Analysts say future performance will hinge on stability in commodity prices and trade for the sector as a whole. The sector still holds a few green apples, which can allow those invested to remain parked, if with a long-term perspective, of more than a year. The reason: the bigger Indian shipping companies get a large portion of their revenue from the tanker segment where freight rates haven't collapsed as is the case in the dry bulk segment.
The Baltic Dry index (BDI), the global benchmark for shipping freight rates, has crashed from a high of 11,000 in 2008 to 297 currently, on a slowing Chinese economy and commodity price crash. The World Bank has projected a slow growth era, with 2015 growth falling from the 2.6 per cent in 2014 to 2.4 per cent. In 2016, it could reach 2.6 per cent.
The BDI measures change in transportation cost of raw materials like metals, grain, and fertiliser by sea. The Baltic Dirty Tanker index and Baltic Clean Tanker index are used for crude oil and petroleum products, respectively. The tanker segment is doing well, due to increased demand for storing of crude oil. However, it remains to be seen if the trend would prevail.
“Last year, demand for crude oil was higher. In 2016, we see the demand at 1-1.25 million barrels a day. From the supply side, there is no growth seen this year. Last year, supply was up by a good three million barrels,” G Shivakumar, group chief financial officer at Great Eastern Shipping, said at a December quarter earnings conference call. "Also, we do not know how storage will play out in crude oil, since facilities on land are coming close to tank tops. Due to this, earnings from the tanker segment are going to be lower in 2016, compared with 2015."
Great Eastern Shipping and state-owned Shipping Corporation of India continue to be the preferred bets by brokerages, due to their diversified business models. About half of SCI’s 69 vessels are in the tanker segment, including the VLCCs (very large crude carriers), which insulates the company from the bad weather the dry bulk is going through, for its 17 bulk vessels.
Over the past few quarters, SCI has gradually got back on its feet; it reported a profit in the year gone by, after about three years. An analyst with a foreign institution said GE Shipping and SCI were their favourite shipping stocks for 2016.
Great Eastern, with a dry bulk presence of eight vessels and a tanker division with 21 vessels, and also in the offshore segment, is the biggest favourite among analysts, for the lightest balance sheet (compared with peers). The debt-equity ratio is well below one. The company has been able to reap profits despite the challenging business environment.
“Great Eastern is a better business model, as it is well diversified and can manage the business cycle better. They time their sale and purchase of vessels very well, crucial in this business,” said Bharat Chhoda, analyst with ICICI Securities.
Shipping and logistics company Mercator recently did away with the pain in this business by exiting its dry bulk business, carried on by its Singapore arm. With coal prices down significantly and tankers not as strong as last year, challenges will continue for the company, said analysts.
Debt-laden Varun Shipping, which has strong presence in liquefied petroleum gas (LPG), has wanted to de-merge its business into shipping and ship management but has not been able to make a significant difference to its heavy balance sheet.
"It is certainly not the right time for new investors to come into the shipping sector, where the business outlook is still so weak. They should wait till crude oil and commodity prices stabilise and demand revives,” said Deven Choksey, managing director, KR Choksey Shares and Securities.
However, those already invested should keep patience, said analysts. “The industry is going through a tough time and is certainly going to test the patience of investors,” said Vikram Suryavanshi, analyst with Philip Capital.
Glut in dry bulk capacity has given rise to a demand for scrapping of excess capacities. However, a 20 per cent fall in scrap prices is discouraging ship owners, said officials. Another solution could be to focus on coastal shipping. “We have been into coastal shipping for two to three years but noting the grim scenario overseas, we are looking to focus more in the domestic market, mainly coal needed for power plants,” said a senior official with SCI. “We want our dry bulk vessels to remain deployed and employed on water and, so, will turn more focus to coastal.”
Great Eastern thinks differently, though it has vessels for coastal shipping.
“The market is not too different for coastal; there is limited scope there as well. We don't get any premium in Indian trade. It is the same as global. We will continue to keep the same number of vessels, at four-five, for coastal,” said Shivakumar.