Great Eastern Shipping : 2QFY2024 Earnings Call Transcripts

"Great Eastern Shipping Company Limited Earnings

Conference Call"

October 31, 2023

MANAGEMENT: MR. G. SHIVAKUMAR - CHIEF FINANCIAL OFFICER &

EXECUTIVE DIRECTOR, THE GREAT EASTERN

SHIPPING COMPANY LIMITED.

MS. ANJALI KUMAR - HEAD OF CORPORATE

COMMUNICATIONS, THE GREAT EASTERN SHIPPING

COMPANY LIMITED.

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Moderator:Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to GE Shipping Earnings Call on Declaration of its Financial Results for the Quarter-ended September 30th, 2023.

At this moment all participants are in the listen-only mode. Later, we will conduct a question- and-answer session. At that time, if you have a question please press '*' and '1'. I now hand over the conference to Mr. G. Shivakumar - Chief Financial Officer and Executive Director at The Great Eastern Shipping Company Limited to start the proceeding. Thank you. And over to you, sir.

G. Shivakumar:Good afternoon, everyone, thank you for joining us for the discussion of the Q2 Results in market. As it is customary, we will take you through to a short presentation. And then we will move on to the discussions. Customary caveats apply, we are not forecasting markets, we are just giving some views of how we think the markets can pan out.

Highlights:

Net profit of just under Rs. 600 crores on a consolidated basis. Our consolidated net asset value has moved up to Rs. 1,263 per share, that's at the midpoint of range of offshore asset valuations. Our Standalone NAV has moved past Rs. 1,000 a share. We also declared a second interim dividend that makes a seventh consecutive quarterly dividend.

You have seen the results. So, I am not going to go through the numbers in detail. And we have the normalized financials as well. It's not too far from where the reported financials are. So, again, I am not going to go through these in detail.

You can see what's happened with the markets in this quarter. Product tankers, crude tankers both were slightly weaker than in Q1. And product tankers were significantly also weaker than in Q2 of the previous year. Crude tankers were slightly better than in Q2 of last year. LPG ships are on time charter, so it's much of a muchness. Dry bulks were much weaker than they were in Q2 last year and slightly weaker than in Q1 this year. And when we discuss the market, we will see what led to this market performance.

Again, I must say that crude tankers which are showing $40,000 on average for Q2, current spot markets for Aframaxes and Suezmaxes are probably in excess of $55,000 a day as of yesterday or today. Product tankers are around or a little lower than this. They are probably in the low to mid-20s.

LPG spot: again, our ships are on time charter. But LPG spot markets are close to $100,000 a day. We don't currently have any ships on the spot market. And dry bulk, the spot average across our type of ships is probably somewhere in the $15,000 per day range as of today, just giving weightages for different classes of ships.

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Changes in the net asset value from a year ago, we have had a Rs. 200 increase in net asset value, little over Rs. 200, of which Rs. 194 is contributed by just the cash accrual to the company. So, it's not just a mark-to-market gain on the asset prices, that is there, that is Rs. 53 per share in fleet value. But most of the gain has come from actual cash profits, which have accrued. Of course, in the last 12 months we have also paid out about Rs. 36 in dividends. So, we have had significant gains on net asset value over the last five years.

On a consolidated basis again, we have had Rs. 300 increase of which Rs. 223 has come from cash profits. Fleet value improvements have happened more than on a standalone basis because the offshore assets have been going up steadily in value, as the market strengthens.

Just looking at the shipping market, we are looking at crude and refined products, both of them, in the last quarter, were significantly below their Q2 last year numbers, though obviously much above FY'22 numbers. And showing signs of an uptick, a big uptick in Suezmax earnings in October and a smaller uptick in MRs.

Now, what's led to this performance, we have seen seaborne crude trade was flat, product trade grew year-on-year. However, you had a very high quarter in the last year. So, Q2 FY'23 was an exceptionally strong quarter because of the war impact which was still being felt in the markets. This year, we have had OPEC cuts which has reduced the amount of cargo available for carriage, which meant that markets were relatively weak. As those OPEC cuts get reversed, as we hope they will be going into the winter if demand stays strong, the market should see some strength.

Our asset prices continue to be firm, they are at their strongest since the global financial crisis. And the order book continues to be exceptionally low for crude tankers at 4%, and for product tankers at about 10%. In recent times, the order book is building up a little bit. So, we have seen some crude tanker ordering. But even with all that ordering, we are still at this 4% mark.

Bulk carriers, for capesizes, freights are better than in FY'23 so you can see, it is higher than the orange line, while for the sub capes, there is a Supramax index here, it was worse than in FY'23. Last year we saw significant outperformance from the smaller ships vis-à-vis the capesizes, this year or at least in the last quarter it reversed somewhat.

Spot earnings were lowish during the quarter, but they had some recovery in September. We have had an improvement in tonne miles demand, while on China, the headline is that it seems to be slowing down. And we can see that steel consumption etc. is lower in China. However, the fact is that iron ore imports into China are still pretty strong, and have grown year-on-year. In fact, China seems to be exporting surplus steel. We have seen big increases in coal imports into China, because of the problem with hydropower generation. And therefore, coal imports have significantly increased. Order book continues to be very low at 8% of the fleet.

LPG markets were spectacularly high in the last quarter, mainly due to Panama Canal issues or rather demand for ships was high, but this was exacerbated by the higher waiting times at

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Panama Canal. The Panama Canal is facing water issues due to the El Niño conditions and therefore waiting times at the Panama Canal has gone up. Many ships are deciding to take the long route rather than wait for Panama Canal transit. And that's increased tonne miles. So, that's resulting in tightness in the VLGC markets. And therefore, the markets have been exceptionally high. The order book still continues to be high in excess of 20%.

Looking at fleet supply, I mentioned this on the order book, 4% for crude tankers, 8% for bulk carriers and 10% for product tankers.

Looking at asset price movements, asset prices continue to be strong, dry bulk also after dipping a little bit have picked up while they are much lower than what they were in the highs of 2022 around the beginning of Calendar 2022, but still at fairly high-ish levels. Product tankers and crude tankers, of course remain very strong and so do LPG ships.

Scrapping hasn't been much; we have seen no crude scrapping, though in the last week or two we have heard of some crude ships getting scrapped and some 25 year old crude tankers getting scrapped. But otherwise, there is really nothing of scrapping happening.

Looking at the offshore business; no need to go through each of these points, the headline news is that demand is very strong. And it started about two years ago, demand from the Middle East, it continues to be strong. In the Indian market every successive pricing that we are seeing in the rigs is higher than the last one. So, the most recent pricing in a tender was higher by about 12% to 15% from the pricing that we got on our rig in the last tender, which was a few months ago. So, rates continued to climb, and they are now at a very profitable level. Of course, our rigs will come off from their old contracts in a staggered manner. And once they get repriced and, if the market stays at these levels, then they will be able to enjoy these rates.

On the vessels as well, every pricing that we are seeing is higher than the last. The vessels are now very much in profitable territory already. The rigs will take a little time to catch up, because of the timing of the old contracts getting over.

Fleet supply is under control. Obviously, nobody has ordered any new rigs or vessels in the last four to five years. We have on paper an order book, and these are all rigs which were ordered many years ago and supply vessels, which just are waiting to be delivered, they should have been delivered at least four or five years ago, but there was no business for them, so the delivery did not happen. So, the market continues to be tight and we expect it to be tight going forward also.

Paper utilization is at 75% for jack-up rigs. However, practical utilization is probably in the high 80s and close to 90% based on the marketed utilization so about 10% of the fleet is actually cold stacked for more than three years. And we see that here, yes you can see the number here cold stacked for more than three years, 54 rigs, those are unlikely to come back unless rates go up to very high levels. So, effectively, the utilization is already in the high 80s.

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Looking at how many assets are coming up for repricing and now this is a good picture. Two years ago, we would not have liked to see this picture where lots of assets are coming for repricing, but now that the market is much stronger, it's good because then we will get the impact of the stronger markets on earnings of these ships. So, we have seven vessels which are repricing in this half year, that's between October and March; and then another eight which will be repriced in the first half of next year. We have one rig which will come up for repricing in H1FY'25, another in H2FY'25, and then in H2FY'26. The fourth will be coming off contract now and going

	into a new contract sometime in December/January.
	Just some financial data and a reminder we levered up in the low markets, we bought. Now we
	are levered down; we are sitting on a lot of cash, and we are waiting for opportunities to buy.
	We have done it in a small way, we sold our oldest bulk carrier JAG ROHAN. And we
	announced on Friday that we have contracted to purchase modern Kamsarmax, an eco
	Kamsarmax bulk carrier. So, that's a switch that we did from a smaller size to a larger size, and
	to a more modern unit. We have taken delivery of MR Tanker as well.
	Our share price to consolidated NAV, while the absolute share price has gone up, in terms of
	valuation metrics it's still not much above where it was, let's say in end of FY'22, it was at 0.62
	to NAV. Currently, it stays at about 0.65 to 0.67 to consolidated NAV.
	You can go onto our website and see the details of our ESG and our CSR activities. And we
	welcome you to visit our website. Thank you. Now we are happy to take questions.
Moderator:	Thank you very much. We will now begin the question-and-answer session. The first question
	is from the line of Dhruv Jain from Ambit Capital. Please go ahead.
Dhruv Jain:	Just had a couple of questions on the offshore business. So, you mentioned that the outlook
	remains very strong. So, I just wanted to understand from your perspective, what are the risks to
	this? And another question on offshore was that we understand that on the rigs side, there is a
	tendering process of the contract, but if you could also mention what's the sort of the way it
	works on the vessel side?
G. Shivakumar:	So, first I will answer the question on the potential risks to the business and you can see what
	happened in 2019/2020 where utilization was climbing from the 50s and it had climbed up to
	the 65% mark, you can see this orange line here, right. And that got choked off by COVID. In
	early 2020, we were talking about market strength in offshore again, that got choked off by
	COVID. So, that's the risk which could be there, otherwise the fundamentals are lining up well.
	So, the risk is really of an unexpected event or something like that; though one is not expecting
	it say your global financial crisis if it happened and it took oil prices down and generally oil
	consumption down. So, that's one of the risks, otherwise the fundamentals are lining up, all very
	positively.

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	Second is on the contracting process, vessels also in India go through the same tendering process.
	We are also looking at taking vessels out of India, because markets are available outside, and
	some of the markets outside are paying more than the Indian markets for some of the types of
	vessels. So, we will have a lot of vessels in India, at least 50 to 60% of our fleet will be here.
	But a lot of the ships will go outside India as well. This was the case till 2014 when the market
	started doing badly and we brought the vessels into India at that time, we had more than 30% of
	our fleet outside. So, in India, it continues to be tenders, most of the business is awarded by
	tenders, that's a PSU system. Otherwise, if you are dealing with a private player which is a small
	part of the Indian market, that happens on a bilateral basis.
Moderator:	Thank you. Our next question is from the line of Himanshu Upadhyay from O3 PMS. Please go
	ahead.
Himanshu Upadhyay:	My first question is, see I could understand the rationale for dry bulk, okay what we did. But I
	wanted to have more clarity on MR tankers. See, what I wanted to know is that if we look at the
	prices of tankers, they are at the highest decile in the last 10 years or maybe even 15 years okay.
	And we have stated that charter rates are generally high at the peak. And hence, evaluating cash
	flows is not the best metrics. Because the cash flows are high and hence you can justify but they
	can even revert. So, what was the thought process in the purchase of this MR tanker because if
	we look at the valuation multiple or let's say value you cannot say it is the lowest decile or the
	worst quarter in terms of cash flows also, so some clarity on that.
G. Shivakumar:	In terms of absolute price, certainly it's not low. So, a couple of points on this it's a very small
	part of our investable surplus. Our cash itself is in excess of $600 million, this is a very small
	part of that. So, it's a small step we have taken on the margin.
	Second, and the bigger rationale for it is we have a fairly oldish section of our MR fleet. We
	have four ships which are built in 2004, one built in 2003, and a couple built in 2005 as well.
	So, that's an old part of the fleet and some of those ships will not be able to freely trade in the
	international market, once they turn 20. So, while we can find other employment for them, and
	we will find other employment for them, we thought we should hold on to our position in the
	international markets and continue to have our exposure. So, that's what we have done by adding
	on this one ship. So, on the margin, it's a small deal, I agree with you that it's a high point in the
	cycle so it's not one of those, screaming value buys. But it's more to hold on to our position in
	the markets in which we are operating. We don't want to vacate that space. We have one 2003
	built ship also, which is currently working in India after it completed a 20-year dry dock.
Himanshu Upadhyay:	And what is your view on crude tankers also, because we are at one of the lowest fleet in last 10
	to 15 years on crude tankers. And the asset prices there also are very high, so any thoughts on
	that, how are you evaluating that market?
G. Shivakumar:	You are right. When you say the fleet is at the lowest in 15 years, you mean our fleet, right.

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Himanshu Upadhyay:	Yes.
G. Shivakumar:	You are right. We have six crude tankers. And yes, that is the lowest level we have been in many
	years. Yes, we have a constructive view of the market, we think the market will stay strong for
	some time. Unfortunately, the prices are also very high. So, we are not sure yet what exactly we
	want to do. But we are looking at options. We are trying to see how we can play this cycle
	considering that the markets have gone up, the asset prices have gone up so much. But yes, you
	are right, it is a conundrum. We don't yet have the answer for it, but we are looking at options.
	Let's see if we can find some way around it.
Himanshu Upadhyay:	One related question only, what type of market or market conditions or forecast you have, in-
	chartering a ship for a period makes sense means what are the conditions in, in-chartering--?
G. Shivakumar:	So, if you are expecting that and the good thing about our business is you can put these numbers
	all the time, you know what the prices are, you know what the cost of in-chartering would be.
	And you know what needs to be the residual value at the end of the charter period in order to
	make a reasonable return. If the prices have gone up very high and you are expecting markets to
	say mean revert in three to five years' time than you would say maybe, just set off the premium
	on the ship or the potential capital loss on the ship versus the premium paid for the charter. Just
	do that comparison and decide. So, sometimes it's a fine comparison and not necessarily exactly
	right. But you can get a broad picture of whether it makes more sense to charter in or to buy a
	ship.
Himanshu Upadhyay:	So, generally in bullish market that makes sense….
G. Shivakumar:	So, in a hot market, so what we have seen in the past, sorry to interrupt Himanshu, in a very high
	market, in general it makes more sense to in-charter because when you buy a ship, you are paying
	for more than three or five years of high earnings. While if you are in-charter you are just paying
	for those three or five years of high earnings.
Himanshu Upadhyay:	And one small question, see on Slide #14 when we look at our standalone NAV, value has gone
	up by Rs. 53 because let's say the value of fleet has gone up on Rs. 809 of previous NAV, which
	means that the value of ships has gone up by 6% to 7%. But generally, what we have seen is
	secondhand, older vessels the price rise has been much higher means 15%, 20% in tankers or
	crude in last I would say one year. Is there something I am missing out or I am making a logical
	error or is it the right way or where am I making a mistake?
G. Shivakumar:	No tankers have gone up more so from a year ago level tankers have gone up 15% plus, you are
	right. However, bulk carriers have gone down by some 5% or so. So, your overall increase is
	about 10% in fleet value in this period. So, to that extent, you are right, that there has been an
	increase from a year ago level, definitely. Was that your question?

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Himanshu Upadhyay:	Yes, see, it is increased, but it seems very low, because LPG and all those things. Because there
	is one slide in our presentation itself where on the asset values, five-year-old asset values.
G. Shivakumar:	So, there is little bit of difference in the movement in prices at different age levels. So, that also
	you should keep in mind there, so it won't be an exact parallel to that.
Himanshu Upadhyay:	But generally, see, this is the slide, the Slide#22, see generally the price rise what we understand
	is higher on the older fleet of ships?
G. Shivakumar:	Let me take you through one thing, Himanshu. So, just look at this, this is October '22 between
	140-150. You can see that for a product tanker, for a five-year-old product tanker, which today
	is at about 160. So, that's about a 10% move in the price. In a crude tanker, we were at about
	135-140, that's gone up to 160 plus, so that's a 20% kind of move. While for bulk carriers, you
	have, okay, now it's more or less the same as what it was a year ago. But again, this is taking
	into account constant age, while your fleet will age by one year in this time. What also happens
	is that you have say a 15-year-old ship in '22, it's become a 16-year-old ship. So, you would have
	a normal drop in the price of the ship, which may be 5% or so just for age, it should be more
	than 5%, which may be 10% or so, but you have a benchmark price increase. So, you have a
	benchmark price increasing by 15%, but your age depreciation of 10%? So, net-net, you have a
	5%, I am just giving you a broad example.
Himanshu Upadhyay:	No, then it makes sense.
Moderator:	Thank you. Our next question is from the line of Sanjeev Pandiya Lancers Impex Limited. Please
	go ahead, sir.
Sanjeev Pandiya:	This is also about your CAPEX cycle, we have seen you in 2017 get aggressive on the CAPEX
	cycle and that decision has already gone through, now you are on net cash balance sheet. So, the
	key issue here that we think will drive valuations will be, the message that we get about how
	you are planning your next CAPEX cycle. At the moment you seem to be treading water, I mean
	you are only going to be replacing ships and your ship count and your DWT count probably is
	going to stay within the same range.
	At the same time we find someone like Frontline taking a leverage bet on two views. One is that
	crude ordering is not going to pick up for various technological and peak oil demand not supply,
	peak oil demand around the corner at 2030. So, it depends on your view on what is happening
	to solar and wind conversion and you know the difference between renewables and oil, etc. So,
	when exactly that is going to hit whether it's 2027 or 2035. So, basically, there is a view of peak
	oil.
	The second is related to that is the LNG carrier. So, embedded in these two, somebody is taking
	a very brave leveraged bet that VLCCs will go into orbit. Now this kind of the previous questions
	also and your own answers kind of tells us that you are probably not aligned with this kind of an

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aggressive view, where somebody is even taking a leverage bet. You do have a significant cash reserve. And you could sort of provide for the MTMs, on potential MTM, should you get it wrong, but some message about what is happening to your CAPEX cycle, I mean, if we could get your comments on --

G. Shivakumar:So, yes, we have had other players making dramatically different calls on the market. Our views may not be very different from them, or they may match or they may be very different, whichever. But irrespective of what we are playing by is what is our approach to the business, we don't take outsized bets in high markets. And some other players may view it differently that they say, okay, no, I am 100% convinced of this, I am going to put all my money to work there. And that's the beauty of the market, there are people with different views. So, that's great.

As far as our CAPEX approach is concerned, our approach will be to be cautious in this. We did this small investment in MR tanker. It's a small incremental investment as part of modernizing which you also pointed out that its fleet renewals more than anything else. So, that's what we will be doing, maybe on the margin one or two ships here and there, but not a huge amount.

Having said that dry bulk is actually very close to our levels at which we are okay to invest. So, we could go out. It's the tankers that are priced pretty expensive, dry bulk seem to be priced quite reasonably. If you can find a good asset, it's not a bad investment so we could think, it's very close to where we would think of investing. So, yes, we might invest incrementally and, on the margin, and we have a lot of investment capacity now that we have deleveraged, and we have so much of cash. But we are unlikely to go out into a large amount of CAPEX. We are not going to bet the house on this market, no matter what view we have on it.

Sanjeev Pandiya:A related question given that the cost of idle funds is now pretty substantial and is probably taking away more and more, although it would have reduced somewhat given how interest rates have moved. And from what you are telling me that you are not going to use up all your cash, this is going to be, I mean, if we just project it out five years forward and all the cost of idle funds is going to cumulatively add up to quite a bit. So, are you thinking about that or doing something out of the box, in that area or you just treat it as a cost and just absorb it?

G. Shivakumar:I see the point you are making, the cost yes, so one thing is the cost of idle funds has come down as you yourself rightly pointed out from 0% interest you have gone up to 4% to 5% interest in dollars so that's one thing. However, because the earnings of the business are so much higher that gap has actually gone higher, because the 5% increase in the earnings on funds is much lower than what has happened to the returns on ships. However, that is a trap that we fell into the last time which is going for current yield, that is always a temptation, that you get a higher current yield from ships than you get from cash and therefore you say I would rather put it into ships than cash. However, cash remains cash and ships can depreciate, or they can appreciate. But at some points in the cycle, you know that the likelihood of depreciation is higher than the likelihood of appreciation. And that's what we will be very careful about.

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	So, when we look at funds, and the cost of holding funds or cost of keeping money idle in
	treasury, we also look at if you get a 5% drop in the value of the ship or net of the earnings, then
	that's adding to the ability to your decision to hold on to cash. For instance, we saw that the ships
	we bought in 2007 in the high part of the market even if you just held on to that cash for the next
	five years till you got the opportunity to buy it cheap you were better off than buying it in 2007.
	So, it's okay, you know, we are not going to go by current yield, by buying when the yield on
	shipping assets is better than the yield on cash, because we have seen that that can be a trap
	sometimes.
Sanjeev Pandiya:	So, what I am noticing is that therefore you continue to talk the language of value as compared
	to, I mean to use market lingo as compared to momentum. So, when I see another shipping
	company, I see somebody talking momentum, which basically the VLCC, crude -
G. Shivakumar:	It may work for them, yes.
Sanjeev Pandiya:	Kind of while you continue to stick with the value philosophy. Now, given that --
G. Shivakumar:	Not a 100%, so, if we were a 100% fundamentalist on value than we would not be doing anything
	today. Maybe on the margin we will do something, but we will be focused more on value than
	on buying at high points in the market. But yes, our focus will continue to be on value.
Sanjeev Pandiya:	Then this points to a divergence in the understanding of what is happening to ship ordering and
	shipyard capacity. If shipyard capacity is mostly today committed to, let's say containers, then
	how much is left for any crude, bulk etc.? And has the downside, given higher steel prices etc.,
	because when we were talking in 2017, we were looking at steel prices in the region of $350,
	$400 and today it's something else. So, the baseline also would have shifted. Given that, can't
	we assume that the existing downside, the existing VAR value-at-risk on your existing ship
	portfolio would be almost down to zero and it is the new ships that will add value-at-risk given
	the context of where shipyard capacity is right now I mean, and the fact that orders are not
	forthcoming either for technology reasons, or whatever the reason --
G. Shivakumar:	That's right. And I think the risk in buying today is higher than the potential return sort of where
	we are, and when we weigh the two, we think that there is more downside than upside to doing
	those transactions and that's why we are not doing that.
Moderator:	Thank you. Our next question is from the line of Vaibhav Badjatya from Honesty & Integrity
	Investment. Please go ahead.
Vaibhav Badjatya:	So, I just want to understand a few things on the global oil flows. So, I think as of now most of
	the oil from Saudi Arabia, Kuwait and UAE through Strait of Hormuz. Now I want to understand
	what the alternate routes are and what are the capacities of those alternate routes. So, one is the
	Red Sea and another is much longer, probably through the Suez Canal. So, I just want to
	understand the capacity, both in terms of pipeline from Saudi Arabia, from the oil production

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