The Hindu Business Line : Freight rates to remain healthy this fiscal — Mr K. M. Sheth, Executive Chairman, GE Shipping

Healthy freight market trends and tonnage growth have helped shipping companies in India register handsome increases in their net profits last fiscal. Although the freight rates have softened in the recent months, shipping companies are optimistic that it would remain firm and stable in the remaining period of the year.

However, the growth of the Indian and Chinese economies hold out some interesting possibilities for the shipping sector. In an interview with Business Line, Mr. K. M. Sheth, executive chairman of Great Eastern Shipping, India's largest shipping company in the private sector, discusses the prospects of the industry and the company.

Excerpts from the interview:

Let us start with your company's financial performance last fiscal. How does it compare with the previous fiscal?

The year 2004-05 was an impressive year for Great Eastern Shipping. The profit touched a record high of Rs 809 crore, representing a jump of 72 per cent over the previous year. The rise in profit was mainly due to tonnage growth of around 22 per cent and 8 per cent increase in revenue days.

The spot rates for all asset classes rose sharply and the company could take advantage of the rising freight rates on its tankers, which were trading in the spot market. Even the dry bulk carriers recorded a 23 per cent rise in earnings. The profit has resulted in an increase of 46 per cent in shareholders funds.

How has the tonnage tax impacted your organisation? How true are the government's claims that implementation of tonnage tax has resulted in the industry's `phenomenal growth'?

When compared to earlier years, tonnage tax regime is certainly beneficial. However, the growth in Indian Shipping cannot be solely attributed to the implementation of tonnage tax. On a year-on-year basis, that is December 2003 to December 2004, when tonnage tax was not implemented, there has been a 7 per cent growth in fleet (number of ships), a 16.3 per cent growth in GRT terms and a 16.92 per cent rise in DWT terms.

As on March 31 2005, when tonnage tax was implemented, the GRT of Indian fleet has exceeded 8 million, which is a growth of around 3.89 per cent since December 2004 and 15 per cent since 31, March 2004.

As regards G E Shipping, the impact has been positive due to reduction in tax outflow. The fiscal year saw a write back of around Rs 48 crore towards deferred tax provided — a one-time addition.

Global players are looking at India as an investment centre. Is GE Shipping facing competition on this account?

All the interest shown by global companies is in the liner or containerised trade, port operations and similar logistics services. Few manning agencies and BPOs have also initiated operations in India. Hence, in my opinion, this question is more relevant to shipping companies engaged in containerised trade, wherein the ships have a fixed route and a fixed schedule and carry varied cargoes from different customers.

As regards GE Shipping, we are in tramp trade and hence operate internationally.

How do you see the freight market in the current fiscal?

In 2003-04, global freight rates were phenomenally high across all the sectors. As I see it, in the current fiscal the freight rates for both dry bulk carriers and tankers are expected to continue at healthy levels. Prime contributors to strong freight rates in current fiscal would be high oil demand coupled with high oil supply.

The growth in demand for oil is expected to be at a lower level at between two to 2.5 per cent, as against last year's growth of 3.4 per cent.

In such a case, with high deliveries of tankers, which is expected to be about 30 million dwt and a decrease in growth rate, the average earnings could be softer. But, as tonnage is very tightly balanced, any disruption in supply or demand of oil could vitiate the equation either way.

On the dry bulk front, increased steel production and exports are expected to impact freight rates positively. China however would continue to be a key player in the dry bulk trade.

What are your fleet acquisitions plans? And how do you propose to fund them?

Asset prices are currently at very high levels for all asset classes and types. However, in spite of high asset price level, sale and purchase market globally remained extremely active throughout the last year.

GES believes in expansion with financial prudence — we believe in purchasing assets at mid-point, if not at the lower end of price curve, to ensure low breakevens.

The company was cautious in asset expansion last year. We increased our tonnage by around 87 per cent in the year before last, when the asset prices had not picked up and were lagging behind the surging freight rates.

We will continue to participate in the sale and purchase markets after gauging all investment parameters. On the new building front, the company has on order 13 new building vessels (six tankers and 7 OSVs). Five of these are expected to be delivered in the current year. On the second hand front, the company has contracted three modern Handymax dry bulk carriers to be delivered in the first quarter of this fiscal. The company intends to fund this expansion through internal accruals and borrowings.

What are the prospects in the offshore sector, now that exploration and production activities are on the upswing? Do you think the absence of a comprehensive maritime offshore policy in India will impact Indian players in the offshore business?

Prospects of offshore sector have improved over the years, especially in light of Government's increased attention to the sector.

The level of activities have resulted in new discoveries and also increased participation by foreign players.

In fact, the Government's recent decision to conclude the fifth round of NELP within four months, as against six months taken during NELP IV and also to reduce the net worth criteria from $1 billion to $500 million clearly indicates its commitment towards the development of the E&P industry.

Several E&P operators in the country have earmarked around Rs 10, 000 crore on an aggregate basis for E&P activities.

The country's largest E&P company, ONGC, is offering marginal fields for development. It has decided to launch the biggest ever data acquisition program and has also announced a major gas find in deep-waters recently. Activities off the coast of India are on the rise, which augurs well for the industry.

The Government has identified absence of a comprehensive maritime offshore policy as an area of concern and efforts are on to address the same.

What are your plans for LNG transportation?

LNG transportation is highly capital intensive and currently GES does not plan to induct LNG ships into its fleet on ownership basis. However, the company intends to participate in the business, which seems promising and hence has filed two RFQs for the Petronet's tender.

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