• PAGE ONE
• INDEX
• HOME

How long will the honeymoon last?

N. K. Kurup

FISCAL 2000-01 was a Champagne Year for the country's shipping companies. The government-owned Shipping Corporation of India (SCI), the largest of them, has reported an after-tax profit of Rs 401.59 crore, up 148 per cent, from Rs 161.51 crore the previous year. The Great Eastern Shipping Company, the leading private sector player, is not far behind. Notching up a 66 per cent growth in net profit at Rs 177 crore, the oldest tramp operator in the country could almost double its EPS to Rs 8. Essar Shipping, another major operator, has yet to announce its results. Going by the indications and the third quarter results, Essar too is expected to report record earnings.

What is all the more encouraging is that even the SCI's liner segment, in the red for years, has turned the corner. The corporation is expanding the service jointly with other international players.

The near-term outlook for the shipping sector is also promising. The buoyancy in tanker rates that bolstered bottomlines is expected to continue throughout the current fiscal. Though the dry bulk segment may witness a marginal slowdown in demand, it is n ot likely to have any significant impact on the overall earnings of Indian lines.

So, the domestic lines are enjoying the fine weather. But how far can they sail along smoothly? If industry statistics are anything to go by, nearly 40 per cent of the Indian fleet needs to be replaced in the next three years, a significant part of which would be oil tankers that are currently earning the maximum.

Last year, due to various hurdles, most companies could not acquire additional tonnage. Though these problems have been resolved to some extent by the Government announcing new policies, it will take some time for anyone to acquire additional tonnage. Ne w guidelines on ship acquisition are yet to be issued. It is understood that there are some disputes, interestingly, among the shipowners themselves, on the issue of age-norms on purchase of second-hand ships.

That apart, there has been a steep increase in the prices of second-hand ships. Shipping companies have to mainly depend on borrowing, which is costly. Raising equity funds may be difficult at the moment. The current boom is unlikely to lure more equity investors into shipping, at least in the short-term. There are several reasons. First, shipping is a cyclical business. It was after a prolonged recession, lasting over a decade, that the industry is smooth sailing. So, it may take sometime for shipowner s to build up confidence among investors.

Second, shipping shares have been dormant for a long time. Only long-term investors would have benefited from shipping. Yet, even they cannot easily forget the stories of the erstwhile giants such as Scindia Steam Navigation Company and India Steamship C ompany. Shares of companies such as Essar Shipping are quoting below par even after a year's good performance.

Some cash surplus companies resort to the buyback of shares with the ostensible objective of rewarding shareholders, while the real strategy is to raise the promoters' stake in the company.

Third, investors confidence in the equity market in general is currently at its lowest. Even blue-chip firms are deferring plans for public issues. So, in the short-term, borrowing is the only option. Even to maintain the current level of tonnage, shippi ng lines have to make huge investments in foreign exchange.

As such the field is not even for Indian players. Compared to their counterparts in many countries, Indian shipping companies are paying a higher level of corporate tax. The suggestion for the introduction of `tonnage tax' to replace corporate tax is sti ll being debated. Now it would be all the more difficult for them to convince the Government on the advantage of tonnage tax as the loss of revenue would be more if one goes by the current taxes. This year all the companies will pay higher taxes. SCI has made a tax provision for Rs 177 crore against Rs 41 crore in the previous year. GE Shipping has provided for Rs 24 crore as against Rs 16 crore.

So unless shipowners and the Government play together, the party may not last long.