SCI buyback of shares- bad idea?

A report in the Hindu Business Line says that the cash strapped government may be looking at the Shipping Corporation of India to buyback some of its shares to help the country's declining fiscal situation. "SCI is reportedly among the public sector undertakings (PSUs) picked up by the Department of Disinvestment to help the Government bridge its revenue gap through a buyback of shares", the report says. "SCI had a cash surplus of over Rs 2,000 crore at the end of last fiscal; its turnover was around Rs 4,000 crore. This qualifies (under present norms) SCI for buyback of five per cent of its shares".

Financial and industry analysts say that while this practice is normal- in bad times, the government usually eyes cash rich PSUs to garner funds and, at the same time, indicate to the bourses that the stock price of the PSU is undervalued- a buyback of shares by SCI may not be a good idea for many reasons. For a start, they point out to the fact that SCI has been making losses in the last three quarters (Rs 140 crores in the quarter ending September 30) and that no turnaround is expected in the next year, given poor conditions in freight markets. 

This, combined with SCI's expansion plans- although these have been slowed down in the present scenario, as statements by SCI and the Ministry of Shipping indicate- means that the PSU will need a substantial part of its cash for capex and other reasons to do with covering losses and presenting a stronger balance sheet to potential lenders. As the Hindu points out, an outstanding debt of Rs 3500 crores " makes it all the more important to maintain a comfortable cash reserve to enable it to negotiate best rates in the international market. In the current scenario, the company has no alternative but to draw on its cash reserves to put up the equity".

"Taking all factors in account, it would be in the best interests of SCI for the Department of Disinvestment to exclude it from the buyback proposal," it concludes.

SCI to sell thirteen old ships

Reports say that Shipping Corp. of India Ltd will sell thirteen of its oldest ships in the next four months- and up to 17 vessels in the current financial year, as operating them under present market conditions is becoming increasingly unviable. Each ship is around twenty-five years old.

 “Our plan is to sell 15–17 ships this fiscal, out of which we have sold four ships so far,” Arun Kumar Gupta, Director of SCI's technical and offshore division, is quoted saying in Live Mint.

The industry is finding it tough to put old vessels in service in the present abysmal market conditions; charterers are showing little interest in ageing vessels, a fact that has seen a spurt in ship breaking activity this year. A report by Clarkson UK says that about 33 million DWT of tonnage has been disposed off already; two thirds higher than in the corresponding period last year, although the number of vessels scrapped has increased at a lesser pace- 786 this year vs. 732 last year.

SCI, which has 26 vessels under construction, obviously plans to continue its plans to replace an ageing fleet- perhaps at a slower rate than initially envisaged. It had sold eight ships in the previous fiscal year. The company's bottom-line has been under pressure this year, though, so it probably hopes to raise some cash with the sale of unproductive or loss making assets. Gupta indicated as much when he said, “It is not viable to operate 25-year-old ships because charterers do not want vintage vessels."We have to spend more on repairs and maintenance of older ships. Besides, the acceptability of such ships at ports is less".

"When freight rates are under pressure, there is no point running older ships and keep sustaining losses.”

Is SCI really on the verge of financial collapse?

A report put out by news agency PTI presents an alarming picture about the future of the State run Shipping Corporation of India, quoting an internal Shipping Ministry document as saying that the shipping giant is "on the verge of financial collapse" because of its expansion plans. It also reveals that SCI's Directors wanted to stop all acquisitions at their last meeting.

"SCI, which has had a profitable run for the last 19 years, is on the brink of a financial collapse...the company will be in the red from this year onwards. The large and high cost orders are leading to a "debt-trap, almost on the lines of Air India," the document warns, before going on to underline the comparison with the beleaguered airline. It says that the shipping company may lose around USD 200 million because of the purchase of new ships. 

If these reports are true, the fact that that such thinking comes from within the Shipping Ministry will ring alarm bells across the industry and financial markets. SCI - that owns a third of Indian tonnage and has operating interests in practically all areas of the shipping business- had announced at its 61st AGM recently that it would spend Rs 3,700 crore in the ongoing fiscal to acquire 24 new vessels. Finance Director BK Mandal had said at the time, "Our capital expenditure for 2011-12 is Rs 3,700 crore and this will be used for acquiring 24 vessels."  It is those plans that may now become a question mark at the company that was conferred “Navratna” status three years ago, a status that gave SCI greater autonomy to decide on many issues like capital expenditure, formation of Joint Ventures and mergers. 

According to the document quoted, acquisition costs per vessel as contracted by SCI are lagging way behind present market value of the vessel's in question. "The overall loss to the company on account of such acquisitions, where there are gaps between the contract price and the present market value, is in excess of USD 200 million," the document said. SCI has 33 vessels on order, many at Chinese yards; it is believed to have tied up finance for just ten of these.  "It was in this context that the Board of Directors of SCI in its last meeting had desired a complete ban on all fresh acquisitions," the Ministry document stated.

SCI's Chairman and Managing Director S Hajara declined to comment on the observations made by the Shipping Ministry, PTI says.  On another note, media reports had said last month that Mr Hajara had hinted at the 61st AGM that the company was under financial pressure and was going slow with its plans to acquire a stake in private shipyards.  "When your bottom lines are under pressure... I cannot say when the plan will be implemented," he had said when a shareholder had asked about the status of the plan.

Industry snapshots

Yemen navy provides escort services to ships at a price. British based Gulf of Aden Group Transits (GAGT), along with Yemeni company Lotus projects are providing ships with Yemeni naval vessel escorts. Nick Davis from GAGT says that they have an exclusive contract with the Yemeni navy; one ship a week, on an average, is already using this service that provides protection from pirates in the Gulf of Aden at a cost of up to $55,000 per ship. For that price, you get a dedicated warship with armed guards to travel alongside your vessel in transit. Other military support is also available, at varying prices (see table). “It is the only dedicated, military supported full escort protection available in the Gulf of Aden at the moment. There's nothing better. We'd all like it to be free but that's not possible," Davis told an Australian newspaper.



Armed Vessel Escort  $55000
Armed Embarked Team $35,000
Unarmed Embarked Team $7,500
Ship Support Service FREE





Mercator and SCI plan to buy second hand vessels. Mercator, the second largest private shipping firm in India, is tight lipped about its acquisition plans, says the Hindu’s Business Line, with Mr H. K.Mittal, Executive Chairman of Mercator Lines, declining to comment. However, other company officials say that up to six second hand tankers may be purchased by Mercator soon; the budget for this shopping list is anything from Rs 400 crore and Rs 600 crore. The vessels will be a maximum of five years old; Mercator is simultaneously planning to scrap three single hull tankers. Meanwhile, State owned Shipping Corporation of India is contemplating something similar: sources say that SCI may pick up two tankers, two bulk carriers and two offshore vessels from the resale market. Both Mercator and SCI obviously want to take advantage of the prices in the second hand market that have tanked after the global meltdown. Besides cost, these plans make sense for another reason: almost half of the Indian fleet (by capacity) is more than 20 years old and needs to be replaced soon. “The timing is just right for acquiring ships because you can buy ships today at 10 year average low prices,” says an analyst.





Rs 3,686-cr Chennai port container terminal cleared. When completed, the port’s capacity will increase by 4 million TEUs annually; the present capacity is a little over2 million TEUs. “We hope to issue the project contract by March,” Capt. Subash Kumar, Chairman, Chennai Port Trust (ChPT) says. ChPT will call for a ‘Request for Proposal’ (RFC) shortly; amongst others, DP World, L & T Transco and IL &FS Maritime Infra Co Ltd have shown interest. The project is estimated to cost Rs. 3686 crores and will be India’s first mega container terminal to be built on a BOT (build, operate and transfer) basis. With a straight line quay length of 2 km and a new breakwater, it will have about 90 hectares of land, some reclaimed, as backup and storage area.
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