On October 1, the Shipping Corporation of India celebrated its golden jubilee in Mumbai. The Prime Minister, Dr Manmohan Singh, himself came down to grace the occasion. On October 3, the first trading day after the event, the shares of SCI fell 9.6 per cent. Was there a link between the golden jubilee and the fall in the stock price?

No, on the other hand, the Prime Minister had praised the role played by the company in the development of the domestic shipping sector. Normally, this should have boosted its share price.

But on the very day of the golden jubilee celebration, there was a news report that the financial position of SCI is precarious and that the company would be unable to raise funds for its fleet acquisition. The report was based on an internal note prepared by the financial advisor to the Shipping Ministry. Apparently, that news report had brought the shares down.

Officials of the company and the Shipping Ministry had subsequently clarified matters on SCI's financial position and allayed fears that the government-controlled company is heading for a debt trap. But its shares are yet to recover and, last Friday, they closed at Rs 71.97, more than 15 per cent below the September-end level of 83.

Bearish market

SCI had suffered losses in the last two quarters. Given the current bearish shipping market, the trend is unlikely to reverse in the near term. The company would be lucky if it could avoid being in the red for the full year. Even large global shipping lines are expected to face a steep dip in profits in the current year.

The financial advisor has apparently pointed out that SCI stands to lose around $200 million from its purchase of ships. It has on order 28 vessels costing $1.4 billion.

Of these, the market value of some of the vessels has come down and the lenders may ask for additional collateral. This would lead to a situation were the company's financial projections may go awry.

But, according to the company, its current debt-equity ratio is 0.66 and it will not exceed 1:1 even after it buys all the Eleventh Plan targeted 66 ships. Shipping is a highly capital-intensive business; globally, shipping lines are highly leveraged with debt-equity ratio of 1:2 or beyond. SCI's average cost of funds has been below two per cent in the last fiscal.

The financial advisor, who is also on the board of the SCI, had apparently raised the issue at its board meeting and the board took a decision to review the fleet acquisition plan and go slow on fresh investments.

There is nothing wrong in a financial advisor sounding the alarm. But, as an official put it, “leak of the internal note' and its timing, speaks of something more than meets the eye. There has been talk in shipping circles that after SCI became a “navratna,' some bureaucrats in Delhi have been unhappy that their personal requests were not entertained by the Mumbai-based PSU.

Strong fundamentals

Let's leave these rumours aside. As on date, the company's fundamentals are strong, but it needs to sail along cautiously. The global freight market outlook is bleak with too many ships chasing too few cargoes. The global economic environment could upset trade and cargo projections. And SCI cannot be insulated from the market uncertainties.

In such a backdrop, the company should think about alternative ways of acquiring tonnage. One idea could be to tap the ‘bare-boat cum-demise' (BBCD) charter route. Under this, the company does not have to make large capital investments.

BBCD is a form of lease financing where vessels are under the command of the charterer without ownership rights. It is a method of acquiring ships whenever the financing cost is very high. The charterer is free to operate the vessel as he wants. Only at the end of the contract, after a certain balloon payment, he gets ownership of the vessel. The only problem is that such vessels are treated as Indian flag only at the end of the contract.

But it can help tide over the immediate problem of acquiring tonnage without making large investments. It also can certainly help SCI from getting into a debt trap.

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