In choppy waters

The shipping industry is in doldrums but is there scope to fish around?  

Illustration by Kishore Das

Once a well-established player in the shipping industry, Varun Shipping is busy restructuring its debt after defaulting. The company has not reported its financial numbers for the past one year and its stock has not relisted post-restructuring.  It is not the only one sailing through financial stress. The ‘Z’ score, an indication of the probability of a firm going bankrupt, is an alarming 0.25 for Mercator and 1.87 for Shipping Corporation of India (SCI), two of the largest listed shipping companies in India, besides GE Shipping. That’s because the shipping industry is in much dire straits today than it was post the 2008 economic crisis.

A capital intensive business anyway, companies that relied heavily on borrowed funds are facing the maximum impact during the downturn. Varun Shipping has a debt to equity ratio of 4.24x (last reported), Mercator 2x and SCI 1.17x. Compounding the issue is the high cost of capital in India. “This is why they stay high on the global cost curve,” says Captain Vivek Singh Anand, who heads the Indian operations of Japanese ship major NYK Line and is the president of Mumbai and Nhava Sheva Ship Agents Association (Mansa). “A foreign shipper will raise funds at Libor (London Interbank offer rate) plus 1-1.5%, whereas an Indian company will raise funds at Libor plus 5-6%,” he adds. For Indian players, for every dollar earned, 75 cents goes towards covering the capital cost of a capsize dry bulk ship — that leaves little room to accommodate operating costs and make a profit. 

It’s not all gloom and doom though. The debt to equity ratio of Shreyas Shipping and GE Shipping is 0.8x. This is also the reason that despite the downturn, Shreyas’ interest coverage stood at 11x, followed by GE Shipping’s 3.7x. In contrast, Varun Shipping and Mercator haven’t even been able to repay interest. More importantly, not only is GE almost debt free at the net level, it has never reported losses in the last 20 years, and has a consistent dividend paying history. 

The stress though, is reflecting on stock prices, with major shipping companies trading at near half their book value. GE is currently trading at 4x its earnings and offering the highest dividend yield of 4% in the shipping space. Does it then make sense


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