Great Eastern Shipping : 2QFY2023 Earnings Call Transcripts

"The Great Eastern Shipping Company Limited Q2

FY23 Earnings Conference Call"

November 14, 2022

MANAGEMENT MR. BHARAT SHETH - DEPUTY CHAIRMAN AND

MANAGING DIRECTOR, THE GREAT EASTERN

SHIPPING COMPANY LIMITED

MR. G. SHIVAKUMAR - EXECUTIVE DIRECTOR AND

CHIEF FINANCIAL OFFICER, THE GREAT EASTERN

SHIPPING COMPANY LIMITED

MS. ANJALI KUMAR - THE GREAT EASTERN SHIPPING

COMPANY LIMITED

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The Great Eastern Shipping Company Limited

November 14, 2022

Moderator:Good evening, ladies and gentlemen. Thank you for standing by. Welcome to GE Shipping Earnings Call on declaration of its financial results for the quarter 2 of FY '23. At this moment, all participants are in the listen-only mode. Later, we will conduct a question and answer session. At that time, you may click on the raise hand icon to ask a live question. Please note that this conference is being recorded. I now hand the conference over to Mr. G. Shivakumar, Executive Director and CFO at The Great Eastern Shipping Company Limited to start the proceedings. Thank you, and over to you, sir.

G. Shivakumar: Thank you. Good afternoon, everyone, and welcome to the results presentation for Q2 and H1 FY '23. Thank you for joining us today. Let me go through quick highlights that we try to present. We have Mr. Bharat Sheth, our Deputy Chairman and Managing Director here with us. I won't take up too much time on the presentation, so that we can get into Q&A.

Let's go forward. Standard disclaimer. Our market is quite difficult to forecast, and therefore, we don't make forecast of our earnings. Or what we're trying to do is explain what has gone into the past performance and what are the various factors lining up to be.

So, highlights. We have just declared our best-ever quarter of profits. Our previous best was in Q2 FY 2008, '09, that was a quarter just before we had global financial crisis. And that was just about Rs. 500 crore. In this quarter, we have had a profit of Rs. 688 crore. That's on a standalone basis. And on a consolidated basis, we have a net profit of Rs. 769 crore. The half year profit was Rs. 1,100 crore and Rs. 1200 crore standalone and consolidated respectively. We declared a second straight interim dividend. That's our second interim dividend for this year. And after the last 5 quarterly meetings we had, 4 of them have ended with the Board declaring an interim dividend. We also finished the quarter, thanks to the strong cash flows, with more cash than debt. Therefore, we are now net cash. We have zero net debt, in fact, a negative net debt.

As you know, we also normally present what we call the normalized financials, which strips out the impact of the exchange rate movements on our results. At this time, there's not much difference between the normalized and the reported results. So, marginally up and down. It's a couple of percentage points up and down in terms of the impact on the results. We'll come to the net asset value. And this is just a little bit of the history of what's been happening to our earnings. Obviously, the last couple of quarters have been very strong, which you see reflected in this graph.

You would have seen this management commentary by Mr. Bharat Sheth. Again, this has to do with the markets and what has happened in terms of the results. The last bit is important, the last couple of paragraphs. We are also seeing continuing strength in oil prices and that seems to be having a positive impact on the offshore oilfield services business as well. We've seen an uptick in asset values. We have seen an uptick in contracting in the international market and in rates that are being awarded in the international markets. Again, all of this comes with a word of caution, high inflation, high interest rates, there is certainly potential for a global recession or at

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The Great Eastern Shipping Company Limited

November 14, 2022

least in significant parts of the global economy, and that could affect demand for commodities, and that's what really drives our business. So, that's something to keep in mind.

Tankers did exceptionally well in this quarter, that's crude and product tankers. They were quite strong in the last quarter. They built on that strength in this quarter, that is in Q2 of FY '23. LPG carriers continue to be all on time charter. The improvement in rates is because we've sold one of the smaller ships, which was a time charter at a slightly lower rate. And that's one of the main reasons for improvement in rates.

We also had in the previous quarter, a dry dock which could have skewed this. Dry bulk rates have come off quite a bit in the quarter, down 20% on average from the previous, that's the immediately preceding quarter. And after this also, we have seen some drop in rates that is in the month of October.

Now one of the things that happened is that we've had a very big change in our net asset value. And we ended March '22 with a net asset value of Rs. 618 per share. We are declaring a standalone net asset value of Rs. 809 a share. The contributions to this, and we've just taken the main contributions, cash profit of Rs. 96 a share, that's PAT plus deprecation. The fleet value has gone up by Rs. 106 per share. Most of it due to re-evaluation of ships, some of it due to the exchange rate changes because the rupee had depreciated against the dollar.

We, of course, have paid in May and August. We've paid 2 interim dividends for a total of Rs.

10.80. So, that took away from the net asset value since it was an outflow to the shareholders. So, that's our standalone net asset value move. Just going back, a little bit in history, and this is since March 2017, this is how our standalone net asset value has moved. The CAGR of NAV has been 17% over this 5.5-year period, so all the way from Rs. 337, up to Rs. 809 per share.

Coming to consolidated net asset value, that's gone up as well. That's gone up from Rs. 679 per share in March to Rs. 935 per share. For the first time in many quarters, we are seeing a significant marking up of values of offshore assets. So, rigs were all on average, marked up by about $12.5 million at the midpoint of the range. Offshore vessels also saw some marking up in values. And that's what helped the net asset values to go up even more on a consolidated basis. So, we had Rs. 190 increase in standalone net asset value. But if you take it on a consolidated basis, you have a Rs. 250 increase in the consolidated net asset value.

Looking at the shipping markets. The story is pretty clear. If you look at the graph, we were down in the dumps on the tanker markets last year, all the way up to Q4, so which reflects in the rates you can see there, so in YTD FY '22, Suezmaxes earned $5,500 a day. And YTD FY '23, they've earned $41,000 a day. This, again, is not our average. This is the spot market average. MR tankers also had a spectacular increase from $6,000 a day to $36,000 a day. Now what caused this change in trade patterns. So, more of West-East and East-West trade flows, shortage in middle distillates in the Atlantic basin, which resulted in longer movement of products. And we have some statistics on the increase in trade. So, we have demand on both crude and the

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The Great Eastern Shipping Company Limited

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product trade back to pre-pandemic levels, which is an important milestone because we've been expecting this all the way from middle of 2021, and it is not happen, but finally is there. And this is despite the Chinese demand actually not growing and because of the lockdowns. The fleets have grown but the very heartening fact is that the order book for crude and product tankers is between 4% and 5% of orders.

Coming to dry bulk, dry bulk performed significantly worse than in the previous quarter and in the previous year. So, you had a more than 50% drop in Capesize earnings year-on-year. We also had a drop between Q1 and Q2, and that was more pronounced in the case of the Capesize and less in the case of the smaller vessels. You can see it on the right as well in the Supermaxes, we dropped by about 24% year-on-year. And since we haven't mentioned that number here, but it's dropped by probably 15% to 20% in from Q1 to Q2.

Again, trade growth has been flat to negative YTD over the previous year. And again, because of weakness in the iron ore trade which has been compensated to some extent by the Minor bulk, that weakness in the iron ore trade explains why the Capesizes have been so weak. We had lower congestion, especially for Capesizes and that released a significant amount of the fleet into the market, and that again changed the demand supply balance.

The current order book to fleet ratio continues to be again not high and therefore, gives somesort of comfort that we don't have too much of a supply overhang going forward. LPG, the spot market really doesn't matter or really hasn't affected our earnings because our ships were on time charters through this quarter. However, markets have been stronger YTD FY '23 versus FY '22. And they've become even stronger now over the last 2 or 3 weeks. However, our ships, our 4 LPG carriers, all are on time charters and therefore, will not be participating in this market. Looking at fleet supply. I already mentioned this about the order book. So, we have about 4% to 5% for the crude and product tankers. We have got 7% for the bulk carriers.

Asset prices, of course, have gone up, reflecting what has happened to earnings. Dry bulk has come down by about 15% to 20% during the quarter, again, reflecting what has happened to earnings. And as we've seen, of course, reflected in our net asset value. Scrapping, I won't go into because it's been nothing significant since the markets have been quite strong.

Coming to the Oil Field services business, Great Ship India Limited. There is an increasing number of cold stacked rigs, but there are also more rigs coming off from idling and moving into contracts. We'll see it here, there's a gradual improvement in utilization and rigs under contract. So, we are back again to pre-pandemic levels. If you recall, in early 2020, we said we seem to have turned a corner in the drilling market, oil field services market.

Unfortunately, COVID came in and derailed that recovery but the market has got significantly tighter since then, of course, we've had removals of rigs as well. We have seen very much improved pricing coming in from contracts that have been announced in the Middle East by listed players. So, there is a lot of optimism in the market. And significant amount of tightness

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The Great Eastern Shipping Company Limited

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in the market for jack-up rigs. This is also reflecting in a slightly lesser way on the vessels. We have 1 rig coming off contract in H1 FY '24, which needs to be repriced. We have 6 vessels coming off contract between now and March '23 and that's the other schedule. And the other 2

	rigs are coming off contract at FY '25.
	Looking at a couple of financial ratios, and we've been showing this graph for some time. So,
	we levered up in FY '17, '18, '19 to buy ships. And what has happened since then is that we've
	had very strong cash flows because those investments paid off and we are now down to negative
	net debt. Again this is all standalone numbers. Just an indication of where we stand today. We
	are still trading at a significant discount to net asset value. Our net asset value, as I showed you
	earlier, is about Rs. 935 in the middle of the range for offshore asset values. We're still at about
	35% to 40% discount in those segments.
	We continue to make initiatives on the environment. We try to save on fuel consumption and
	therefore, reduce our CO2 emissions. For anyone who is interested in our ESG efforts, we have
	a lot of information available on our website under the tab for sustainability. Last year, we
	published our first ESG report. And of course, we are looking at different things that we can do
	in order to increase our initiatives.
	Thank you. That brings me to the end of the presentation, and we'll now throw the floor open to
	you for questions, and we'd be happy to discuss our markets.
Moderator:	Thank you very much. We will now begin the question and answer session. The first question is
	from the line of Amit Khetan from Laburnum Capital. Please go ahead.
Amit Khetan:	Just coming to the tanker markets, so we've seen very good rates and the fundamentals look very
	supportive. My question was based on your understanding of the market, what are the main 2 or
	3 risks or rather events, as you like to say it, that you as management are most mindful of which
	could take freight on a sustained basis, back to the levels that we saw for much of 2021.
Bharat Sheth:	So, we don't think that should happen again because, as we know, Cal '21, the average for the
	year was at a 31-year low. So, that's unlikely to happen. Can the markets downward correct?
	Yes, they could. And what could drive that downward correction? Although I don't believe it's
	going to be anywhere close to the Cal '21 numbers, but some corrections can always take place.
	And it all depends on, I guess, the level of possible demand destruction on recessionary fears
	and on what can happen on interest rates and the whole impact that on demand for some of the
	products, particularly on diesel oil. But if you look at the inventory levels, they're all running
	pretty low. So, hopefully, some demand destruction we'll be able to take in our stride, but a lot
	more demand destruction than currently anticipated, can upset the applecart.
Amit Khetan:	And do you have a preference for operating the spot market, but given the kind of rates that we
	have been seeing lately, are you tempted to lock in more time charters? And broadly, how are

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