

witnessed in 1985. The scrapping activity is only expected to gain further traction from here and breach the highs seen ear

Figure: Scrapping seeing a significant increase

Source: BRS and ISL

Substantial drop ininvestment in shippingcapex

0

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1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 8m09

(US$bn)

Tankers Bulkers LNG LPG Containers Others

2009 scrapping at 36 mn dwt

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Asset prices have slowly started to stabilize

Asset prices in the case of the tanker and dry-bulk vessels have stabilized over the last couple of months after a substan

decline. Prices in case of the tanker vessels dropped by almost 60% and in the case of dry-bulk vessels dropped by alm

50%.

Figure: Asset price trends

Source: Bloomberg; SSY; IDBI Capital Market Services

also there are good chances that vessels will not be delivered

In 2009 we had a seen good part of order delayed due to order cancellation and delays in execution.

Figure: Increase in order cancellations

Source: ISL Fairplay

6973 10953 3861 913 44

14349

95772

4990 1879 50

0

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40000

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120000

Tankers Bulk Carrier Container Ships General Cargo Passenger ships

(Thousanddwt)

2008 - 1000 dw t 2009 - 1000 dw

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45k Clean Aframax VLCC

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(US$mn)

Supramax Panamax Capes

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Indian Shipping Scenario

Indian shipping tonnage forms a miniscule 1.2% of the total world tonnage. Despite an aggressive growth in tonnage over the last

years the Indian shipping sector remains a marginal player. Almost 80% of the Indian cargo is carried by foreign flagged vessel

Figure: Share in Tonnage

Source: Bloomberg

Highly sensitive to tanker earnings

Indian Shipping companies have a considerable share of tanker tonnage in their fleet. Hence historically they have showconsiderable dependence upon the tanker charter rates.

Table: Shipping Fleet Profile (Under coverage)

Vessel SCI (Total DWT 4.88 mn) GESCO (Total DWT 2.94 mn) Mercator (Total DWT 2.1 mn)Type Number % of DWT Age Number % of DWT Age Number % of DWT Age

Crude 26 65 15 11 51 9 4 20 16

Product 16 13 14 20 34 14 4 15 0

Dry Bulk 18 17 20 6 15 13 13 65 3

Container 5 4 5

Total 65 96 15 37 100 12 21 100 5

Note: SCI and GESCO's product fleet includes gas carriersSource: Bloomberg

Net debt for the companies under coverage

The Net debt position of the shipping companies under coverage is modest and we believe the shipping companies un

coverage ahould be able to cover their long term liabilities in view of current expansion plans.

Figure: NetDebt to Equity position well poised in view of a comfortable DSCR


SCI, 33%SANMAR

SHIPPING, 1%

OTHERS, 21%

PRATIBHA

SHIPPING, 2%

TOLANI, 3%

PALLONJI

SHIPPING, 1%

VARUN, 3%

CHAMBAL

FERTILIZERS &

CHEMICALS, 3%

APEEJAY, 2%

WEST ASIAMARITIME, 1%

ESSAR, 3%GESCO, 18%

MERCATOR, 8%

2000 2730

19910

2900030100

0

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10000

15000

20000

25000

30000

35000

SCI GESCO(Stand) GESCO(Cons) Mercator Varun

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Companies Covered

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Company Report Great Eastern Shipping Ltd.

Great Eastern Shipping Ltd.

June 24, 2010

Price Performance

52-week high/low Rs 345/212

-1m -3m -12m

Absolute (%) 11.4 7.0 30.1

Rel to Sensex (%) 3.5 5.3 6.2

Key Stock DataSector Shipping

Bloomberg/Reuters GESCO IN / GESC.BO

Shares o/s (mn) 152.3

Market cap (Rs mn) 46,299

Market cap (US$ mn) 1,002

3-m daily average vol. 97,717

Stock vs Relative to Sensex

Source: Bloomeberg; Capitaline

Price (Rs.)

COMPANYCOMPANYCOMPANYCOMPANYCOMPANY


Summary

GE Shipping (GESCO), India's largest private sector shipping company has had a successful tra

record of maintaining profitability despite severe fall in rates. We expect the company to be able

successfully hedge its earnings by growing its fleet in offshore space, which currently has own

fleet strength of 14 assets through its subsidiary Greatship India. We believe that offshore w

contribute to almost 45% of FY11E PBIT. With likely listing of the offshore subsidiary we expe

a value unlock in the near term. We recommend a BUY on the stock with target of Rs 376, a 23

upside.

Investment Highlights

Listing of the offshore subsidiary to provide value unlocking

GESCO plans to list its offshore subsidiary Greatship India. The subsidiary currently has 14 owned ass

and 2 in-chartered assets under management. Post the leftover capex of US$ 362 mn the company

have total owned assets strength of 23 vessels. The listing of the offshore subsidiary is expected to furt

unlock value.

Stable offshore earnings to contribute significantly

With the growth of fleet in the offshore segment where the charter rates are likely to remain stable we exp

the offshore contribution in the combined consolidated entity will increase to ~37% by FY12. Compan

presence in the mid-sized offshore asssets is likely to be less risky as compared to a player like Va

which has a higher exposure in the higher end offshore segment.

Greater exposure to the tanker segment to provides better long term visibility

On a standalone basis GESCO currently books ~85% of its revenues from the tanker segment. We belie

that despite a bleak near term scenario the tanker segment is likely to achieve better rates in the lon

terms (beyond two years). We believe that the tanker cycle is currently at its trough and is less likely to

further down from here.

Valuation

We have done the valuation on the SOTP basis due to disparateness in the shipping and offsho

business. The shipping business has been valued on the basis of P/NAV basis whereas offshore has be

accorded 9x FY11E, PE based on the global peerset valuations.

Nifty: 5321; Sensex: 17730

AnalystChetan Kapoor

+91-22-4322 1232

[email protected]

BUGreat offer in offshore

CMP Rs 304

Target Price Rs 376

Potential Upside/Downside +23%


Year-end: March FY08 FY09 FY10 FY11E FY12E

Net sales 31,308 38,008 28,565 28,499 32,684

EBIDTA 13,856 15,496 9,401 11,237 13,324

Adjusted net profit 9,689 10,846 5,390 6,226 7,429

EPS (Rs) 63.6 71.2 35.4 40.9 48.8

P/E (x) 4.8 4.3 8.6 7.4 6.2

EV/EBIDTA (x) 4.4 4.3 8.8 7.3 6.2

Source: Company reports; IDBI Capital Market Services

Shareholding Pattern (%)

Promoters 30.00

FIIs/NRIs/OCBs/GDR 13.65

MFs/Banks/FIs 21.04

Govt. Holding 0.01

Non Promoter Corporate 8.19

Public & Others 27.12

0

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Sensex GE Shipping

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Background

G E Shipping is India's largest private sector shipping service provider. G E Shipping initially promoted by two families - the Sheths a

the Bhiwandiwallas, who started GESCO to help expand the reach of their trading businesses. The company started its shippi

operations in 1948, after obtaining the mothballed Liberty ship, SS Fort Elice. GESCO has a diverse asset base with presence in t

crude, product, dry bulk and offshore segments. GESCO has a presence in the offshore business through the wholly own

subsidiary Greatship India Ltd. The company's management is constituted by Mr K M Sheth, Chairman, Mr Bharat Sheth, Managi

Director and Mr Ravi Sheth, Managing Director of Greatship India.

Diagram: Fleet details


Table: Capex details

Capex planned Type of vessel Shipyard Amount (US$ mn)

ShippingFY11 Kamsarmax STX 136

Supramax Cosco

Supramax Cosco

FY12 Kamsarmax STX 332

Kamsarmax SPP

VLCC Hyundai

VLCC Hyundai

Offshore

FY11 PSV CDL 326

PSV CDL

PSV CDL

MPSV Keppel

MPSV Keppel

MSV Mazgaon Dock

MSV Mazgaon Dock

AHTSV Drydock World, Singapore

FY12 AHTSV Drydock World, Singapore 36

Total 939


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Operational Highlights

Figure: Avg TCY movement for the company's fleet: Expected to remain in a similar range


Very dynamic in S&P activity

GESCO has been one of the most aggressive companies historically in the field of sale and purchase of ships and is likely

continue the policy.

Figure: Consistent booking of profit in gain of sale of ships

Source: Company reports

Greatship: a good support

Greatship has a young (average age of ~2 years) mainly mid-sized offshore vessels. The following is the expected fleet pro

of the offshore segment at the end of planned capex.

Table: Fleet breakup post expansion

Vessel Type Greatship Fleet Worldwide Fleet Orderbook Orderbook (%)AHTSV 10 2,446 376 15.4

PSV 4 1,954 210 10.7

MPSSV, DSV 8 268 87 32.5

Jack-up rig 1 474 71 15.0

Total 23


The charter rate scenario in the offshore markets is expected to be more robust as compared to the shipping sector. Orderbo

situation is much less alarming in case of offshore vessels.

0

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Q1FY07 Q3FY07 Q1FY08 Q3FY08 Q1FY09 Q3FY09 Q1FY10 Q3FY10 FY11E

Crude Product Carrier Dry Bulk

248

3314

1363

28942545

1733

0

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2005 2006 2007 2008 2009 2010

Rsmn

Gain on Sale of Ship

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The orderbook in case of AHTSV and PSV category of vessels stands at 15.4% and 10.7% of existing fleet. Also about 48% a

40% of the existing fleet is above 25 years in the case of AHTSV and PSVs respectively. Hence relatively lower additions in

shipping tonnage are expected to sustain the current levels in charter rates.

Figure: Greatship revenue breakup: Rigs and the MSVs to constitute a major share of revenues


Table: Charter rate assumptions

Vessel Category Charter Rates (US$/day)

Tankers

Suezmax 25,000

Aframax 21,000

Panamax 21,000

MR 17,000

GP 15,000

Gas 15,000

Dry Bulk

Capesize 28,000

Panamax 16,000

Kamsarmax 20,000

Handymax/Supramax 25,000

Handysize 13,000

Offshore

PSV 17000

AHTSV 13500

MPSSV 25000

ROV support 30000MSV 50000

Rig Chetana 161000

Rig Chitra 130000


0%

20%

40%

60%

80%

100%

FY10E FY11E FY12E

PSV AHTSV MPSSV ROV support MSV Rig Chetana Rig Chitra

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Valuation

We have valued GESCO on SOTP basis, providing a multiple of 1x to the NAV of the shipping fleet and a multiple of 9x FY11E PE

the offshore subsidiary. We believe that asset prices are already at the trough level with a modest recovery underway a multiple

1x NAV is justified at these levels.

Table: Valuation

NAV of the shipping fleet (Rs) 287

PAT for Greatship India (FY11E) (Rs mn) 2,148

Multiple (x) 9

Contribution from Greatship (Rs mn) 19,328

After holding company discount (30%) 13,529

Total Value (Rs mn) 57,240

Value per share (Rs) 376

Source:

1 Year forward EV/EBIDTA chart (standalone): May be distorted due to Greatship contribution missing

Figure: P/NAV has remained in the 0.5x to 1x NAV range Figure: EV/EBITDA: Distorted due to Greatship earnin


Figure: P/B: Maintains in the 1x BV range


0

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Close Price 1XBV 1.5XBV .5XBV

0100200300400500600700

31/03/2007

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PRICE .5NAV 1NAV

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A p r - 1 0

EV/EBIDTA Mean

+1 Std dev -1 std dev

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Financials

Revenue contribution likely to be skewed towards offshore

The dependence upon offshore revenues is expected to escalate over the next couple years with the stagnation in the shippin

charter rates. Fleet accretion in the offshore segment is expected to increase its contribution with the charter rates likely to rema

stable.

Fig.: Dependence upon offshore revenue to increase Fig.: Revenue breakup of shipping business

Source: Company reports; IDBI Capital Market Services Source: Company reports; IDBI Capital Market Services

The GESCO standalone revenues are expected to remain depressed in the next two years. Greatship revenues are expecte

to grow exponentially on the back of fleet addition though the EBIDTA margins are expected to stabilize in the range of 36%

Fig.: GESCO standalone: revenue to remain stagnant Fig.: Greatship (India): providing support to revenue

Source: IDBI Capital Market Services Source: IDBI Capital Market Services

EBIT contribution to be further skewed towards offshore

We believe that the earnings will be further skewed towards offshore in FY11 as it is expected to contribute to 35% of consolidate

revenues whereas constitute about 45% of PBIT.

Figure: Shipping vs Offshore: Offshore PBIT contribution at ~45% in FY11E


0%

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FY09 FY10 FY11E FY12E

Shipping Offshore

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Rev enue EBITDA margin

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Leverage

The DSCR and the interest coverage ratios of the company are at ~1.2x and 3.7x for FY11E. We believe that GESC

(consolidated) is in a comfortable position to provide for the long term obligations.

Figure: Interest cover and DSCR (consolidated): comfortably placed


1.31.2

7.1

3.8 3.7 3.5

0.50.50.6

0.40

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2

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Financial Summary (Consolidated)

Profit & Loss Account (Rs mn)

Year-end: March FY09 FY10 FY11E FY12E

Net sales 38,008 28,565 28,499 32,684

growth (%) 21.4 -24.8 -0.2 14.7

Operating expenses -22,512 -19,165 -17,262 -19,360

Operating profit 15,496 9,401 11,237 13,324

Other operating income

EBITDA 15,496 9,401 11,237 13,324

growth (%) 11.8 -39.3 19.5 18.6

Depreciation -4,540 -4,246 -5,175 -5,770

Other income 2,190 2,808 2,656 3,065

EBIT 13,146 7,963 8,718 10,619

Interest paid -1,847 -2,123 -2,368 -3,010

Pre-tax profit

(before non-recurring items) 11,300 5,840 6,350 7,609Non-recurring items 3,231 -294

Pre-tax profit(after non-recurring items) 14,531 5,546 6,350 7,609

Tax (current + deferred) -454 -450 -124 -180

Net profit 14,077 5,096 6,226 7,429

Adjusted net profit 10,846 5,390 6,226 7,429

growth (%) 11.9 -50.3 15.5 19.3

Prior period adjustments 101 32

Net income 14,178 5,128 6,226 7,429Source: Company reports; IDBI Capital Market Services

Balance Sheet (Rs mn)


Current assets 27,134 21,848 33,453 38,163

Investments 3,023 21,789 3,058 3,058

Net fixed assets 75,800 75,034 88,860 99,125

Other non-current assets 7Total assets 105,956 118,678 125,371 140,345

Current liabilities 10,976 7,879 5,935 7,121

Total Debt 42,659 53,702 57,360 65,196

Other non-current liabilities

Total liabilities 53,635 61,580 63,295 72,317

Share capital 1,642 1,605 1,523 1,524

Reserves & surplus 50,679 55,493 60,553 66,504

Less: Misc. expenditure

Shareholders' funds 52,321 57,098 62,076 68,028

Minorities interests

Total equity & liabilities 105,956 118,678 125,371 140,345Source: Company reports; IDBI Capital Market Services

Cash Flow Statement (Rs m


Pre-tax profit 14,531 5,546 6,350 7,60

Depreciation 1,059 4,438 5,175 5,77

Chg in working capital 4,463 -2,549 -3,310 93

Total tax paid -454 -457 -117 -18

Other operating activities

Cash flow from operations (a) 19,599 6,977 8,098 14,13

Capital expenditure -20,053 -3,673 -19,000 -16,03

Chg in investments 151 -18,765 18,731

Other investing activities -3,543

Cash flow from investing (b) -23,445 -22,438 -270 -16,03

Free cash flow (a+b) -3,846 -15,461 7,828 -1,90

Equity raised/(repaid) -104 -37 -82

Chg in minorities

Debt raised/(repaid) 15,190 11,042 3,659 7,83

Dividend (incl. tax) -1,426 -1,408 -1,165 -1,47

Other financing activities 1,126

Cash flow from financing (c) 13,661 10,723 2,411 6,35

Net chg in cash (a+b+c) 9,815 -4,738 10,239 4,45Source: Company reports; IDBI Capital Market Services

Key ratios


EPS (Rs) Adjusted for sale of ships 71.2 35.4 40.9 48

EPS growth (%) 11.9 -50.3 15.5 19EBITDA margin (%) 40.8 32.9 39.4 40

EBIT margin (%) 34.6 27.9 30.6 32

ROCE (%) 15.9 7.7 7.6 8

Net debt/Equity (%) 39.1 63.5 47.8 48Source: Company reports; IDBI Capital Market Services

Valuations


PER (x) 4.3 8.6 7.4 6.

PCE (x) 3.0 4.8 4.1 3.

Price/Book (x) 0.9 0.8 0.7 0.Yield (%) 2.6 2.6 2.2 2.

EV/Net sales (x) 1.8 2.9 2.7 2.

EV/EBITDA (x) 4.3 8.8 7.3 6.Source: Company reports; IDBI Capital Market Services

Du Pont Analysis - ROE


Net margin (%) 28.5 18.9 21.8 22.

Asset turnover (x) 0.4 0.3 0.2 0.2

Leverage factor (x) 1.9 2.1 2.0 2.

Return on equity (%) 22.7 9.9 10.4 11Source: Company reports; IDBI Capital Market Services

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Financial Summary (Standalone)



Net sales 28,363 18,822 17,884 20,337

Growth (%) 9.9 -33.6 -5.0 13.7

Operating expenses -13,729 -11,275 -11,877 -12,397


Other operating income

EBITDA 14,634 7,547 6,007 7,940

growth (%) 15.2 -48.4 -20.4 32.2

Depreciation -4,185 -3,465 -3,908 -4,162

Other income 1,924 1,899 1,800 1,900

EBIT 12,373 5,982 3,899 5,678

Interest paid -1,536 -1,430 -1,346 -1,829

Pre-tax profit

(before non-recurring items) 10,836 4,553 2,554 3,849Non-recurring items 3,361 -233

Pre-tax profit(after non-recurring items) 14,197 4,320 2,554 3,849

Tax (current + deferred) -450 -392 -89 -135

Net profit 13,747 3,928 2,464 3,714


Growth (%) 12.9 -59.9 -40.8 50.7

Prior period adjustments 101 29

Net income 13,848 3,957 2,464 3,714




Current assets 21,634 15,281 21,848 22,973

Investments 12,510 32,510 20,678 21,858

Net fixed assets 53,740 48,255 52,113 62,330

Other non-current assets

Total assets 87,884 96,046 94,639 107,162


Total Debt 30,666 36,689 35,913 45,073

Other non-current liabilities


Share capital 1,523 1,523 1,523 1,523


Less: Misc. expenditure


Minorities interests

Total equity & liabilities 87,884 96,046 94,639 107,162




Pre-tax profit 14,197 4,320 2,554 3,84

Depreciation 711 3,790 3,908 4,16

Chg in working capital 2,797 -1,065 -3,071 32

Total tax paid -450 -392 -89 -13

Other operating activities -2,000


Capital expenditure -6,126 1,695 -7,765 -14,37

Chg in investments -3,296 -20,000 11,833 -1,18

Other investing activities -2,616 1,908

Cash flow from investing (b) -12,038 -16,397 4,067 -15,56

Free cash flow (a+b) 3,217 -9,745 7,368 -7,35

Equity raised/(repaid) -157 0

Chg in minorities

Debt raised/(repaid) 5,820 6,023 -776 9,16

Dividend (incl. tax) -1,425 -1,408 -577 -86

Other financing activities

Cash flow from financing (c) 4,238 4,615 -1,353 8,29

Net chg in cash (a+b+c) 7,455 -5,130 6,016 93Source: Company reports; IDBI Capital Market Services

Key ratios


EPS (Rs) Adjusted for sale of ships 68.2 27.3 16.2 24

EPS growth (%) 12.9 -59.9 -40.8 50EBITDA margin (%) 51.6 40.1 33.6 39

EBIT margin (%) 43.6 31.8 21.8 27

ROCE (%) 16.9 7.0 4.3 5

Net debt/Equity (%) 25.0 43.7 30.0 42Source: Company reports; IDBI Capital Market Services

Valuations


PER (x) 4.5 11.1 18.8 12.

PCE (x) 3.2 6.1 7.3 5.

Price/Book (x) 0.9 0.9 0.8 0.Yield (%) 2.6 2.6 1.1 1.

EV/Net sales (x) 2.1 3.7 3.5 3.




Net margin (%) 36.6 22.1 13.8 18.



Return on equity (%) 22.8 8.1 4.5 6.Source: Company reports; IDBI Capital Market Services

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Company Report Shipping Corporation of India Ltd.

Shipping Corporation of India Lt

June 24, 2010

Price Performance

52-week high/low Rs 182 / 112

-1m -3m -12m

Absolute (%) 6.1 6.7 39.0

Rel to Sensex (%) (1.9) 5.0 15.1

Key Stock Data

Sector Shipping

Bloomberg/Reuters SCI IN / SCI.BO



Market cap (US$ mn) 1,512



Source: Bloomberg; Capitaline

Price (Rs.)



SummaryShipping Corporation of India (SCI) a Navratna PSU is one of the least leveraged plays in shippi

space in India. The company has India's largest shipping fleet has a major presence in the tank

segment. Currently having an aged fleet (average age ~19 years) the company has on order

vessels which will bring down its fleet age to

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Background

The Shipping Corporation of India was established in 1961 by the amalgamation of Eastern Shipping Corporation and Weste

Shipping Corporation. Starting out as a marginal Liner shipping company with just 19 vessels, the SCI today has 77 ships of 5.1 m

dwt with interests in almost all segments of the shipping trade. In addition, SCI mans/manages 60 vessels of 0.2 million tonnes DW

The SCI owns and operates about 33% of the Indian tonnage servicing both national and international trades. Over the years it hdiversified into a large number of areas, and is today the only Indian shipping company providing overseas break-bulk and contain

services to Indian trade. The SCI operates shipping services in various segments viz. container, break-bulk, crude oil & products,

bulk, LPG / Ammonia, Phosphoric Acid / Chemicals, LNG, coastal passenger transportation, offshore logistic support services a

other coastal services.

Management

The SCI Board is headed by the Chairman and Managing Director, Mr S.Hajara, 5 full time directors heading the divisions a

10 part time directors (2 official and 8 non-official) nominated by Government of India.



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Operational details

Bulk

SCI currently has had a higher share of tankers in its fleet which is expected to undergo significant revamp post the acquisi

plan. The average age of the bulk fleet is expected to reduce post acquisition to 14 years from current 18 years. In b

operations the company is mainly catering to the cargo originating from the Indian subcontinent.

Liner

The company's liner operations are largely concentrated in the Asia-Europe route. Besides five owned vessels with 14,4

TEUs of owned capacity the company also has also an in-chartered fleet of about 5 vessels. SCI has actively renegotiated

older charters and working on a loss mitigation plan in the Liner business.

Table: Liner services details

Name Consortium Service Capacity of Allocation Port rotation

Partner vessels per week

Indian subcontinentservices (ISES) MSC Weekly 2750-3500 1650 Colombo / JNP / Mundra / Salalah /

Port Said / Barcelona / Hamburg /Rotterdam / Felixstowe / Port Said /Jeddah / Colombo

India Far East (INDFEX 1) PIL and Weekly 1950-2250 750 NSICT /Colombo / Singapore /K Line Susan / Shanghai / Ningbo /

Hong Kong / Singapore /Port Kelang / Colombo / NSICT

India Far East (INDFEX 2) PIL and Weekly 2100-2200 440 Chennai / Vizag / Singapore /K Line Hong Kong / Shanghai /

Dalian / Xingang / Qingdao /Hong Kong / Shekou /Singapore / Port Kelangand Chennai

SCI Middle East India Independent Weekly 1800 1800 Colombo / Tuticorin / Cochin /Liner Express (SMILE) Nhava Sheva / Mundra / Jebel Ali /service Mundra / Cochin / Tuticorin / Colomb

India - Red Sea Service Hull and 12 Days 1100-1700 775 Mundra - Nhava Sheva - Jeddah -Hatch Port Sudan - Hodeidah - Djibouti

-Aden - Salalah - Mundra.When there is adequate inducement,the SCI vessels in the service callat Eilat.

SCIMAX Maxicon 8-9 days 700 Kolkota/Haldia-colomboshipping agency


Others

SCI has a fleet of 10 offshore vessels with an average fleet of 25 years; these are currently employed in the Indian waters w

ONGC. It also services about 21 vessels of ONGC. The Liner segment also includes the passenger transport services b

owned by SCI and on account of the Andaman & Island administration.

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Capex details

The company plans to incur a capex of US$ 1.6 bn over the next three years. About 15 vessels are estimated to be added

FY11 and another ~10 in FY12. The estimated capex details are as given below:

Table: Capex details (Estimates)

Sr No Newbuilding Type Shipyard Total DWT Year of addition (estimated)

1 LR-II Product Hyundai , S Korea 105000 FY11

2 LR-II Product Hyundai , S Korea 105000 FY11

3 Aframax Crude Hyundai , S Korea 115000 FY11




7 LR-1 Product STX S Korea 73000 FY11




11 LR-1 Product STX S Korea 73000 FY1112 LR-1 Product STX S Korea 73000 FY11

13 AHTSV Offshore Bharati FY11



16 Handymax Drybulk STX Dalian 57000 FY 12

17 Handymax Drybulk STX Dalian 57000 FY12






23 AHT Offshore Cochin FY12

24 AHT Offshore Cochin FY12

25 Panamax Drybulk STX Dalian 80655 FY13




29 PSV Offshore Cochin FY13

30 PSV Offshore Cochin FY13


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Valuation

We believe that SCI will be able to draw upon the current low leverage and revitalize and grow its fleet in next two years. T

container/liner segment may show a reduction in losses. We have valued SCI on EV/EBIDTA basis providing a multiple of 7.5x FY1

providing a target price of Rs 170. The book value of the fleet is ~Rs 150 for FY10. We believe that at the current market price the sto

is fairly valued and recommend HOLD rating on the stock.

Figure: Recent valuation surpassed the normal P/NAV band


Figure: EV/EBIDTA chart Figure: P/B chart

Source: IDBI Capital Market Services Source: IDBI Capital Market Services

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Financials

Revenues

SCI is expected to book revenue CAGR of 15% over FY10-12E. Further growth in revenues is likely to be contributed by t

fleet increment in the next couple of years which is likely to see addition of about 25 vessels. Of this the bulk(mainly tank

segment is expected to provide major portion of growth with increment in the fleet. The recovery in the liner segment is currendependent upon the ability of the liner companies to hold on to the rate.

Figure: Revenues to show growth on back of fleet addition


EBIT to improve

We expect a modest recovery in liner segment and the accretion of the new-buildings is likely to lead to growth of overall EB

Figure: EBIT breakup: Liner segment recovery may support EBIT growth

Source: Company reports; IDBI Capital Market Services @ figures for bulk segment also include other income due to shipsale

Interest cover and DSCR

SCI is currently has an interest cover of 7x EBIT. The DSCR for the company is likely to be 1.5x in FY11E and 1.3x in FY12

Net Debt to equity which is negligible currently is expected to increase but with vessel acquisitions.

Figure: Interest cover and DSCR: most comfortable of all shipping stocks


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Financial Summary



Net sales 41,666 34,631 41,315 46,030

Growth (%) 12 (17) 19 11

Operating expenses (30,823) (29,941) (31,428) (34,281)


Other operating income 0 0 0 0

EBITDA 10,844 4,690 9,887 11,749

Growth (%) -56.7 110.8 18.8

Depreciation (3,239) (3,801) (5,366) (5,988)

Other income 3,496 3,171 3,200 3,300

EBIT 11,100 4,060 7,721 9,061

Interest paid (647) (525) (1,146) (1,599)

Pre-tax profit (before non-recur.) 10,454 3,534 6,575 7,462

Non-recurring items -56 38 13Pre-tax profit (after non-recur.) 10,798 4,760 6,575 7,462

Tax (current + deferred) (1,150) (1,000) (131) (149)

Net profit (before Minority Interest,Pref. Dividend etc..) 9,648 3,760 6,443 7,312

Prior period adjustments 0 0 0 0

Minority interests 0 0 0 0

Preference dividend 0 0 0 0

Reported PAT 9,648 3,760 6,443 7,312


Growth (%) (73) 154 13Source: Company reports; IDBI Capital Market Services



Cash and Marketable securities 26,728 24,065 26,326 30,858

Other current assets 13,557 13,851 13,177 14,103

Investments 1,115 1,667 1,115 1,116

Net fixed assets 59,278 63,615 87,731 93,759

Total assets 100,678 103,197 128,349 139,837


Total debt 24,717 26,969 49,458 57,145


Share capital 4,235 4,235 4,235 4,235



Minorities interests 0 0 0 1

Total equity & liabilities 100,678 103,197 128,349 139,836

Capital employed 86,801 90,339 114,797 125,252




Pre-tax profit 10,798 4,760 6,575 7,46

Depreciation 2,867 525 5,366 5,98Change in working capital 2,835 (212) 320 10

Total tax paid (1,150) (1,000) (131) (149

Other operating activities (4,313) 0 0


Capital expenditure (15,174) (4,862) (29,482) (12,016

Change in investments (700) (552) 552 (1

Others 2,461 (1,100) 1,047

Cash flow from investing (b) (13,413) (6,514) (27,884) (12,017

Free cash flow (a+b) (2,377) (2,441) (15,754) 1,38

Equity raised/(repaid) 5,763 1,286 1,969 2,76

Debt raised/(repaid) 10,175 2,252 22,489 7,68Dividend (incl. tax) (3,220) (2,469) (3,220) (3,220

Other financing activities (4,525) (1,291) (3,223) (4,092

Cash flow from financing (c) 8,193 (222) 18,016 3,14

Net change in cash (a+b+c) 5,816 (2,664) 2,261 4,53


Key ratios


Adjusted EPS (Rs) 22.0 6.0 15.2 17.3

Growth (%) -72.8 -72.8 154.2 13

Book NAV/share (Rs) 146.6 149.7 154.3 160

Dividend/share (Rs) 6.5 5.0 6.5 6Dividend payout ratio (%) 34.6 97.4 50.0 44

Tax (%) 10.6 21.0 2.0 2

EBITDA margin (%) 26.0 13.5 23.9 25

EBIT margin (%) 26.6 11.7 18.7 19

ROCE (%) 14.1 4.6 7.5 7

Net debt/Equity (%) -5.8 0.3 32.9 36Source: Company reports; IDBI Capital Market Services

Valuations


PER (x) 7.5 27.6 10.8 9.

PCE (x) 5.9 5.4 6.6 6.Price/Book (x) 2.0 1.6 1.4 1.

Yield (%) 2.8 3.4 3.4 3.

EV/Net sales (x) 1.8 1.6 1.3 1.




Net margin (%) 22.3 7.3 15.6 15.



Return on equity (%) 15.7 4.0 10.0 11Source: Company reports; IDBI Capital Market Services

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Company Report Mercator Lines Ltd.

Mercator Lines Ltd.

June 24, 2010

Price Performance

52-week high/low Rs 72/42

-1m -3m -12m

Absolute (%) 0.6 (17.8) (20.8)

Rel to Sensex (%) (7.3) (19.5) (44.7)

Key Stock Data

Sector Shipping

Bloomberg/Reuters MRLN IN / MRCT.BO



Market cap (US$ mn) 240



Source: Bloomberg; Capitaline

Price (Rs.)



SummaryMercator Lines (MLL), is India's second largest private sector shipping player has historica

ridden the shipping cycles well to show rapid growth of 56% CAGR in revenues and earnings fro

FY04-09. The sudden sharp decline in charter rates in FY09 impacted the earnings adversely whi

in FY10 which led to 81% YoY fall in earnings. We expect the earnings scenario for the company

moderately improve from here. This is expected to be mainly due to aggressive expansion in oth

avenues like offshore (rigs), and coal to hedge its risks due to shipping. We believe that the sto

is fairly valued at these levels and initiate coverage with a HOLD rating on the stock.

Investment Highlights

Most diversified player in the shipping spaceBesides shipping, MLL has presence in offshore, coal mining, dredging and oil prospecting. The reven

contribution from all these segments on a consolidated basis is expected to be in excess of 35% for FY

12. We believe that the diversification strategy may help the company to withstand the downturn in

shipping space.

MOPU deal to provide earnings support

The Mobile Offshore and Production Unit (MOPU) to be stationed at the west coast of Africa have be

chartered out to Afren Plc. The deal to provide a rig and one of its Suezmax tankers involving a capex

US$ 125 mn would provide MLL, revenues of US$ 225 mn over the next seven years. The company

be booking revenues of US$ 88,000/day from the MOPU venture which would provide it an EBID

contribution of ~US$ 65,000/day from Sept 2010 onwards.

Time charters and COAs to cover the dry-bulk operations

Mercator currently owns and operates 17 ships in dry-bulk space of which 13 vessels are owned. T

company currently has firm TCs for eight of its vessels and COAs for another four. The company's strat

of fixing long term charters has helped it bode over worse of the times.

Dredging business has seen a slow-down

MLL is has reduced focus on the dredging segment which was bogged down by lower utilization post

ending of contracts with DCI for the Sethusamudram project and other manpower issues. It plans

develop the skillset of the people in place which would take 4-6 months, before undergoing furth

expansion.

Valuation

We have valued MLL on an SOTP basis which translates to Rs 52 on the consolidated entity. We havalued the shipping fleet on NAV basis and the rig business on EV/EBIDTA basis. The coal and the MO

business have been valued on DCF basis.

Nifty: 5321; Sensex: 17730

Analyst

Chetan Kapoor

+91-22-4322 1232

[email protected]

HOLDNon shipping focus for now...

CMP Rs 47

Target Price Rs 52

Potential Upside/Downside +11%


Year-end: March FY08 FY09 FY10 FY11E FY12E

Net sales 14,549 22,105 18,087 24,352 25,321

EBIDTA 5,874 9,470 6,449 6,614 6,787

Adjusted net profit 2,976 3,773 184 711 1,142

EPS (Rs) 12.7 16.0 0.8 2.9 4.7

P/E (x) 3.7 2.9 61.6 16.2 10.0

EV/EBIDTA (x) 4.0 3.3 5.2 5.3 3.6


Shareholding Pattern (%)

Promoters 37.96

FIIs/NRIs/OCBs/GDR 19.49

MFs/Banks/FIs 8.61

Non Promoter Corporate 6.66

Public & Others 27.29

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Background

Mercator Lines Ltd (MLL) was incorporated on 24 November 1983 as a private limited company and is currently the second large

private sector shipping company in India. It was converted into a public limited company on 3 April 1984 and was taken over by t

promoter of the company, Mr H. K. Mittal in 1988. After its maiden issue in 1993 the company procured an oil tanker of 1,000 d

capacity and a cargo carrier of 4,300 dwt capacity and since then has grown manifold.

The tonnage has expanded exponentially to about 1.8 mn dwt in 2007. The company has forayed into the oil & gas offshore busine

through its subsidiaries and placed an order for the construction of a new generation Jack-up rig. Currently, Mercator has presen

in the segments of crude oil, product tanker and dry bulk operations. Mercator also has presence in coal mining through its subsidia

Oorja Holdings Pte, which holds coal mining blocks in Indonesia.

Diagram: Company structure




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Time charters and COAs to provide good visibility for dry-bulk operations

Mercator Lines (Singapore) currently owns and operates 17 ships in dry-bulk space of which 13 vessels are owned. Curren

MLL has firm TCs for 8 of its vessels and COAs for another ~4 vessels which provides it a better TC:Spot mix of ~70:30. T

company's strategy of fixing long term charters has helped it bode over worse of the times. Only one of these vessels is com

for re-negotiation in the next six months.

Diagram: Mercator Dry Bulk Contracts Details: Indicate good coverage

Source: Company pr

Documents

Shipping SR 240610