The Great Eastern Shipping Company Limited (500620) Earnings Call Transcript

[Audio Gap] -- and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Shivakumar, Executive Director and CFO. Thank you. And over to you, sir.

Thank you. Good afternoon, everyone, and welcome to the, quarterly earnings call for Q1 FY '25-'26. I trust you've had a good look at the results which came out last evening. So we'll do a quick run through of the results and what led to those results. And after that, we can have Q&A. Mr. Rahul Sheth is here with me, and we will be happy to take questions after that. Our customary disclaimers apply. Our consolidated net asset value is up slightly, quarter-on-quarter as a result of the earnings accrual to the cash balance. The net profit, while down significantly versus a year ago, is up versus Q4 FY '25. And we've had -- we've declared the 14th consecutive interim dividend, this time at INR 7.20 per share, representing a payout of about 27% on standalone earnings. I'm not going to go through the numbers here, because I'm sure you've had time to go through them since yesterday. Just here, we have the standalone net asset value at the bottom, which is at INR 1,120 per share, down from INR 1,181 a year ago, which is, of course, due to the drop in the values of assets. But up from March, up slightly from the March number. This is what happened, and this is what resulted in those numbers. So you see Q1 FY '25, we had the crude tankers averaging USD 46,000 a day, which is down to USD 33,800 in Q1 FY '26. The product tankers averaging USD 37,000 versus just under USD 25,000. So that's a huge impact that we had. Of course, our LPG ships got repriced upwards, and therefore, there's an improvement from USD 36,700 to USD 43,800. The bulk carriers as well went down from about USD 18,000 to just under USD 15,000. But versus the immediate preceding quarter, we had some slight improvement, USD 31,000 on the crude tankers went to USD 33,000. The product tankers were about the same. LPG, again, continuing on charter and therefore, the same and dry bulk improving slightly as well. Along with the rates coming off, we also sold a few ships last year. So that also resulted in some reduction, not in the rates, but in the earnings on an absolute basis. Standalone net asset value, of course, it's been going up, though for the last 2 years now, it's been -- for the last -- since March last year, it's now been stagnant. So we had mentioned this earlier that while asset prices can drop, and therefore, interrupt the growth in net asset value, earnings are quite strong and the earnings growth and the cash accrual due to earnings sometimes compensates for the drop in the value of the ships themselves. This is the factors that led to the change in the net asset value. Similarly for the consolidated NAV, where you have a small drop in the consolidated NAV. Let's look at what happened in the shipping market. So you had the Suezmax earnings coming off from last year, and this is market earnings, and this is a market benchmark, so not necessarily reflective of exactly what the ships are doing. You also have the MR earnings coming off about 40% year-on-year. Now what led to this? The dirty trade, which is a crude tanker trade was flat year-on-year in the first quarter, and -- which means that demand basically has plateaued. And while you did not have too much of any addition of fleet, it still made the markets a little softer. You would remember that last year, we had the impact of the Red Sea closure, which happened in December '23. So those effects lingered through the first half of calendar '24. And that's why the rates were exceptionally high in Q1 of FY '25, which is normally -- Q1 is normally not a strong quarter for tankers. And therefore, that was an unusual quarter, and we came off from those numbers. The product trade also was flat year-on-year and -- but mainly the long-haul trade, which is from East to West, the Eastern refineries exporting to the European Union remained flat. And therefore, you had a weak demand, while you had the fleet growing by about 3%. Again, therefore, the rates remained quite poor. Asset prices remained flat during the quarter, maybe about 5% down for older product tankers. But on a year-on-year basis, we are talking of 30% plus drops in product tanker values, especially at the slightly older end. The order books are -- have been building up in the last couple of years and still currently at 12% and 20% for crude and product tankers, respectively. Coming to dry bulk, we had a slightly weaker quarter than the corresponding quarter in both the Capes and the sub-Capes. And basically, we have the coal trade declining. That was a major reason for the weak dry bulk trade demand and therefore, rates. Iron ore trade picked up slightly, but that wasn't enough to offset. The global green trade decline, which affects the smaller vessels more, that's the sub-Capes. And bauxite continued its strength through the first quarter, and that grew 19% year-on-year. The bulk carrier fleet year-on-year grew about 3%, and the order book still remains only at about 10% to 11% of the fleet. LPG, our 4 ships, of course, are on the time charter market. Earnings were down, but still at pretty strong levels. So we are still looking at USD 40,000 a day on the spot market. The trade grew, and this is one trade that has been growing very strongly, but you also have the fleet growing and you have a very, very significant order book at 30%. Looking at fleet supply. As I mentioned, the order book hit the bottom in 2023 or so for tankers, and it's been picking up since then. So you are now at 20% for product tankers and 12% for crude tankers. Looking at scrapping, of course, with these earnings and the earnings even in dry bulk have been pretty decent. It more than covers operating expenses and even if you have to do a dry dock in that year. And therefore, the scrapping has been very minimal. And you can see that in the numbers. For the last 4 or 5 years, we've seen basically no scrapping at all. Looking at asset prices, they have been -- as I mentioned, they've been sort of range bound, a little bit of movement in the last 3 months, maybe a 5% -- up to a 5% drop in product tankers and bulk carriers at a -- for the slightly older and smaller vessels. Coming to the oilfield services business, we have the standard data. And we have our rigs, all of them have got contracts, which is what we had reported in the last quarter. Two of our rigs, that's the Chetna and the Chaaya have got short-term contracts, a 4-month contract and a 7-month contract, both of which will start after the monsoon. So we are talking of October, November, December. And they will do the short-term contracts in India. We have got another rig coming off contract, that's Chitra coming off contract around December. She's already landed the next 3-year contract. And after doing the work between the contract, she'll go back on to a new contract. Currently, the Chetna and the Chaaya are waiting for their contracts to start. We have a very small standby rate on the Chetna, and we are idling and not receiving any payment for the Chaaya. On the vessels front, all our vessels are more or less fixed through the year. Out of our 19 vessels, 4 are operating in the spot market on short contracts. And these are the most capable vessels, which we have decided to operate on the spot market or on short-term contracts. And those vessels will continue to operate typically on the spot market unless we get a contract which we believe compensates us at a reasonable level. So we have the vessels essentially fixed through most of the year and the rigs also fixed, but we will have repricing starting in early 2026. This is the standard slide on debt/equity. We have now net cash of about USD 600 million on a standalone basis. In the group, we have net cash of about USD 700 million, including the subsidiaries. And the share price to consolidated net asset value remains at just about 2/3. So we have a 1/3 discount. And finally, something that we are proud of, which is the foundation, which works in the CSR social sector. We have partnered with many NGOs and we have hopefully helped to transform many lives. Thank you. And now we are happy to take questions.

[Operator Instructions] Our first question comes from the line of Mohammed Farooq from Pearl Capital.

Congratulations on the solid set of numbers this quarter. Given the improving spot rates as seen in the dry bulk index, the evolving tariff environment under Trump and the expected trade rerouting due to both tariffs and ongoing Russian sanctions, how do you see Q2 shaping up? Do you anticipate this next quarter performance to be stronger than Q1 or broadly in line based on these developments?

So we can tell you what rates are like today. We don't make a forecast, but this is what is happening currently. Currently, rates are -- for bulk carriers are better than they were in the last quarter, that's in Q1. For tankers, it's more or less the same as where it was in the last quarter, maybe marginally higher. So that's where we are today. Again, to be clear, we have only finished a month of the quarter, so this could easily change. You know the nature of our markets. There are very big swings that happen on a daily and weekly basis. So we'll not hazard a guess as to whether the quarter will be better or worse.

So what about the demand, sir, regarding the trade issues in rerouting because of these tariffs? Is there a demand increase on that because of that?

No, not really. There is no trade rerouting because of the tariffs. None of the commodities really are affected by these. On a very marginal basis, they may be affected, but there's no rerouting happening really and no significant rerouting.

So if you want to just break it up sector by sector, so the oil trade is not really affected by the tariffs because it's broadly out of it. If you look at LPG, China has a 10% tariff on exports from the U.S. So we have seen some of that cargo go to -- U.S. exports of LPG go to certain other Southeast -- other Southeast Asian countries, including India as well. And then we've seen China pick up more cargoes from the Middle East. So there's been some change. On the ton-mile basis, there is a slight improvement on this rerouting. And then on dry bulk, the U.S. is not a major contributor to the dry bulk trade, except for the grain trade. And we've seen -- and this happened even in the last time in 2018 or so when Trump had put on those tariffs. We saw some of the grain exports from U.S. get sent instead of China to certain other Southeast Asian countries, but the Latin American countries picked up the volume to send it to China. So we've seen some of that change as well. But on an overall basis on the dry bulk trade, it's not had a very big impact.

Sir, again, as a long-term investor, our key objective is wealth creation. The company has posted strong results and maintained robust cash reserves. At its valuation, especially in terms of price to earning remains among the lowest in Indian market. Has the Board discussed the possibility of a share buyback as a way to unlock value? Also, what other strategic measures are being considered or implemented to enhance the shareholder wealth and improve the market perception of the company's true value?

Yes. No, there has been no discussion around buyback at the Board level. And when we do that, there will be all appropriate disclosures. With regard to improving the shareholder value of the stock price, we are not experts in that. All we do is run our business to provide maximum returns from the business. And we hope that someday that will be recognized and translate into the appropriate valuation for the stock. But beyond that, we -- and we communicate what we are doing as well as transparently as we can. And hopefully, that will have an impact some time.

Our next question comes from the line of [ Saket Kapoor from Kapoor Company ].

Sir, firstly, in terms of our offshore segment, for this quarter, although the revenue has been down Q-on-Q, the profitability has moved up from INR 82 crores to INR 126 crores. So what has contributed to this?

Yes. So the main factor is that the -- so while the revenue has gone down, the contributions of the vessels business and the rig business have been moved in different -- separate directions. The vessels business has given a much higher contribution in the revenue. While the rig business, because 2 of our rigs are effectively idling, the revenue dropped. Now what has happened because of that is that the rigs when they are idling, we bring down the operating expenses to the bare minimum, and therefore, we save a lot of costs there. That's what has happened. While for earning the additional revenue in the vessels business, we did not need to spend more. So for the same revenue, basically, you had lower costs, and that's why we've had a better result despite having a very similar revenue number.

Can you provide the split between the vessels and the rig revenue for this quarter and also for the preceding quarter?

We don't give out the numbers. It's as one segment, which is the offshore segment. But I can tell you that --

But for the rig --

Sorry.

No, no, you continue.

-- compensated for each other more or less.

So you mentioned that since the rigs were idle and there is lower cost attributed to the same and the vessels revenue and the profitability being higher, so even the lower revenue has compensated for the same. This is what the understanding is.

That's correct. That's correct.

Sir, for the rig segment, I think so ONGC came out with a tender 1 quarter ago, I think, so maybe 4 months ago, wherein the previous -- previously, there were some cancellation also, which happened because of the higher charter rate. But the rate at which the tender happened was way below than the previous rate. I'm just referring to the last rate where the rate was tendered out in the vicinity of USD 38,000 to USD 45,000, whereas the preceding were in upward of USD 70,000. So what has exactly changed in the rig market? If you could just give us some more color how the rig charter rates have moved, and also the CapEx outlined by the PSUs. Have they curtailed their CapEx and because of this our asset being sitting idle, we have lowered the rates just to offer, not to keep the assets idle. What's the thought process?

And this question had come up in the last quarter's call as well, and we had addressed it there, but let me give you the short summary of it. The market was on an uptrend from 2021 all the way up to end of '23. In end of '23 was when we had the pricing where we were around USD 80,000 a day. I think it probably went up close to USD 90,000 a day. What happened in early 2024 is that Saudi Aramco, which is the largest hirer of rigs, customer for jack-up rigs, suspended contracts for between 20 and 25 rigs in April, May 2024. That resulted in a change in the market. And therefore, the market sentiment went down and rates went down as well. In our case, we decided that we would like to have the employment, while 2 rigs have got short-term employment, the third rig, we decided that we would like to take that contract and keep the rig employed even though the rates were likely to be much lower, and that's why we dropped the price and took that contract. So we wanted to avoid idling on that rig. So we decided it's better to take a low rate, which gives an EBITDA contribution rather than keep the rig idle.

So, sir, currently, what's the status in terms of the current charter rates? And when is the -- are there further contracts for deployment of rigs pending wherein we will be participating with the 2 idle ones? Or what's the update, sir, currently?

Sorry, the 2 idled rigs have got -- received contracts, short-term contracts. They are currently not working. However, both of the rigs have received contracts one for 4 months and one for 7 months. Both of them will go on to those contracts by the end of 2025. And therefore, we do not currently need to look for work for them. Of course, they will come off contract in the first half of 2026, at that time we will require to find some work for them. So currently, we are not necessarily marketing any rigs.

And can you give some color on where the charter rates are since the Aramco fiasco or the Aramco providing a lot of supply?

You had the correct number. You are in the ballpark for the ONGC rigs. [Indiscernible].

Sorry, sir, I interrupted you. What were you telling?

You mentioned a number of below USD 40,000 that's where -- that was the correct range of contract.

And lastly, sir, from the government PSU CapEx front, any understanding that we get in terms of the curtailment or --

Yes, this is not -- yes, you had asked this question as well. This is not a public information. We don't know what's happening there. All we know is that some contract tenders have got canceled. So actually the number of rigs with the largest customer in India have got reduced. But we don't know what their long-term plans are really or what are the plans for the next 6 to 12 months, whether they're going to come out with more tenders or not.

Right, sir. And currently, sir, what portion of our business is from the government and how much is private?

Sorry, you mean on the offshore business or the --

Both. Total pie, sir, also and offshore also.

In the shipping business, it's a small part. When you say government, I'm including PSUs. It's a small part of the business, maybe less than 15% of our fleet is engaged in PSU business in shipping. And in the offshore business, the rigs, 2 rigs are operating with the largest customer who is the PSU. And one of the short-term contract is also with the PSU. The vessels -- of the vessels which are operating in India, a majority are operating with the end client as ONGC, whether directly or indirectly, they are working with ONGC.

Okay, sir. And lastly, sir, on the shipping aspect, what -- how do we book our order booking if investors look at the visibility part, standing today in the month of July, what is the visibility we have in terms of the total fleet? How much -- what kind of revenue have we booked the charter rates? And how do we go on developing the -- building the order book going ahead? How much is spot --

The spot is -- we have maybe 20% of our fleet operating on charters -- less than 20%. We are operating on charters. Typically, these are 1- to 2-year charters. And we take calls on this depending on the view we are taking on the market. If we get offered a good rate for a time charter, we would take it. Our default mode would be to operate in the spot market.

And what are the conditions, sir, current market conditions?

Current market conditions are the same as what they were in the previous quarter. Dry bulk slightly stronger and tankers more or less the same.

Okay. And on the --

[Operator Instructions] Our next question comes from the line of [ Nisha Shah from Neerjar ] Enterprise.

So I just have one question. I wanted to understand how is the shipping cycle across all our assets, okay, in face of the tariffs that has recently been going on?

Yes. So the shipping markets -- so spot markets have been reasonably strong for tankers, though they are down from a year ago Q1 over Q1, but they're still historically at fairly strong levels. Dry bulk are maybe around market averages. At current spot rates, they're probably above long-term averages as well. And LPG, of course, are very, very high in the long-term historical context. So that's where we are in rates compared to the long-term numbers that we've seen.

Okay. So sir, how do you see the cycle? Is it like do we see it going upwards? Or how do you see the cycle now?

The market's been strong. So it's tough to see what can drive it upwards. For the market to get stronger, you need either demand -- end user demand to go up or you need some logistical disruption, which makes the fleet less efficient. On the disruption, one never knows what can happen. But on the demand side, it doesn't appear that economies are doing very well. So there's not going to be a big demand upside really, whether it's in oil or dry commodities. So it doesn't -- the general outlook would be either you hold at this level or it gets weaker rather than having any upswing from here. Then of course, you could have, say, seasonal improvements in oil demand, et cetera. But otherwise, the cycle is already pretty strong.

Our next question comes from the line of Himanshu Upadhyay from Buglerock PMS.

So my first question was on regarding this loan we are giving from Great Eastern Shipping GIL at INR 450 crores, okay. When we look at the consolidated numbers what we give in the presentation and standalone, the difference between the net cash is around INR 1,000 crores, okay? So and one of the largest subsidiary working subsidiary for us is GIL, so would this majority INR 1,000 crore would be in GIL only or it is across various other subsidiaries and hence, we have to -- we are giving this loan or some CapEx plan on GIL and hence, so we are --

No, there is no CapEx plan. Sorry, I got the question. There's no CapEx plan. About 50% to 60% of the cash that's there is sitting in GIL itself. The issue that is there is that the loan is in India and a lot of the cash is in the overseas subsidiaries. There is some inefficiency in bringing the cash from the subsidiaries as of now. And therefore, it was better to do this transaction.

And one more question just to understand your thoughts on it. Nearly 1 year back and 1.5 years back, it seemed we were much more eager to have a replacement of older ships with newer ships, okay. And as of today, when we see the product tankers and dry bulk which is 5 to 10 years each, is down by 15% -- 10% to 15% or whatever those percentage is, that eagerness seems to be much lesser, okay, to renew the fleet. Though we have done one transaction, but it is after a very long period of time. So any thoughts on that why at the 1 year back it seemed we were much more eager to replace the things. And right now, we are going much lower when the prices are down nearly 15% --

So Himanshu, there has been no change in strategy on that front. We are as eager as earlier to continue with the switch strategy. You should just keep in mind that if asset values have come down 20%, 30%, basically, they come out for the ships we are going to buy and the ships we are going to replace them with. So the delta, the extra capital that you will end up investing to conduct the switch strategy broadly remains the same. So there has been no change of thought on that. It's just that we also look at when the ships are reaching those age profiles at which to conduct the switch. That's all.

But per se, you still find the markets to be expensive and you are not thinking about expanding the fleet. The focus is just replacement currently.

Yes. At the moment, it is to replace.

And one more thing. On the offshore side, you stated that besides jack-up the other segment has done pretty well and hence the numbers are much better. Is there any dry docking which is pending because before to give the -- before the jack-up goes for these 2 orders even if it is short term? Or do you think this is the status quo for now for long or for next --

Sorry, can you just -- in the last statement I could not hear it clearly.

I was saying that we had stated that the offshore segment did well because of vessels which did pretty much better.

Yes.

And I was just asking that is there any dry docking expenses pending which before the jack-up rigs for tenders?

So before every jack-up tender that we deploy our rigs, there is some amount of work that gets done on the rigs. But that's part and parcel of the business. That is a certain amount of expenses we'll expect in every year. Of course, in this year, like Shiv had mentioned previously, we've got 3 rigs going on to contract. There are years where if all the rigs are fixed out, then there may be -- you may not have a rig coming off contract getting repriced. But generally, before a rig goes on to contract, there's always a little bit of expenses that we have to incur.