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Close to bottom; but long way to recovery
Indian shipping companies continue to reel under the
global supply glut which has kept the day rates under
pressure. The net profit for Great Eastern Shipping (GE
Shipping) is expected to be down 45.5% YoY to
Rs526mn. Aban Offshore’s net profit is estimated to
decline 74.3% YoY to Rs621mn. Shipping Corp of India
(SCI) is likely to report losses of Rs520mn vs. loss of
Rs62mn last year. Though the freight rates have reached
historical lows, a recovery in shipping cycle is still far
away as new vessel deliveries would continue to depress
freight rates during 2012. We believe that though the
Indian shipping companies are well diversified, they will
remain impacted by the current downtrend at least in
the near term of one year.
Bunker costs remains high; up 23% YoY; container
and spot charter segment to remain impacted: Price
of bunker oil (fuel for shipping vessels) increased to
record levels of $732 per barrel during Q4FY12 vs.
$598/bbl last year. SCI, which is present in the container
liner segment, would be impacted the most. Its bunker
costs increased 93% in Q3FY12, is likely to go up by 56%
in Q4 to Rs3.8bn leading to a 107bp decline in operating
margins to 10.6%.
Offshore oil services (drilling) industry too remains
under pressure: The offshore drilling industry
continued to remain under pressure during Q4FY12.
According to Rigzone.com, the global rig utilisation rate
remained at a low of 78.4%, although it improved from
77.9% last year. Offshore rig day rates remained stable,
while jack-up market continued to face pricing
pressures. Utilisation of jack-up was at 77% vs. 76%
recorded last year. Demand for deepwater rigs was
strong globally, as fleet utilisation for Semi-subs
improved to 83.7% vs. 81.7% last year.
Top Pick: GE Shipping (Buy with TP of Rs308): We
believe GE Shipping is better placed compared to peers
due to its diversified presence in the offshore segment
and strong under-leveraged balance sheet which is
likely to help it take advantage of the current downturn
and increase fleet at lower costs. Further, it is expanding
only in the offshore segment giving its better visibility
and higher profitability
Sell on SCI and Aban: We have a negative stance on
pure play shipping company SCI with a target of Rs60.
We also maintain Sell on Aban Offshore as concerns
persist with three of its assets idle and others coming for
re-negotiations at the bottom of the day-rate cycle,
over-leveraged balance sheet and high exposure in Iran.