Shipping SR 240610

Sector Report Shipping
June 24, 2010
SECTOR REPORT
Shipping: Range bound for now
Bottom behind us but a "new normal" to persist

The bottom of the shipping cycle is behind us but we expect the earnings scenario to remain depressed in the next couple of years. The shipping sector has now reached a new normal where we expect the rates to remain rangebound which we expect to range around the 10% IRR level rates for the current second hand asset prices (US$ 29,000/day for VLCCs and US$ 25,000/day for Capesizes). The peak witnessed in FY08 is unlikely to be repeated again in the medium to long term. Figure: Tanker charter rates
250000 200000 (US$)
(US$)
Figure: Dry-bulk charter rates

300000 250000 200000 150000 100000 50000 0 93000 24600 Jan-07 Mar-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 May-10 Capesize Charter Rates 10% IRR Charter Rates
Source: GE Shipping and Fearnleys
150000 100000 50000 0 Sep-08 Nov-08 Dec-09 Feb-10 Aug-09 Oct-09 Sep-07 Apr-08 Jun-08 Apr-09 Jun-09 Nov-07 Feb-08 Jan-09 Feb-09 Apr-10 Jul-08
VLCC Charter Rates Charter Rates for 10% IRR

Source: GE Shipping and Fearnleys
Median Charter Rates
Median Charter Rates
What made the charter rates go up?

Steel production in China grew by 21% YoY since 2001 (approx 75% of world steel production growth over the period). Seaborne trade growth for dry bulk goods was around 3%YoY before 2003 but has been close to 6% per year since then. Growth in tonne mile due to Increase in Brazil's share in iron ore exports which is about 11,000 miles as compared to 4,000 miles for Australia from the main importing nation: China. Shortage of shipyard capacity drove up the rates of new buildings. Substantial speculative activity also contributed to the increase in the new building rates.
What brought it down?

Credit freeze across the world which led to a collapse of global trade With the commencement of deliveries of the enormous orderbooks (at the peak almost 70% of existing fleet in case of dry-bulk) the situation worsened.
What from here:

Medium term: Rates to remain depressed, Long term: Tankers to recover, dry-bulk remain depressed We expect rangebound charter rates with a down ward bias in the next two year period. Though we expect the Tanker segment to indicate better rates by the end of FY11 the dry-bulk sector will persist with its long term bearish phase. Other segments like containers and LPG segment having more oligopolistic markets may show recovery due to application of certain floor rates. Table: Financial snapshot
Reco SCI* GE Shipping Mercator Varun Shipping HOLD BUY HOLD Not Rated
* Standalone; # Shipping fleet as on March 2010
(Rs mn)
Revenues FY11E FY12E 41,315 28,499 24,352 46,030 32,684 25,321 PAT FY11E FY12E 6,443 6,226 711 7,312 7,429 1,142 EPS (Rs) FY11E FY12E 15.2 40.9 2.9 17.3 48.8 4.7 NAV# (Rs) P/E(x) Current FY11E FY12E 135 287 20 10.8 7.4 16.2 9.6 6.2 10.0 EV/EBIDTA (x) FY11E FY12E 6.2 7.3 5.3 5.2 6.2 3.6 ROE(%) FY11E FY12E 10.0 10.4 2.5 11.0 11.4 3.3
Source: Company reports; IDBI Capital Market Services
Chetan Kapoor
+91-22-4322 1232
chetan.kapoor@idbicapital.com
1
Contents
Page No. Shipping Sector Tanker markets: Recovery in sight only by 2012 .......................................................................................................................................... 5 Dry-bulk markets: Charter rates likely to settle down .................................................................................................................................. 10 Container Shipping: Rates gaining ground on a weak foundation .................................................................................................................. 14 Indian Shipping Scenario ............................................................................................................................................................................ 17 Companies Covered Great Eastern Shipping Ltd. Summary ................................................................................................................................................................................................... 19 Investment Highlights ................................................................................................................................................................................. 19 Background ............................................................................................................................................................................................... 20 Operational Highlights ................................................................................................................................................................................. 21 Valuations ................................................................................................................................................................................................. 23 Financials ................................................................................................................................................................................................... 24 Financial Summary .................................................................................................................................................................................... 26 Shipping Corporation of India Ltd. Summary ................................................................................................................................................................................................... 29 Investment Highlights ................................................................................................................................................................................. 29 Background ............................................................................................................................................................................................... 30 Operational details ...................................................................................................................................................................................... 31 Valuations ................................................................................................................................................................................................. 33 Financials ................................................................................................................................................................................................... 34 Financial Summary .................................................................................................................................................................................... 35 Mercator Lines Ltd. Summary ................................................................................................................................................................................................... 37 Investment Highlights ................................................................................................................................................................................. 37 Background ............................................................................................................................................................................................... 38 Valuations ................................................................................................................................................................................................. 40 Financials ................................................................................................................................................................................................... 41 Financial Summary .................................................................................................................................................................................... 42 Varun Shipping Ltd. Summary ................................................................................................................................................................................................... 43 Investment Highlights ................................................................................................................................................................................. 43 Background ............................................................................................................................................................................................... 44 Financial Summary .................................................................................................................................................................................... 45 Appendix 1: Shipping Sector Stats ............................................................................................................................................................. 46 Appendix 2: Global Peer Set ...................................................................................................................................................................... 47 Disclaimer .................................................................................................................................................................................................. 48
Shipping markets have traditionally suffered long term cycles

Historically long cycles Shipping markets have historically shown very long cycles which extend into decades. The imbalances, created due to the substantial growth in trade and subsequent shipbuilding bubble, inflates the fleet build-up. This leads to a drop in charter rates which when goes down the breakeven cost per vessel (consisting of opex+capital cost). This leads to scrapping of vessels which again balances the demand supply gap. In the 1970s, the last shipbuilding bust period, had a very similar resemblance to the bust seen recently in 2009 though the magnitude was different. Fig.: Sea trade growth at ~1.3x world GDP growth Fig.: Deliveries have historically fal short of orders placed
Source: Clarkson
Source: Clarkson
The boom in the shipping tonnage addition was led by the demand for commodities by Japan and Europe in the 1960s. The demand push for Tankers was further amplified due to growth in oil imports by US. This led to an order of 129.5 mn dwt by 1973. Remarkably, the historical data shows us that the deliveries lagged the ships on order so much so that only 60 mn dwt of tonnage was delivered. We expect a re-run of the 1970s wherein the delivery of the tonnage can show a shortfall of ~40% from the actual orders.
Cargo movement growth and shipping tonnage growth

In the initial part of 2000's we had seen a brief period when the world shipping tonnage addition had fallen short of the growth in the cargo movement. Later on during the decade the shipping tonnage addition exceeded cargo movement growth but still the charter rates improved mainly because of the growth in the miles aspect of the trade. We expect the shipping tonnage to continue to overshoot the demand on the gross basis. Figure: Cargo movement and shipping tonnage growth: spread to widen
8 7 6
Tonne mile growth supported by growth in miles
(%)
4 3 2 1 0 2001 2002 2003 2004 2005 2006 2007 2008 2011E
Cargo mov ement grow th(bn tonnes)

Source: CESA and Intertanko
World tonnage grow th (mn dw t)
The world merchant fleet which on a consolidate basis stands at about 1,234 mn dwt and has seen an average growth of 6.9% pa is expected to see a substantial addition in excess of 9% in the next couple of years. Figure: Worldwide tonnage growth since 2006: substantial growth
1400 1200 1000 (mn dwt) 800 600 400 200 0 Oil tankers 6.3 -4 452 8.5 Chemical tankers 40.8 Liquid gas tankers 451.2 Bulk/OBO carriers 169.5 Container General ships 13.9 7.2 11 2.1 105.8 cargo ships 1.7 6.4 Passenger 1234.2 Total 6.9 45 35 25 15 5 -5 -15 (%)
mn dw t 2010
Source: ISL - LR Fairplay
Av . Yearly grow th (%) 2006-10 - dw t
Figure: Total seaborne cargo: Crude oil forms the major share
Container 15% Crude oil and General cargo, ro-ro 10% gas 37%
Cruise Reefer RoRo 1% 5% Chemicals 2% 6% Car 5% LNG 7% LPG 2% Container Bulk 24%
ships
Tankers 25%
Baux ite 13%
Iron-ore,coal and grain 25%

Source: ISL - LR-Fairplay
23%
Tanker markets: Recovery in sight only by 2012

Crude oil forms one-third of the commodities transported by sea from the producers to the consumers by a dedicated fleet of over 2,600 tankers with a capacity of more than 452 mn dwt (including crude and product). Crude oil shipping demand is primarily affected by the crude oil demand which in turn is derived out of worldwide energy requirements. Energy requirement is one of the major factors affecting crude oil shipping rates. Hence the demand side comprises key variables are the crude oil demand growth and the location of refinery capacity/storage capacity. On the supply side net fleet addition is the major factor affecting rates. Major trade movements 2009
Source: BP Energy Review 2010
Demand scenario: Headline projections encouraging

Crude demand to recover Tonne mile demand is estimated to have fallen by 4% in 2009 compared to global oil demand declining by 1.5%. It is estimated that tonne mile demand will increase in 2010 with oil demand expected to grow by 1.9%. A mild recovery in the crude oil demand is anticipated on the back of estimates by EIA and IEA, which expect a 1-1.5 mnbpd growth in crude demand to stand at ~86.5 mbpd for 2010. We expect a tonne mile growth of 4% in the tanker segment in 2010 and 2011, where the average distance traveled is expected to increase post long haul trade growth of crude from Latin America and West Africa to the BRICS nations. Among the BRICS the Chinese demand has shown a steady growth over the last decade with average demand for crude increasing by 9% CAGR. China, currently consumes less than 10% of global oil but has absorbed the equivalent of more than 40% of every extra barrel produced since 1999. The tonne mile distances are hence expected to increase which currently stands at ~5,200 nautical miles. Figure: World liquid fuels consumption: on a recovery path
million barrels per day 95 90 85 80 75 70 65 60 55 50 45 40 35 30 2003 2004 2005 China 2006 2007 2008 2009 2010 2011 -0.5 -1.5 -2.5 Annual growth Total consumption million barrels per day 5.5 Forecast 4.5 3.5 2.5 1.5 0.5
United States
Other Countries
Source: BP Energy Review 2009
Figure: Demand side projections: Tonne mile growth to clock ~4% CAGR
20 10 0 -10 -20 -30 1980 1984 1988 1992 1996 2000 2004 2008 2012 Tonne mile grow th % World oil demand grow th
Source: IMF, IEA, Fearnleys
7000 6000 5000 (miles) 4000 3000 2000 1000 0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 Av erage Distance miles
(%)
World GDP grow th
Ex-OECD countries to corner a bulk of incremental imports

There has been a marked change in the crude oil import share by the different regions in the world with the rest of the world mainly comprising of the developing Asian economies like China gaining prominence. This development is expected to further impact the trade patterns in the long run once the newly developed fields in the Latin American regions start producing crude post 2014. Fig.: Importers: Share of ex-OECD countries increasing Fig.: Exporters: Middle-East predominates
100% 80% 60% 40% 20% 0% 1980 US Europe 1990 Japan 2000 2009 Rest of World *
Rest of World * North America Asia Pacific 3% 11% 10% South & Central West Africa America 8% 7% North Africa 5% Europe 4% Former Sov iet Union 17% Middle East 35%
Source: BP Energy Review 2010; IDBI Capital Market Services
but US inventories remains key indicator

US imports still constitute a major chunk of oil imports. The crude oil movement on the AG to US route constitutes about 40% of the total seaborne crude imported by US which is the largest importer of crude. The VLCC charter rater rates have historically shown a keen correlation between the fall in the inventories and increase in the charter rates. Figure: US inventories vs VLCC charter rates: inverse correlation
1900000 1850000 1800000 1750000 1700000 1650000 1600000 1550000 Seasonal drops in US inv entories helps rates 150000 100000 50000 0 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Crude inv entory
Source: EIA, GE Shipping and IDBI Capital
VLCC charter rates(US$/day )
Storage demand provide little respite

The storage demand for tankers has been increasing though it impacts only about 6-7% of the shipping floating tonnage and is not sufficient enough to provide a long term support to rates. The demand for storage had received prominence post the fall in charter rates which brought the rates below the breakeven levels. Figure: Number of vessels utilized in storage
140 120 100 80 60 40 20 0
(Nos.)
Dec-08
Mar-09
Jan-09
Feb-09
Jun-09
Aug-09
VLCCs
Source: Intertanko
May-09
Suezmax
LR2/Aframax
Supply side
The tanker supply has seen a growth of 6.6% CAGR over 2006-2010 which expected to increase to approach double digit numbers by 2010. By the end of 2009, the world tanker fleet (crude and products) reached 452 mn dwt which is 37% of world shipping fleet. According to minimum phase-out estimates even if all the tankers are phased out by 2010 and assuming 4% increase in tonne mile demand we have a scenario of oversupply in tanker tonnage. Figure: Projection tanker fleet based on current orderbook and phase out (above 25,000 dwt)
600 500 (mn dwt) 300 200 100 0 2002 2004 2006 2008 2010 2012 2014 Fleet
Source: Intertanko and ISL Fairplay
270 278
295 311 326
400
450 400 350 300 250 200 150 100 50 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 VLCC Suezmax Aframax Panamax
Figure: Tankers delivery schedule

600 500
341 360
405 423 467
471 470 468 464
(mn dwt)
400
163.4
300 200 100 0
439.1
Sep-09
LR1/Panamax
59.4 23.2 29 7.3
61.6 21.5 8.1 10 3.4
VLCC
Suezmax
Aframax Ex isting Fleet
Panamax Order book
98 24.6 15.7 7.1 1.8
27.9 6 2.4 3.3 0.3
17 9.4 6.1 1.5
Small 2010E 2011E
Source: Industry
128.5 58.8 55.4 14.3

Total 2012E
7
88.3
Oct-09
Apr-09
Jul-09
Tanker delivery still onerous

Considering the tanker deliveries at various levels of trade growth and assuming a maximum phaseout of single hull tonnage in 2010. Even considering a 4% growth in tonnage the tanker tonnage supply seems overbearing. We may see a balancing only post FY14 in most optimistic of the estimates. Figure: Tanker delivery: surplus to sustain
Tanker Phase Out, Deliv eries, Scrapping Tankers 25,000 dw t+ assuming v arious demand Increases 100 Minus 2% grow th in 2009 (mn dwt) 50 0 Assumed market balance end 2008 -50 CY02 CY03 CY04 CY05 CY06 CY07 CY08 Deletions Surplus 2.5% Trade Grow th CY09 CY10 CY11 CY12 CY13 CY14 FY15 Deliv eries Surplus Zero Trade Grow th
Source: Intertanko
Remov als in addition to phase out
Max Phase Out Surplus 4% Trade Grow th
Single hull tanker scrapping

About 13% of the existing single hull tonnage tonnage is yet to be scrapped. This tonnage we expect to be scrapped in the next two years. Less than 70000 dwt segment of the tanker fleet has the maximum share of the old tonnage which stands at ~17% of the existing fleet. This further indicates at the likely tough times for the large sized vessels which are relatively young. Figure: Share of single hulls not significant
Tanker Singe Hull Fleet, Orderbook & Total Fleet 400 300 (No.) 200 100 0 SH - 13% Small Suezmax
Source: Intertanko and RS Platou
Figure: Older vessel fleet relatively younger

Age Profile of tankers 100% 80% 60% 40% 20% 0% 17% 8% 11% 19% 45% 10K70K 5% 14% 13% 25% 44% 120K 70K2% 16% 16% 27% 40% 120K200K 3% 13% 19% 34% 31% 200K+ 7% 12% 15% 27% 39% Total 10-15 y ears
Orders - 30% Panamax VLCC
Fleet - 100% Aframax
0-5 y ears 15-20 y ears

Source: Intertanko and RS Platou
5-10 y ears 20+ y ears
Net tanker fleet development

We expect reduction in surplus tanker tonnage only after CY11 provided all the single hulled tankers are scrapped and there is in nil addition in order book. Hence there is a likely sustained recovery in the tanker tonnage post 2011. This view can definitely undergo a change in case of higher than expected scrapping. Fig.: Net tanker fleet development
60 40 (mn dwt) 20 0 -20 -40 90 92 94 96 98 00 02 04 06 08 10 12 Year Demolition Conv ersion Deliv eries Deletion
Source: Intertanko
Fig.: Conclusion: Tanker tonnage growth & cargo growth

100 80 60 40 20 0 -20 -40 1970 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2011 Tanker tonnage grow th
Source: CESA; Intertanko; IDBI Capital Market Services
Deliv eries Phase Out
14
(%)
Cargo grow th
IRR sensitivity to charter rates

At the current value of secondhand ships we worked on the various IRR generated by the vessels at different charter rates. The graphs thus generated in our model can hence be utilized to find out the likely charter rates which may provide feasible operations. We believe that in case of the low utilization of the shipping fleet the charter rates will revert back to the "least feasible" charter rates. Figure: Sensitivity of IRR with change in charter rates
1.15 0.95 0.75 0.55 0.35 0.15 -0.05 9500 12000 14500 17000 19500 22000 24500 27000 29500 32000 34500 37000 39500 42000 44500 47000 49500 52000 54500 57000
9
US$ 22 mn US$ 38 mn US$ 52 mn US$ 76 mn
(US$/day ) IRR - Suex max

Source: IDBI Capital Market Services
IRR - Clean
IRR - VLCC
IRR - Aframax
We have worked upon the following assumption: TCE & OPEX remain constant 5 yr old Second Hand Vessels are bought Vessels are used for 15 years and then sold/salvaged Insurance cost @1% of Book Value Loan Repayment is EMI Based, payable quarterly for 8 years Table: Charter rates for 10% IRR
Tankers VLCC Suezmax Aframax Clean
Source: BRS; IDBI Capital Market Services
Second hand Price ($ mn) 76 52 38 22
For 10% IRR 29153 21734 17625 12902
Charter Rates as On 31-Mar-2010 22096 22412 19554 3620
Dry-bulk markets: Charter rates likely to settle down

Dry bulk segment which had witnessed all time high charter rates in 2008 are also similarly plagued by excess capacity as the tanker segment but the situation is much grimmer in this case. The current newbuilding orderbook is in excess of 53% of existing fleet. The tonne mile growth has hovered between 6.2-8% over 2004-08 but going ahead we believe there will be slowdown in growth. This slowdown will be mainly due to a flattening of iron-ore import growth by China which has been the main driver for the dry-bulk trade. A grim fleet addition scenario with fleet addition in double digits will continue to affect pressure on rates. Major Dry Bulk Seaborne Trade Routes
Source: Dryships
Demand drivers: China all the way

Iron ore, coal and grains constitute ~70% of the total commodity being transported by the dry-bulk carriers. It is predominantly iron-ore and coal which decides the fate of charter rates in the dry-bulk sector. In this, China plays a significant role, at a time when the world was cutting back on iron ore imports; Chinese consumption of iron-ore had a profound effect on dry bulk trade. In 2009 Chinese iron ore imports alone accounted for 67.9% of global iron ore trade and 20.6% of world dry bulk trade. Chinese Iron-ore imports from Brazil recovered in FY10 which helped provide support to the dry-bulk charter rates in 2009. Figure: Scorching growth in Chinese ore and coal imports helped support rates in FY11
50% 42% 40% 30% 19% 20% 10% 0% 2004 2005 2006 2007 2008 2009 Grow th, % 208 275 326 18% 16% 32% 700 600 500 400 300 200 384 444 628 100 0
120% 100% 80% 60% 40% 20% 0% 2005 2006 2007 26% 46% 33% -25% 2008 2009 Grow th, % 51% 38% 38% 113% China Coal Imports 196%
250% 200% 150% 100% 50% 0% -50%
China Iron Ore Imports, mn tonnes

Source: Bloomberg
Chinese Coal Import, mn tonnes
10
Figure: Chinese Iron ore imports

60000000 (Tonnes) 50000000 40000000 30000000 20000000 10000000 0 Oct-05 Oct-08 JanApr-04 Apr-07 Jul-06 JanJul-09
Figure: Iron-ore import growth from various sources

60 50 40 30 20 10 0 -10 FY06 FY07 FY08 FY09 FY10
CIRIIQSA Index CIRIIQIN Index

Source: Bloomberg
CIRIIQAU Index CIRIIQBZ Index
(%)
Total import grow th Import grow th from India

Source: Bloomberg
Import grow th from Brazil Import grow th from Australia
China growth story showing a slowdown?

China has shown a CAGR of 12% in consumption of steel over the period FY03-10. For FY10, the Chinese steel consumption increased by 19% YoY. Close to 50% of steel consumed in China is for construction projects. With the increasing stress by the Chinese authorities towards cooling off the economy we expect a moderation in growth in the Chinese iron-ore imports. The contraction in M1 growth and moderation in PMI indicates at a lower growth in Chinese iron-ore consumption arising out of slower growth in economy. According to the WSA the Chinese steel consumption will show a slowdown in growth to ~5% YoY for 2010. Figure: Iron ore inventory at Chinese ports has been growing indicating at a reduction in demand pull
Chinese Iron Ore Inv entory 80
China monthly M1 Supply growth 50 40 30

(%)
(mn tonnes)
60 40 20 0
20 10
Jul-06 Dec-06 May-07
Oct-08 Dec-08
Oct-07 Mar-08
Jul-08 Aug-08 Sep-08
Jan-09 Feb-09 Mar-09
May-09 Jun-09
0
Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10
11
CIOITTAL Index
Source: Bloomberg
Steel consumption forecast

According to the World Steel Association (WSA) the world steel consumption is expected to increase by 10.7% in CY10E and 5.3% in CY11E. In case of China growth is expected to taper down substantially to 6.7% and 2.8% for FY10 and CY11 respectively. This we believe is a negative for the dry-bulk shipping business which is now largely dependent upon the Chinese iron-ore demand. Table: World steel consumption forecast: posting a grim picture for China
CY09P World China India BRIC World (excl China) World (excl BRIC)
Source: WSA
CY10E 1,241 579 63 692 662 549
CY11E 1,306 595 72 721 711 586
CY09P -6.7% 24.8% 7.7% 17.5% -24.5% -26.8%
CY10E 10.7% 6.7% 13.9% 8.0% 14.4% 14.3%
CY11E 5.3% 2.8% 13.7% 4.1% 7.4% 6.7%
1,121 542 55 641 579 480
Tonnage supply
Effective tonnage supply growth The dry-bulk tonnage which currently stands at 463 mn dwt is expected to see significant additions in CY10. We expect an effective tonnage supply for the year 2010 and 2011 which is in excess of 10.8% YoY. But slippages are more rampant in case of the dry-bulk segment and a repetition of 40% slippage seen in CY09 cannot be ruled out. Figure: Dry-bulk tonnage addition schedule
700 600 500 400 300 200 100 0 463 172 144 122 278 92 123 27 13 9 5 2010E Handysize 2011E Total 2012E 62 60 46 47 77 94
(mn dwt)
37
23
23
14
27
17
Capesize
Panamax
Ex isting Fleet
Source: Industry
Handymax
Order book
Figure: Significant mismatch expected in effective supply growth in tonne mile growth
12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% Effectiv e supply grow th
Source: CESA; IDBI Capital Market Services
2002
2003
2004
2005
2006
2007
2008
2009
2010E
2011E
Tonne mile grow th
Table: Slippages can help to an extent

Total Current Orderbook Orderbook beginning of 2009 for delivery 2009 Delivered in 2009 'Slippage' for 2009 % of '09 Orderbook actually delivered Current Orderbook for 2010 Expected deliveries Jan Feb 2010 (as at 01/01/10) Actual deliveries Jan Feb 2010 'Slippage' for Jan Feb 2010
Source: Dryships
Dry Bulk Fleet (mn dwt) 277.8 71.3 42.5 40% 60% 118.6 18.4 9.9 46%
No of ships 3,165 964 531 45% 55% 1,438 218 119 45%
12
61
IRR sensitivity to charter rates: Drybulk

At current value of secondhand ships we worked on the various IRR generated by the vessels at different charter rates. The graphs thus generated in our model can hence be utilized to find out the likely charter rates which may provide feasible operations. We believe that in case of the low utilization of the shipping fleet the charter rates will revert back to the "least feasible" charter rater rates. Figure: Sensitivity of IRR with change in charter rates
1.15 0.95 0.75 0.55 0.35 0.15 0.1 -0.05 9500 12000 14500 17000 19500 22000 24500 27000 29500 32000 34500 37000 39500 42000 44500 47000 49500
US$ 28 mn US$ 38 mn US$ 57 mn
IRR - Capesize
IRR - Panamax
IRR - Supramax
We have worked upon the following assumption: TCE & OPEX remain constant 5 yr old Second Hand Vessels are bought Vessels are used for 15 years and then sold/salvaged Insurance cost @1% of Book Value Loan Repayment is EMI Based, payable quarterly for 8 years Table: Charter rates per 10% IRR
Dry-bulk Capesize Panamax Supramax
Second hand Price ($ mn) 57 38 28
For 10% IRR 24,613 16,545 11,960
Spot Charter Rates as On May-2010 83,800 43,000 35,500
13
Container Shipping: Rates gaining ground on a weak foundation

Container shipping which forms a part of the liner shipping segment also suffered from severe rate pressures in 2008 and 2009. Excess capacity and slowdown in trade had taken its toll. We expect a slight improvement in situation in the container shipping segment post greater co-operation between the container shipping players. The players have successfully tried to enforce a floor rate for container shipments on certain routes so that they can cover their operating costs. About 25 large liner companies dominate the container industry worldwide controlling about 85 percent of the container capacity. A 6,500 TEU 5-years old vessel in 2007 commanded a daily hire of about US$ 40,000 for 3 years and only US$10-12,000 in 2009 for about one year, as no owner was willing to charter his vessel for a longer period. That vessel would cost in excess of US$ 100 mn in 2007 and US$ 43 mn in 2009. Operating expenses are in the region of US$ 7,500 per day for such a ship. In May 2010, the daily hire for a one year charter would be in excess of US$ 24,000/day. Today, about 90% of non-bulk cargo worldwide moves in containers stacked on transport ships; 26% of all containers originate from China. Current liner shipping capacity stands at ~14.1 mn TEUs with ~5,900 ships active. Figure: Container shipping charter rates: Showing recovery
CTEX INDEX 1200 1000 800 600 400 200 0 Dec-07 Dec-08 Oct-07 Oct-08 Sep-08 Apr-09 Aug-09 Sep-09 Apr-08 Feb-09 Feb-08 Nov-09 Mar-10 Jun-09 Jan-10 Jul-08 May-08 May-10
12% 10% 8% 6% 4% 2% 0% 31 Dec 2009 31 Dec 2010 31 Dec 2011 Fleet
Source: Alphaliner
Source: Bloomberg
Improvement in fleet addition scenario

There has been a marked reduction in the orderbook position with outstanding orderbook standing at 34% of existing fleet in TEU terms and about 22% in mn dwt terms. The idle capacity which is a good indicative of current fleet demand supply situation has reported an improvement. The idle capacity has reduced from 1.03 mn TEUs in March 2009 to 0.63 mn TEUs by March 2010 which is ~5% of the total fleet. It is a significant improvement as compared to peak layoff of about 12% of capacity at the peak of the crisis. Figure: Fleet addition estimates
18000000 13000000 teu 8000000 3000000 -2000000 31 Dec 2012 Deliv eries 31 Dec 2013 Grow th YoY%
14
On the supply side, in 1QCY10 only about 17% of scheduled deliveries materialized, which, if replicated for the rest of the year, suggests that only 60-70% of scheduled deliveries will actually happen in 2010. Figure: Recovery in container trade
Port of Long Beach Inland Containers Index 400000 350000 300000 250000 200000 150000 100000 50000 0 6/30/2007 8/31/2007 2/29/2008 4/30/2008 6/30/2008 8/31/2008 2/28/2009 4/30/2009 6/30/2009 8/31/2009 2/28/2010
8m09
10/31/2007
12/31/2007
10/31/2008
12/31/2008
10/31/2009
Source: Bloomberg
All is not lost

Despite such a gloomy scenario we believe that all is not lost and there is ray of hope at the end of tunnel. There has been a substantial slowdown in capex over the last year, 2009. A spate of cancellations and deferments came as a respite to the dry-bulk sector in 2009. The contracts are much more water tight in case of tanker segment but here too we saw slippages/cancellations of about 24.2% of the orderbook. Almost 40% of the orderbook in case of dry-bulk was deferred or cancelled in 2009. Figure: Investment in shipping tonnage has reduced
250 200 (US$ bn) 150 100 50 0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Substantial drop in investment in shipping capex
Tankers
Source: Clarkson World Shipyard Monitor
Bulkers
LNG
LPG
Containers
12/31/2009
Others
Substantial increase in scrapping

The scrapping of vessels has increased threefold the over 2009 on a YoY basis. Though it is still less than the scrapping witnessed in 1985. The scrapping activity is only expected to gain further traction from here and breach the highs seen earlier. Figure: Scrapping seeing a significant increase
40 35 30 (mn dwt) 25 20 15 10 5 0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
15
2009 scrapping at 36 mn dwt
Source: BRS and ISL
4/30/2010
Asset prices have slowly started to stabilize

Asset prices in the case of the tanker and dry-bulk vessels have stabilized over the last couple of months after a substantial decline. Prices in case of the tanker vessels dropped by almost 60% and in the case of dry-bulk vessels dropped by almost 50%. Figure: Asset price trends
200 150 (US$ mn)
200 150 (US$ mn)

30-Apr-02 31-Oct-02 30-Apr-03 31-Oct-03 30-Apr-04 31-Oct-04 30-Apr-05 31-Oct-05 30-Apr-06 31-Oct-06 30-Apr-07 31-Oct-07 30-Apr-08 31-Oct-08 30-Apr-09 31-Oct-09 30-Apr-10
100 50 0
100 50 0 30-Apr-02 31-Oct-02 30-Apr-03 31-Oct-03 30-Apr-04 31-Oct-04 30-Apr-05 31-Oct-05 30-Apr-06 31-Oct-06 30-Apr-07 31-Oct-07 30-Apr-08 31-Oct-08 30-Apr-09 31-Oct-09 30-Apr-10 Supramax Panamax Capesize
45k Clean
Aframax
VLCC
Source: Bloomberg; SSY; IDBI Capital Market Services
also there are good chances that vessels will not be delivered
In 2009 we had a seen good part of order delayed due to order cancellation and delays in execution. Figure: Increase in order cancellations
120000 100000 (Thousand dwt) 80000 60000 40000 20000 0 Tankers Bulk Carrier Container Ships General Cargo 2008 - 1000 dw t
Source: ISL Fairplay
95772
6973
14349
10953
3861 4990
913
1879
44
50
Passenger ships 2009 - 1000 dw t
16
Indian Shipping Scenario

Indian shipping tonnage forms a miniscule 1.2% of the total world tonnage. Despite an aggressive growth in tonnage over the last ten years the Indian shipping sector remains a marginal player. Almost 80% of the Indian cargo is carried by foreign flagged vessels. Figure: Share in Tonnage
WEST ASIA MARITIME, 1% SANMAR SHIPPING, 1% PALLONJI SHIPPING, 1% PRATIBHA SHIPPING, 2% APEEJAY, 2% TOLANI, 3% CHAMBAL FERTILIZERS & CHEMICALS, 3% ESSAR, 3% VARUN, 3% MERCATOR, 8% GESCO, 18% SCI, 33% OTHERS, 21%
Source: Bloomberg
Highly sensitive to tanker earnings

Indian Shipping companies have a considerable share of tanker tonnage in their fleet. Hence historically they have shown a considerable dependence upon the tanker charter rates. Table: Shipping Fleet Profile (Under coverage)
Vessel Type Crude Product Dry Bulk Container Total SCI (Total DWT 4.88 mn) Number % of DWT Age 26 16 18 5 65 65 13 17 4 96 15 14 20 5 15 37 100 12 21 100 5 GESCO (Total DWT 2.94 mn) Number % of DWT Age 11 20 6 51 34 15 9 14 13 Mercator (Total DWT 2.1 mn) Number % of DWT Age 4 4 13 20 15 65 16 0 3
Note: SCI and GESCO's product fleet includes gas carriers

Source: Bloomberg
Net debt for the companies under coverage

The Net debt position of the shipping companies under coverage is modest and we believe the shipping companies under coverage ahould be able to cover their long term liabilities in view of current expansion plans. Figure: NetDebt to Equity position well poised in view of a comfortable DSCR
35000 30000 25000 20000 15000 10000 5000 0 SCI
30100 19910
29000
2000
2730
GESCO(Stand)
GESCO(Cons)
Mercator
Varun
17
Companies Covered
Company Report Great Eastern Shipping Ltd. June 24, 2010
COMPANY REPORT
Analyst Chetan Kapoor +91-22-4322 1232
Great Eastern Shipping Ltd.

Great offer in offshore
BUY
Summary
GE Shipping (GESCO), India's largest private sector shipping company has had a successful track record of maintaining profitability despite severe fall in rates. We expect the company to be able to successfully hedge its earnings by growing its fleet in offshore space, which currently has owned fleet strength of 14 assets through its subsidiary Greatship India. We believe that offshore will contribute to almost 45% of FY11E PBIT. With likely listing of the offshore subsidiary we expect a value unlock in the near term. We recommend a BUY on the stock with target of Rs 376, a 23% upside.
Nifty: 5321; Sensex: 17730

CMP Target Price Potential Upside/Downside Key Stock Data Sector Shipping Bloomberg/Reuters GESCO IN / GESC.BO Shares o/s (mn) 152.3 Market cap (Rs mn) 46,299 Market cap (US$ mn) 1,002 3-m daily average vol. 97,717 Price Performance 52-week high/low -1m Absolute (%) 11.4 Rel to Sensex (%) 3.5 Shareholding Pattern (%) Promoters FIIs/NRIs/OCBs/GDR MFs/Banks/FIs Govt. Holding Non Promoter Corporate Public & Others
Stock vs Relative to Sensex
Price (Rs.)
150 125 100 75 50 25 0 Dec-09 Oct-09 Aug-09 Sep-09 Feb-10 Mar-10 Jun-09 Jan-10 Apr-10 Nov-09 May-10 Jun-10 Jul-09
Rs 304 Rs 376 +23%
Investment Highlights
Listing of the offshore subsidiary to provide value unlocking
GESCO plans to list its offshore subsidiary Greatship India. The subsidiary currently has 14 owned assets and 2 in-chartered assets under management. Post the leftover capex of US$ 362 mn the company will have total owned assets strength of 23 vessels. The listing of the offshore subsidiary is expected to further unlock value.
Stable offshore earnings to contribute significantly

With the growth of fleet in the offshore segment where the charter rates are likely to remain stable we expect the offshore contribution in the combined consolidated entity will increase to ~37% by FY12. Company's presence in the mid-sized offshore asssets is likely to be less risky as compared to a player like Varun which has a higher exposure in the higher end offshore segment.
Rs 345/212 -3m 7.0 5.3 -12m 30.1 6.2
Greater exposure to the tanker segment to provides better long term visibility
On a standalone basis GESCO currently books ~85% of its revenues from the tanker segment. We believe that despite a bleak near term scenario the tanker segment is likely to achieve better rates in the longer terms (beyond two years). We believe that the tanker cycle is currently at its trough and is less likely to go further down from here.
30.00 13.65 21.04 0.01 8.19 27.12
Valuation
We have done the valuation on the SOTP basis due to disparateness in the shipping and offshore business. The shipping business has been valued on the basis of P/NAV basis whereas offshore has been accorded 9x FY11E, PE based on the global peerset valuations.
Table: Financial snapshot

Year-end: March Net sales EBIDTA Adjusted net profit EPS (Rs) P/E (x) EV/EBIDTA (x)
Sensex GE Shipping
(Rs mn)
FY08 31,308 13,856 9,689 63.6 4.8 4.4 FY09 38,008 15,496 10,846 71.2 4.3 4.3 FY10 28,565 9,401 5,390 35.4 8.6 8.8 FY11E 28,499 11,237 6,226 40.9 7.4 7.3 FY12E 32,684 13,324 7,429 48.8 6.2 6.2
Source: Bloomeberg; Capitaline
19
Company Report Great Eastern Shipping Ltd.
Background
G E Shipping is India's largest private sector shipping service provider. G E Shipping initially promoted by two families - the Sheths and the Bhiwandiwallas, who started GESCO to help expand the reach of their trading businesses. The company started its shipping operations in 1948, after obtaining the mothballed Liberty ship, SS Fort Elice. GESCO has a diverse asset base with presence in the crude, product, dry bulk and offshore segments. GESCO has a presence in the offshore business through the wholly owned subsidiary Greatship India Ltd. The company's management is constituted by Mr K M Sheth, Chairman, Mr Bharat Sheth, Managing Director and Mr Ravi Sheth, Managing Director of Greatship India. Diagram: Fleet details
Table: Capex details

Capex planned Shipping FY11 Kamsarmax Supramax Supramax FY12 Kamsarmax Kamsarmax VLCC VLCC Offshore FY11 PSV PSV PSV MPSV MPSV MSV MSV AHTSV FY12 Total
Type of vessel
Shipyard STX Cosco Cosco STX SPP Hyundai Hyundai CDL CDL CDL Keppel Keppel Mazgaon Dock Mazgaon Dock Drydock World, Singapore Drydock World, Singapore
Amount (US$ mn) 136
332
326
AHTSV
36 939
20
Operational Highlights
Figure: Avg TCY movement for the company's fleet: Expected to remain in a similar range
60000 50000 40000 30000 20000 10000 0 Q1FY07 Q3FY07 Q1FY08 Q3FY08 Q1FY09 Q3FY09 Q1FY10 Crude
Q3FY10 Product Carrier
FY11E Dry Bulk
Very dynamic in S&P activity

GESCO has been one of the most aggressive companies historically in the field of sale and purchase of ships and is likely to continue the policy. Figure: Consistent booking of profit in gain of sale of ships
4000 3500 3000 2500 Rs mn 2000 1500 1000 500 0 2005 2006 2007 2008 2009 2010 Gain on Sale of Ships
Source: Company reports
3314 2894 2545 1733 1363 248
Greatship: a good support

Greatship has a young (average age of ~2 years) mainly mid-sized offshore vessels. The following is the expected fleet profile of the offshore segment at the end of planned capex. Table: Fleet breakup post expansion
Vessel Type AHTSV PSV MPSSV, DSV Jack-up rig Total
Greatship Fleet 10 4 8 1 23
Worldwide Fleet 2,446 1,954 268 474
Orderbook 376 210 87 71
Orderbook (%) 15.4 10.7 32.5 15.0
The charter rate scenario in the offshore markets is expected to be more robust as compared to the shipping sector. Orderbook situation is much less alarming in case of offshore vessels.
21
The orderbook in case of AHTSV and PSV category of vessels stands at 15.4% and 10.7% of existing fleet. Also about 48% and 40% of the existing fleet is above 25 years in the case of AHTSV and PSVs respectively. Hence relatively lower additions in the shipping tonnage are expected to sustain the current levels in charter rates. Figure: Greatship revenue breakup: Rigs and the MSVs to constitute a major share of revenues
100% 80% 60% 40% 20% 0% FY10E PSV
FY11E AHTSV MPSSV ROV support MSV
FY12E Rig Chetana Rig Chitra
Table: Charter rate assumptions

Vessel Category Tankers Suezmax Aframax Panamax MR GP Gas Dry Bulk Capesize Panamax Kamsarmax Handymax/Supramax Handysize Offshore PSV AHTSV MPSSV ROV support MSV Rig Chetana Rig Chitra
Charter Rates (US$/day) 25,000 21,000 21,000 17,000 15,000 15,000
28,000 16,000 20,000 25,000 13,000
17000 13500 25000 30000 50000 161000 130000
22
Valuation
We have valued GESCO on SOTP basis, providing a multiple of 1x to the NAV of the shipping fleet and a multiple of 9x FY11E PE to the offshore subsidiary. We believe that asset prices are already at the trough level with a modest recovery underway a multiple of 1x NAV is justified at these levels. Table: Valuation
NAV of the shipping fleet (Rs) PAT for Greatship India (FY11E) (Rs mn) Multiple (x) Contribution from Greatship (Rs mn) After holding company discount (30%) Total Value (Rs mn) Value per share (Rs)
Source:
287 2,148 9 19,328 13,529 57,240 376
1 Year forward EV/EBIDTA chart (standalone): May be distorted due to Greatship contribution missing Figure: P/NAV has remained in the 0.5x to 1x NAV range
700 600 500 400 300 200 100 0 31/03/2007 30/06/2007 30/09/2007 31/12/2007 31/03/2008 30/06/2008 31/09/2008 31/12/2008 31/03/2009 30/06/2009 30/09/2009 31/12/2009
Figure: EV/EBITDA: Distorted due to Greatship earnings

14 12 10 8 6 4 2 0
PRICE
.5NAV
1NAV
Figure: P/B: Maintains in the 1x BV range

600 500 400 300 200 100 0 Dec-06 Dec-07 Dec-08 Dec-09 Oct-06 Oct-07 Oct-08 Aug-06 Aug-07 Aug-08 Aug-09 Oct-09 Apr-06 Apr-07 Apr-08 Apr-09 Feb-07 Feb-08 Feb-09 Feb-10 Jun-06 Jun-07 Jun-08 Jun-09 Apr-10 Jun-10
Close Price
Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10
EV/EBIDTA +1 Std dev Mean -1 std dev
1XBV
1.5XBV
.5XBV
23
Financials
Revenue contribution likely to be skewed towards offshore
The dependence upon offshore revenues is expected to escalate over the next couple years with the stagnation in the shipping charter rates. Fleet accretion in the offshore segment is expected to increase its contribution with the charter rates likely to remain stable. Fig.: Dependence upon offshore revenue to increase
100% 80% 60% 40% 20% 0% FY09 FY10 FY11E Shipping
Fig.: Revenue breakup of shipping business

100% 80% 60% 40% 20% 0%
FY12E Offshore
2008
2009 Crude
2010 Product
2011E Gas
2012E Dry
The GESCO standalone revenues are expected to remain depressed in the next two years. Greatship revenues are expected to grow exponentially on the back of fleet addition though the EBIDTA margins are expected to stabilize in the range of 36%. Fig.: GESCO standalone: revenue to remain stagnant
30000 25000 (Rs mn) 20000 15000 10000 5000 0 2006 2007 2008 2009 2010 2011E2012E Income from operations
Fig.: Greatship (India): providing support to revenues

14000 12000 10000 (Rs mn) 8000 6000 4000 2000 0 FY07 FY08 FY099MFY10 FY10EFY11EFY12E Rev enue
60 50 40 30 20 10 0
60 50 40 30 20 10 0
EBIDTA (ex cluding shipsale)
EBITDA margin
EBIT contribution to be further skewed towards offshore

We believe that the earnings will be further skewed towards offshore in FY11 as it is expected to contribute to 35% of consolidated revenues whereas constitute about 45% of PBIT. Figure: Shipping vs Offshore: Offshore PBIT contribution at ~45% in FY11E
100% 80% 60% 40% 20% 0% FY09
FY10
FY11E
FY12E Shipping Offshore
24
Leverage
The DSCR and the interest coverage ratios of the company are at ~1.2x and 3.7x for FY11E. We believe that GESCO (consolidated) is in a comfortable position to provide for the long term obligations. Figure: Interest cover and DSCR (consolidated): comfortably placed
8 7 6 5 4 3 2 1 0 0.4 FY09 7.1
3.8 1.2
3.7
3.5 1.3
0.6
0.5 FY10 DSCR (x ) FY11E Interest cov er ratio (x )
0.5 FY12E Net Debt/Equity (x )
25
Financial Summary (Consolidated)

Profit & Loss Account
Year-end: March Net sales growth (%) Operating expenses Operating profit Other operating income EBITDA growth (%) Depreciation Other income EBIT Interest paid Pre-tax profit (before non-recurring items) Non-recurring items Pre-tax profit (after non-recurring items) Tax (current + deferred) Net profit Adjusted net profit growth (%) Prior period adjustments Net income
(Rs mn)
Cash Flow Statement

Year-end: March Pre-tax profit Depreciation Chg in working capital Total tax paid Other operating activities Cash flow from operations (a) Capital expenditure Chg in investments Other investing activities Cash flow from investing (b) Free cash flow (a+b) Equity raised/(repaid) Chg in minorities Debt raised/(repaid) 15,190 -1,426 13,661 9,815 11,042 -1,408 1,126 10,723 -4,738 2,411 10,239 3,659 -1,165 FY09 14,531 1,059 4,463 -454 19,599 -20,053 151 -3,543 -23,445 -3,846 -104 -22,438 -15,461 -37 -270 7,828 -82 FY10 5,546 4,438 -2,549 -457 6,977 -3,673 -18,765 FY11E 6,350 5,175 -3,310 -117 8,098 -19,000 18,731
(Rs mn)
FY09 38,008 21.4 -22,512 15,496 15,496 11.8 -4,540 2,190 13,146 -1,847 11,300 3,231 14,531 -454 14,077 10,846 11.9 101 14,178
FY10 28,565 -24.8 -19,165 9,401 9,401 -39.3 -4,246 2,808 7,963 -2,123 5,840 -294 5,546 -450 5,096 5,390 -50.3 32 5,128
FY11E 28,499 -0.2 -17,262 11,237 11,237 19.5 -5,175 2,656 8,718 -2,368 6,350
FY12E 32,684 14.7 -19,360 13,324 13,324 18.6 -5,770 3,065 10,619 -3,010 7,609
FY12E 7,609 5,770 935 -180 14,134 -16,035
-16,035 -1,901 1 7,836 -1,478 6,359 4,458
6,350 -124 6,226 6,226 15.5 6,226
7,609 -180 7,429 7,429 19.3 7,429
Dividend (incl. tax) Other financing activities Cash flow from financing (c) Net chg in cash (a+b+c)
Key ratios
Year-end: March EPS (Rs) Adjusted for sale of ships EPS growth (%) EBITDA margin (%) EBIT margin (%) ROCE (%) Net debt/Equity (%) FY09 71.2 11.9 40.8 34.6 15.9 39.1 FY10 35.4 -50.3 32.9 27.9 7.7 63.5 FY11E 40.9 15.5 39.4 30.6 7.6 47.8 FY12E 48.8 19.3 40.8 32.5 8.4 48.6
Balance Sheet
Year-end: March Current assets Investments Net fixed assets Other non-current assets Total assets Current liabilities Total Debt Other non-current liabilities Total liabilities Share capital Reserves & surplus Less: Misc. expenditure Shareholders' funds Minorities interests Total equity & liabilities
26
(Rs mn)
FY09 27,134 3,023 75,800 105,956 10,976 42,659 53,635 1,642 50,679 52,321 105,956
FY10 21,848 21,789 75,034 7 118,678 7,879 53,702 61,580 1,605 55,493 57,098 118,678
FY11E 33,453 3,058 88,860 125,371 5,935 57,360 63,295 1,523 60,553 62,076 125,371
FY12E 38,163 3,058 99,125 140,345 7,121 65,196 72,317 1,524 66,504 68,028 140,345
Valuations
Year-end: March PER (x) PCE (x) Price/Book (x) Yield (%) EV/Net sales (x) EV/EBITDA (x)
FY09 4.3 3.0 0.9 2.6 1.8 4.3
FY10 8.6 4.8 0.8 2.6 2.9 8.8
FY11E 7.4 4.1 0.7 2.2 2.7 7.3
FY12E 6.2 3.5 0.7 2.7 2.4 6.2
Du Pont Analysis - ROE

Year-end: March Net margin (%) Asset turnover (x) Leverage factor (x) Return on equity (%)
FY09 28.5 0.4 1.9 22.7
FY10 18.9 0.3 2.1 9.9
FY11E 21.8 0.2 2.0 10.4
FY12E 22.7 0.2 2.0 11.4
Financial Summary (Standalone)

Year-end: March Net sales Growth (%) Operating expenses Operating profit Other operating income EBITDA growth (%) Depreciation Other income EBIT Interest paid Pre-tax profit (before non-recurring items) Non-recurring items Pre-tax profit (after non-recurring items) Tax (current + deferred) Net profit Adjusted net profit Growth (%) Prior period adjustments Net income
(Rs mn)
Cash Flow Statement

Year-end: March Pre-tax profit Depreciation Chg in working capital Total tax paid Other operating activities Cash flow from operations (a) Capital expenditure Chg in investments Other investing activities Cash flow from investing (b) Free cash flow (a+b) Equity raised/(repaid) Chg in minorities Debt raised/(repaid) 5,820 -1,425 4,238 7,455 6,023 -1,408 4,615 -5,130 -776 -577 -1,353 6,016 FY09 14,197 711 2,797 -450 -2,000 15,255 -6,126 -3,296 -2,616 -12,038 3,217 -157 6,653 1,695 -20,000 1,908 -16,397 -9,745 0 4,067 7,368 3,301 -7,765 11,833 FY10 4,320 3,790 -1,065 -392 FY11E 2,554 3,908 -3,071 -89
(Rs mn)
FY09 28,363 9.9 -13,729 14,634 14,634 15.2 -4,185 1,924 12,373 -1,536 10,836 3,361 14,197 -450 13,747 10,386 12.9 101 13,848
FY10 18,822 -33.6 -11,275 7,547 7,547 -48.4 -3,465 1,899 5,982 -1,430 4,553 -233 4,320 -392 3,928 4,161 -59.9 29 3,957
FY11E 17,884 -5.0 -11,877 6,007 6,007 -20.4 -3,908 1,800 3,899 -1,346 2,554
FY12E 20,337 13.7 -12,397 7,940 7,940 32.2 -4,162 1,900 5,678 -1,829 3,849
FY12E 3,849 4,162 329 -135 8,205 -14,379 -1,180 -15,560 -7,355
9,160 -869 8,291 936
2,554 -89 2,464 2,464 -40.8 2,464
3,849 -135 3,714 3,714 50.7 3,714
Dividend (incl. tax) Other financing activities Cash flow from financing (c) Net chg in cash (a+b+c)
Key ratios
Year-end: March EPS (Rs) Adjusted for sale of ships EPS growth (%) EBITDA margin (%) EBIT margin (%) ROCE (%) Net debt/Equity (%) FY09 68.2 12.9 51.6 43.6 16.9 25.0 FY10 27.3 -59.9 40.1 31.8 7.0 43.7 FY11E 16.2 -40.8 33.6 21.8 4.3 30.0 FY12E 24.4 50.7 39.0 27.9 5.8 42.6
Balance Sheet
Year-end: March Current assets Investments Net fixed assets Other non-current assets Total assets Current liabilities Total Debt Other non-current liabilities Total liabilities Share capital Reserves & surplus Less: Misc. expenditure Shareholders' funds Minorities interests Total equity & liabilities 87,884 96,046 94,639 49,282 53,711 55,599 38,602 1,523 47,759 42,336 1,523 52,188 39,040 1,523 54,076 87,884 7,936 30,666 96,046 5,647 36,689 94,639 3,127 35,913 FY09 21,634 12,510 53,740 FY10 15,281 32,510 48,255 FY11E 21,848 20,678 52,113
(Rs mn)
FY12E 22,973 21,858 62,330 107,162 3,645 45,073 48,718 1,523 56,921 58,444 107,162
Valuations
FY09 4.5 3.2 0.9 2.6 2.1 4.0
FY10 11.1 6.1 0.9 2.6 3.7 7.8
FY11E 18.8 7.3 0.8 1.1 3.5 9.8
FY12E 12.5 5.9 0.8 1.6 3.5 8.8

FY09 36.6 0.4 1.7 22.8
FY10 22.1 0.2 1.8 8.1
FY11E 13.8 0.2 1.7 4.5
FY12E 18.3 0.2 1.8 6.5

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Company Report Shipping Corporation 24, India Ltd. June of 2010
COMPANY REPORT
Shipping Corporation of India Ltd.

Potential for turnaround
HOLD
Summary
Shipping Corporation of India (SCI) a Navratna PSU is one of the least leveraged plays in shipping space in India. The company has India's largest shipping fleet has a major presence in the tanker segment. Currently having an aged fleet (average age ~19 years) the company has on order 38 vessels which will bring down its fleet age to <15 years by end of FY12. Its container shipping segment continues to be in losses due to a highly competitive sector which is reeling from overcapacities. SCI management though expects to turn around the container/liner segment by FY12 which we believe will be difficult task to achieve though the rates/TEU have improved. We initiate coverage with a HOLD rating on the stock.
CMP Target Price Potential Upside/Downside
Rs 165 Rs 170 +3%
Lowest leverage in the shipping space
SCI's conservative policy has helped it maintain a low leverage with a Net debt to equity position at ~0.1x. Though with a substantial capex planned in the next three years the company's leverage is expected to increase. Still the DSCR is reasonably positioned at about 1.5x in FY11E and equity infusion at this juncture may help it revamp and expand its fleet further when the asset prices are low.
Key Stock Data Sector Shipping Bloomberg/Reuters SCI IN / SCI.BO Shares o/s (mn) 423.5 Market cap (Rs mn) 69,878 Market cap (US$ mn) 1,512 3-m daily average vol. 73,124 Price Performance 52-week high/low -1m Absolute (%) 6.1 Rel to Sensex (%) (1.9) Shareholding Pattern (%) Promoters FIIs/NRIs/OCBs/GDR MFs/Banks/FIs Non Promoter Corporate Public & Others
Price (Rs.)
160 140 120 100 80 60 40 20 0 Dec-09 Oct-09 Aug-09 Sep-09 Feb-10 Mar-10 Jun-09 Jan-10 Apr-10 Nov-09 May-10 Jun-10 Jul-09
Container segment losses to reduce but breakeven elusive

SCI, the only Indian shipping company running international liner operations has been booking EBIT losses since FY08 due to extreme competition in the segment. In FY10 there has a been a steady improvement in the rates in the liner segment on the back of container shipping companies taking a conscious decision against moving containers at less than breakeven costs. This decision will be under strain due to slew of ship additions, ~ 10% additions in capacity every year in FY10-11.
Rs 182 / 112 -3m 6.7 5.0 -12m 39.0 15.1
Predominantly tanker based player

The company's revenues in the bulk segment are largely dependent upon the tanker segment. Tankers contributed to 87% of the bulk segment EBIT in FY10. The tanker segment though in the medium term is expected to remain depressed. It is expected to show a recovery in next two years due to scrapping of vessels and crude oil demand recovery by non-OECD nations.
80.12 2.28 13.04 1.41 3.14
Divestment candidate
SCI is a divestment candidate which currently has ~80% government holding. Also with the current guidelines of more than 25% public shareholding we expect SCI to explore ways its float soon.
Valuation
We have valued the stock on an EV/EBIDTA basis providing 7.5x multiple to FY11E EBIDTA which provides us a target price of Rs 170. We have provided a 10% discount to the global tanker shipping companies which have a median multiple of 8.3x CY11E. Table: Financial snapshot (Rs mn)
Year-end: March Net sales EBIDTA Adjusted net profit EPS (Rs) P/E (x) EV/EBIDTA (x) FY08 37,268 9,112 7,275 17.2 9.6 8.6 FY09 41,666 10,844 9,304 22.0 7.5 6.0 FY10 34,631 4,690 2,534 6.0 27.6 13.0 FY11E 41,315 9,887 6,443 15.2 10.8 6.2 FY12E 46,030 11,749 7,312 17.3 9.6 5.2
29
Sensex
SCI
Source: Bloomberg; Capitaline
Company Report Shipping Corporation of India Ltd.
Background
The Shipping Corporation of India was established in 1961 by the amalgamation of Eastern Shipping Corporation and Western Shipping Corporation. Starting out as a marginal Liner shipping company with just 19 vessels, the SCI today has 77 ships of 5.1 mn dwt with interests in almost all segments of the shipping trade. In addition, SCI mans/manages 60 vessels of 0.2 million tonnes DWT. The SCI owns and operates about 33% of the Indian tonnage servicing both national and international trades. Over the years it has diversified into a large number of areas, and is today the only Indian shipping company providing overseas break-bulk and container services to Indian trade. The SCI operates shipping services in various segments viz. container, break-bulk, crude oil & products, dry bulk, LPG / Ammonia, Phosphoric Acid / Chemicals, LNG, coastal passenger transportation, offshore logistic support services and other coastal services.
Management
The SCI Board is headed by the Chairman and Managing Director, Mr S.Hajara, 5 full time directors heading the divisions and 10 part time directors (2 official and 8 non-official) nominated by Government of India. Diagram: Fleet details
30
Operational details
Bulk
SCI currently has had a higher share of tankers in its fleet which is expected to undergo significant revamp post the acquisition plan. The average age of the bulk fleet is expected to reduce post acquisition to 14 years from current 18 years. In bulk operations the company is mainly catering to the cargo originating from the Indian subcontinent.
Liner
The company's liner operations are largely concentrated in the Asia-Europe route. Besides five owned vessels with 14,407 TEUs of owned capacity the company also has also an in-chartered fleet of about 5 vessels. SCI has actively renegotiated the older charters and working on a loss mitigation plan in the Liner business. Table: Liner services details
Name Indian subcontinent services (ISES) Consortium Service Partner MSC Weekly Capacity of vessels 2750-3500 Allocation per week 1650 Port rotation
Colombo / JNP / Mundra / Salalah / Port Said / Barcelona / Hamburg / Rotterdam / Felixstowe / Port Said / Jeddah / Colombo NSICT /Colombo / Singapore / Susan / Shanghai / Ningbo / Hong Kong / Singapore / Port Kelang / Colombo / NSICT Chennai / Vizag / Singapore / Hong Kong / Shanghai / Dalian / Xingang / Qingdao / Hong Kong / Shekou / Singapore / Port Kelang and Chennai Colombo / Tuticorin / Cochin / Nhava Sheva / Mundra / Jebel Ali / Mundra / Cochin / Tuticorin / Colombo Mundra - Nhava Sheva - Jeddah Port Sudan - Hodeidah - Djibouti -Aden - Salalah - Mundra. When there is adequate inducement, the SCI vessels in the service call at Eilat. Kolkota/Haldia-colombo
India Far East (INDFEX 1)
PIL and K Line
Weekly
1950-2250
750
India Far East (INDFEX 2)
PIL and K Line
Weekly
2100-2200
440
SCI Middle East India Liner Express (SMILE) service India - Red Sea Service
Independent
Weekly
1800
1800
Hull and Hatch
12 Days
1100-1700
775
SCIMAX
Maxicon 8-9 days shipping agency
700
Others
SCI has a fleet of 10 offshore vessels with an average fleet of 25 years; these are currently employed in the Indian waters with ONGC. It also services about 21 vessels of ONGC. The Liner segment also includes the passenger transport services both owned by SCI and on account of the Andaman & Island administration.
31
Capex details
The company plans to incur a capex of US$ 1.6 bn over the next three years. About 15 vessels are estimated to be added in FY11 and another ~10 in FY12. The estimated capex details are as given below: Table: Capex details (Estimates)
Sr No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Newbuilding LR-II LR-II Aframax Aframax Aframax Aframax LR-1 LR-1 LR-1 LR-1 LR-1 LR-1 AHTSV AHTSV AHTSV Handymax Handymax Handymax Handymax Handymax Handymax AHTSV AHT AHT Panamax Panamax Panamax Panamax PSV PSV Type Product Product Crude Crude Crude Crude Product Product Product Product Product Product Offshore Offshore Offshore Drybulk Drybulk Drybulk Drybulk Drybulk Drybulk Offshore Offshore Offshore Drybulk Drybulk Drybulk Drybulk Offshore Offshore Shipyard Hyundai , S Korea Hyundai , S Korea Hyundai , S Korea Hyundai , S Korea Hyundai , S Korea Hyundai , S Korea STX S Korea STX S Korea STX S Korea STX S Korea STX S Korea STX S Korea Bharati Bharati Bharati STX Dalian STX Dalian STX Dalian STX Dalian STX Dalian STX Dalian Bharati Cochin Cochin STX Dalian STX Dalian STX Dalian STX Dalian Cochin Cochin 80655 80655 80655 80655 57000 57000 57000 57000 57000 57000 Total DWT 105000 105000 115000 115000 115000 115000 73000 73000 73000 73000 73000 73000 Year of addition (estimated) FY11 FY11 FY11 FY11 FY11 FY11 FY11 FY11 FY11 FY11 FY11 FY11 FY11 FY11 FY11 FY 12 FY12 FY12 FY12 FY12 FY12 FY12 FY12 FY12 FY13 FY13 FY13 FY13 FY13 FY13
32
Valuation
We believe that SCI will be able to draw upon the current low leverage and revitalize and grow its fleet in next two years. The container/liner segment may show a reduction in losses. We have valued SCI on EV/EBIDTA basis providing a multiple of 7.5x FY11E providing a target price of Rs 170. The book value of the fleet is ~Rs 150 for FY10. We believe that at the current market price the stock is fairly valued and recommend HOLD rating on the stock. Figure: Recent valuation surpassed the normal P/NAV band
250 200 150 100 50 0 Dec-03 Dec-05 Dec-07 Oct-02 Oct-04 Sep-03 Aug-05 Oct-06 Apr-02 Sep-07 Feb-07 Sep-09 Feb-03 Mar-04 Feb-05 Mar-06 Apr-08 Feb-09 Jun-09 May-03 May-05 May-07 Nov-08 Jan-10
.5XBV
Jul-02
Jul-04
Jul-06
Price
1x NAV
0.5x NAV
Jul-08
.75x NAV
Figure: EV/EBIDTA chart

14 12 10 8 6 4 2 0 Dec-07 Oct-08 Sep-06 Feb-07 Aug-09 Apr-06 Mar-09 Jan-10 May-08 Jun-10 Jul-07
Figure: P/B chart

250 200 150 100 50 0 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Close Price 1XBV 1.5XBV
EV/EBIDTA +1 Std dev

Mean -1 std dev
33
Financials
Revenues
SCI is expected to book revenue CAGR of 15% over FY10-12E. Further growth in revenues is likely to be contributed by the fleet increment in the next couple of years which is likely to see addition of about 25 vessels. Of this the bulk(mainly tanker) segment is expected to provide major portion of growth with increment in the fleet. The recovery in the liner segment is currently dependent upon the ability of the liner companies to hold on to the rate. Figure: Revenues to show growth on back of fleet addition
50000 40000 (Rs mn) 30000 20000 10000 0 FY06 Liner Segment (Container)
FY07
FY08
FY09
FY10
FY11E
FY12E
Bulk Segment (Tankers, Dry and Chemical)
Others (Passenger,offshore and managed)
EBIT to improve
We expect a modest recovery in liner segment and the accretion of the new-buildings is likely to lead to growth of overall EBIT. Figure: EBIT breakup: Liner segment recovery may support EBIT growth
12000 10000 8000 6000 4000 2000 0 -2000 -4000 FY06 FY07 FY08 FY09 FY10 Liner Segment(-)
Source: Company reports; IDBI Capital Market Services @ figures for bulk segment also include other income due to shipsale
(Rs mn)
FY11E Bulk Segment
FY12E Others
Interest cover and DSCR

SCI is currently has an interest cover of 7x EBIT. The DSCR for the company is likely to be 1.5x in FY11E and 1.3x in FY12E. Net Debt to equity which is negligible currently is expected to increase but with vessel acquisitions. Figure: Interest cover and DSCR: most comfortable of all shipping stocks
1.6 1.5 1.4 1.3 1.2 FY08 FY09 FY10 FY11E DSCR
1.5 17.2 14.4 1.3 7.7 6.7 5.7 FY12E
20.0 15.0 10.0 5.0 0.0
Interest cov er
34
Financial Summary
Year-end: March Net sales Growth (%) Operating expenses Operating profit Other operating income EBITDA Growth (%) Depreciation Other income EBIT Interest paid Non-recurring items Pre-tax profit (after non-recur.) Tax (current + deferred) Net profit (before Minority Interest, Pref. Dividend etc..) Prior period adjustments Minority interests Preference dividend Reported PAT Adjusted net profit Growth (%)
(Rs mn)
Cash Flow Statement

Year-end: March Pre-tax profit Depreciation Change in working capital Total tax paid Other operating activities Cash flow from operations (a) Capital expenditure Change in investments Others Cash flow from investing (b) Free cash flow (a+b) Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) Other financing activities Cash flow from financing (c) Net change in cash (a+b+c)
(Rs mn)
FY09 41,666 12 (30,823) 10,844 0 10,844 (3,239) 3,496 11,100 (647)
FY10 34,631 (17) (29,941) 4,690 0 4,690 -56.7 (3,801) 3,171 4,060 (525) 3,534 -56 4,760 (1,000) 3,760 0 0 0 3,760 2,534 (73)
FY11E 41,315 19 (31,428) 9,887 0 9,887 110.8 (5,366) 3,200 7,721 (1,146) 6,575 38 6,575 (131) 6,443 0 0 0 6,443 6,443 154
FY12E 46,030 11 (34,281) 11,749 0 11,749 18.8 (5,988) 3,300 9,061 (1,599) 7,462 13 7,462 (149) 7,312 0 0 0 7,312 7,312 13
FY09 10,798 2,867 2,835 (1,150) (4,313) 11,037 (15,174) (700) 2,461 (13,413) (2,377) 5,763 10,175 (3,220) (4,525) 8,193 5,816
FY10 4,760 525 (212) (1,000) 0 4,073 (4,862) (552) (1,100) (6,514) (2,441) 1,286 2,252 (2,469) (1,291) (222) (2,664)
FY11E 6,575 5,366 320 (131) 0 12,130 (29,482) 552 1,047 (27,884) (15,754) 1,969 22,489 (3,220) (3,223) 18,016 2,261
FY12E 7,462 5,988 106 (149) 0 13,406 (12,016) (1) 0 (12,017) 1,389 2,768 7,687 (3,220) (4,092) 3,143 4,532
Pre-tax profit (before non-recur.) 10,454 10,798 (1,150) 9,648 0 0 0 9,648 9,304
Key ratios
Year-end: March Adjusted EPS (Rs) Growth (%) Book NAV/share (Rs) Dividend/share (Rs) Dividend payout ratio (%) Tax (%) EBITDA margin (%) EBIT margin (%) ROCE (%) Net debt/Equity (%)
FY09 22.0 -72.8 146.6 6.5 34.6 10.6 26.0 26.6 14.1 -5.8
FY10 6.0 -72.8 149.7 5.0 97.4 21.0 13.5 11.7 4.6 0.3
FY11E 15.2 154.2 154.3 6.5 50.0 2.0 23.9 18.7 7.5 32.9
FY12E 17.3 13.5 160.8 6.5 44.0 2.0 25.5 19.7 7.5 36.2
Balance Sheet
Year-end: March Cash and Marketable securities Other current assets Investments Net fixed assets Total assets Current liabilities Total debt Total liabilities Share capital Reserves & surplus Shareholders' funds Minorities interests Total equity & liabilities Capital employed FY09 26,728 13,557 1,115 59,278 100,678 13,877 24,717 38,593 4,235 57,850 62,084 0 100,678 86,801 FY10 24,065 13,851 1,667 63,615 103,197 12,859 26,969 39,827 4,235 59,136 63,370 0 103,197 90,339 FY11E 26,326 13,177 1,115 87,731 128,349 13,552 49,458 63,010 4,235 61,105 65,339 0 128,349 114,797
(Rs mn)
FY12E 30,858 14,103 1,116 93,759 139,837 14,585 57,145 71,729 4,235 63,873 68,107 1 139,836 125,252
Valuations
FY09 7.5 5.9 2.0 2.8 1.8 6.0
FY10 27.6 5.4 1.6 3.4 1.6 13.0
FY11E 10.8 6.6 1.4 3.4 1.3 6.2
FY12E 9.6 6.8 1.2 3.4 1.8 5.2

FY09 22.3 0.5 1.5 15.7
FY10 7.3 0.3 1.6 4.0
FY11E 15.6 0.4 1.8 10.0
FY12E 15.9 0.3 2.0 11.0

35
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Company Report Mercator Lines Ltd. 24, 2010 June
COMPANY REPORT
Mercator Lines Ltd.

Non shipping focus for now...
HOLD
Summary
Mercator Lines (MLL), is India's second largest private sector shipping player has historically ridden the shipping cycles well to show rapid growth of 56% CAGR in revenues and earnings from FY04-09. The sudden sharp decline in charter rates in FY09 impacted the earnings adversely which in FY10 which led to 81% YoY fall in earnings. We expect the earnings scenario for the company to moderately improve from here. This is expected to be mainly due to aggressive expansion in other avenues like offshore (rigs), and coal to hedge its risks due to shipping. We believe that the stock is fairly valued at these levels and initiate coverage with a HOLD rating on the stock.

CMP Target Price Potential Upside/Downside Rs 47 Rs 52 +11%
Most diversified player in the shipping space
Besides shipping, MLL has presence in offshore, coal mining, dredging and oil prospecting. The revenue contribution from all these segments on a consolidated basis is expected to be in excess of 35% for FY1112. We believe that the diversification strategy may help the company to withstand the downturn in the shipping space.
Key Stock Data Sector Shipping Bloomberg/Reuters MRLN IN / MRCT.BO Shares o/s (mn) 235.9 Market cap (Rs mn) 11,087 Market cap (US$ mn) 240 3-m daily average vol. 581,014 Price Performance 52-week high/low Rs 72/42
MOPU deal to provide earnings support

The Mobile Offshore and Production Unit (MOPU) to be stationed at the west coast of Africa have been chartered out to Afren Plc. The deal to provide a rig and one of its Suezmax tankers involving a capex of US$ 125 mn would provide MLL, revenues of US$ 225 mn over the next seven years. The company will be booking revenues of US$ 88,000/day from the MOPU venture which would provide it an EBIDTA contribution of ~US$ 65,000/day from Sept 2010 onwards.
-1m -3m -12m Absolute (%) 0.6 (17.8) (20.8) Rel to Sensex (%) (7.3) (19.5) (44.7)
Time charters and COAs to cover the dry-bulk operations

Mercator currently owns and operates 17 ships in dry-bulk space of which 13 vessels are owned. The company currently has firm TCs for eight of its vessels and COAs for another four. The company's strategy of fixing long term charters has helped it bode over worse of the times.
Dredging business has seen a slow-down

Shareholding Pattern (%) Promoters FIIs/NRIs/OCBs/GDR MFs/Banks/FIs Non Promoter Corporate Public & Others
Price (Rs.)
140 120 100 80 60 40 20 0 Dec-09 Oct-09 Aug-09 Sep-09 Feb-10 Mar-10 Apr-10 Jun-09 Nov-09 Jan-10 May-10 Jun-10 Jul-09
37.96 19.49 8.61 6.66 27.29
MLL is has reduced focus on the dredging segment which was bogged down by lower utilization post the ending of contracts with DCI for the Sethusamudram project and other manpower issues. It plans to develop the skillset of the people in place which would take 4-6 months, before undergoing further expansion.
Valuation
We have valued MLL on an SOTP basis which translates to Rs 52 on the consolidated entity. We have valued the shipping fleet on NAV basis and the rig business on EV/EBIDTA basis. The coal and the MOPU business have been valued on DCF basis. Table: Financial snapshot (Rs mn)
Year-end: March Net sales EBIDTA Adjusted net profit EPS (Rs) P/E (x) EV/EBIDTA (x) FY08 14,549 5,874 2,976 12.7 3.7 4.0 FY09 22,105 9,470 3,773 16.0 2.9 3.3 FY10 18,087 6,449 184 0.8 61.6 5.2 FY11E 24,352 6,614 711 2.9 16.2 5.3 FY12E 25,321 6,787 1,142 4.7 10.0 3.6
37
Sensex
Mercator
Company Report Mercator Lines Ltd.
Background
Mercator Lines Ltd (MLL) was incorporated on 24 November 1983 as a private limited company and is currently the second largest private sector shipping company in India. It was converted into a public limited company on 3 April 1984 and was taken over by the promoter of the company, Mr H. K. Mittal in 1988. After its maiden issue in 1993 the company procured an oil tanker of 1,000 dwt capacity and a cargo carrier of 4,300 dwt capacity and since then has grown manifold. The tonnage has expanded exponentially to about 1.8 mn dwt in 2007. The company has forayed into the oil & gas offshore business through its subsidiaries and placed an order for the construction of a new generation Jack-up rig. Currently, Mercator has presence in the segments of crude oil, product tanker and dry bulk operations. Mercator also has presence in coal mining through its subsidiary Oorja Holdings Pte, which holds coal mining blocks in Indonesia. Diagram: Company structure
Diagram: Fleet details
38
Time charters and COAs to provide good visibility for dry-bulk operations
Mercator Lines (Singapore) currently owns and operates 17 ships in dry-bulk space of which 13 vessels are owned. Currently, MLL has firm TCs for 8 of its vessels and COAs for another ~4 vessels which provides it a better TC:Spot mix of ~70:30. The company's strategy of fixing long term charters has helped it bode over worse of the times. Only one of these vessels is coming for re-negotiation in the next six months. Diagram: Mercator Dry Bulk Contracts Details: Indicate good coverage
Source: Company presentation
Coal mining / trading may provide upsides

The company had achieved a total throughput of 1.5 mn tonnes of coal in its coal mining / trading activity in FY10. In FY11, it expects further growth in the mining output to about 1 mn tonnes of coal and trading activity to achieve 4-5 mn tonnes of coal. The coal mine in Indonesia has 15 mn tonnes of reserves and Mozambique has 3 bn tonnes of reserves. Currently it is mining only the Indonesia reserve.
Capex details
In FY11E MLL plans to incur a capex of US$ 125 mn on MOPU. Also capex in the tanker and the dry-bulk space is planned in FY11 though the exact amount and vessel acquisition target is not finalised. It also plans to incur further capex for prospecting of oil in the Gulf of Cambay blocks.
39
Valuation
We have done a SOTP valuation of the stock where the shipping fleet has been valued on the basis of the NAV of the shipping fleet. We have provided a multiple of 0.9x to the shipping fleet NAV. The fleet asset price has been calculated on the basis of the database maintained taking the last traded price of the assets in the market. The rig business has been given a multiple of 5x EV/EBIDTA on global multiples enjoyed by the business. The Rig business has been Table: Valuation
Replacement cost of the shipping fleet (Rs mn) Current net debt (Rs mn) Multiple (x) Valuation of the shipping fleet (Rs mn) (A) Replacement cost of the dredging fleet Debt on the dredgers Multiple (x) Valuation of the dredging business (Rs mn) (B) EBIDTA of Rig business in FY11E (Rs mn) EBIDTA multiple (x) Valuation of rig business (Rs mn) (C) Total (Rs mn) (D) = (A+B+C) MOPU (DCF) (Rs mn) (E) Coal mining business value(DCF) (Rs mn) (F) Total valuation (Rs mn) (D+E+F) Total number of shares post dilution (mn) Value per share (Rs)
25,576 20,900 0.9 4,208 3,760 1,410 0.8 1,880 1,277 5 5,746 11,834 897 1,332 12,268 236 52
Figure: EV/EBIDTA
10 8 6 4 2 0 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10
Figure: Consistently trading at a discount to the BV

200 150 100 50 0 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Close Price 1.5XBV
EV/EBIDTA +1 Std dev

Mean -1 std dev
1XBV .5XBV
40
Financials
Revenues and EBIDTA
The revenue booking is expected to increase to Rs 24 bn by FY11E, 34.6% YoY growth on back of coal trading/mining segment which is expect to contribute almost 40% of total revenues. The share of the shipping revenues in the total revenues has been in the range of 70-80% in the last two years is expected to reduce further to ~50% by FY12E. Revenue contribution from the coal segment is expected to increase manifold mainly due to the trading activity undertaken by the company. Its impact on accretion of the profitability though is expected to be minimal (5-6% EBIDTA margin). Figure: Revenue growth: on back of coal trading
30000 25000 20000 (Rs mn) 15000 10000 5000 0 FY06 FY07 FY08E FY09E FY10E FY11E FY12E 8,262 42.1 26.3 11,228 14,549 22,105 40.4 42.8 80 70 60 50 40 30 20 10 0
35.7 18,087
(%)
27.2 24,352
26.8 25,321
Rev enues
EBITDA Margin
Figure: Revenue breakup: share of coal to increase substantially

Other Coal 24% 0%
100% 80% 60% 40%
Offshore 9% Shipping 67%
20% 0% FY11E Tankers Dry -bulk Dredging Offshore FY12E Others Coal
Interest cover and DSCR

MLL has a modest interest cover ratio of 1.9x and with a current consolidated gross debt of Rs 39.7 bn and cash of Rs 9.4 bn the net debt to equity stands at 0.8x for FY11E. The DSCR of company is expected to be modest at 1.2x for FY11E. Figure: Interest cover Net debt and DSCR
3.0 2.5 2.0 1.5 1.0 0.5 0.0 FY07 FY08 FY09 FY10 2.7 3.3 0.7 0.8 0.9 1.4 1.9 0.8 1.2 FY11E 2.2 0.3 1.2 FY12E 2.8 5.0 3.9 4.0 3.0 2.0 1.0 0.0
DSCR
Interest cov er
Net debt to Equity
41
Financial Summary
Year-end: March Net sales growth (%) Operating expenses Operating profit EBITDA growth (%) Depreciation Other income EBIT Interest paid Pre-tax profit (before non-recurring items) Non-recurring items Pre-tax profit (after non-recurring items) Tax (current + deferred) Net profit Adjusted net profit growth (%) Prior period adjustments Minority interests Net income
(Rs mn)
Cash Flow Statement

Year-end: March Pre-tax profit Depreciation Chg in working capital Total tax paid Other operating activities Cash flow from operations (a) Capital expenditure Chg in investments Other investing activities Cash flow from investing (b) Free cash flow (a+b) Equity raised/(repaid) Chg in minorities Debt raised/(repaid) Dividend (incl. tax) Other financing activities Cash flow from financing (c) Net chg in cash (a+b+c)
(Rs mn)
FY09 22,105 51.9 -12,636 9,470 9,470 61.2 -2,688 -362 6,420 -1,663 4,757 -5 4,752 -78 4,674 3,773 26.8 -383 -906 3,385
FY10 18,087 -18.2 -11,638 6,449 6,449 -31.9 -3,409 -238 2,802 -2,058 744 348 1,093 -50 1,042 184 -95.1 -510 532
FY11E 24,352 34.6 -17,738 6,614 6,614 2.6 -3,528 10 3,096 -1,628 1,468
FY12E 25,321 4.0 -18,533 6,787 6,787 2.6 -3,534 11 3,264 -1,517 1,747
FY09 4,752 2,412 10,667 -78 17,753 -27,985 -377 -28,362 -10,610 62 499 7,245 -139 2,956 10,623 14
FY10 1,093 2,049 -6,731 -149 -3,738 3,870 -326 3,544 -195 -314 2,804 -55 -1,905 530 335
FY11E 1,468 3,528 -7,740 -19 -2,763 -5,042 533 -4,509 -7,272 6 1,987 4,025 -55 3,454 9,416 2,144
FY12E 1,747 3,534 -50 -28 5,203 -44
-44 5,159 0 -2,384 -57 5,779 3,339 8,498
1,468 -118 1,350 711 286.0 -640 711
1,747 -28 1,719 1,142 60.7 -577 1,142
Key ratios
Year-end: March EPS (Rs) (diluted) EPS growth (%) EBITDA margin (%) EBIT margin (%) ROCE (%) FY09 16.0 26.3 42.8 29.0 13.8 76.8 FY10 0.8 -95.2 35.7 15.5 5.1 90.7 FY11E 2.9 286.0 27.2 12.7 5.1 77.1 FY12E 4.7 60.7 26.8 12.9 4.7 34.3
Balance Sheet
Year-end: March Current assets Investments Net fixed assets Other non-current assets Total assets Current liabilities Total Debt Other non-current liabilities Total liabilities Share capital Reserves & surplus Less: Misc. expenditure Shareholders' funds Minorities interests Total equity & liabilities Capital employed
42
(Rs mn)
Net debt/Equity (%)(Average)

FY09 15,280 420 57,975 73,674 19,511 28,356 47,867 236 22,619 22,855 2,953 73,674 51,211
FY10P 13,924 746 52,056 98 66,824 11,090 31,160 42,250 236 21,190 21,426 3,149 66,824 52,586
FY11E 15,211 213 53,570 68,994 2,493 35,185 37,678 242 25,300 25,541 5,776 68,994 60,726
FY12E 23,825 213 50,080 74,118 2,558 32,801 35,359 242 32,165 32,406 6,353 74,118 65,207
Valuations
FY09 2.9 1.7 0.4 1.1 1.4 3.3
FY10 61.6 3.2 0.5 0.4 1.8 5.2
FY11E 16.2 2.7 0.4 0.4 1.4 5.3
FY12E 10.0 2.4 0.3 0.4 1.0 3.6

FY09 17.1 0.4 2.8 17.3
FY10 1.0 0.3 2.8 0.7
FY11E 2.9 0.4 2.4 2.5
FY12E 4.5 0.4 2.0 3.3
June 24, 2010
COMPANY REPORT
Varun Shipping Ltd.

Offshore holds key to turnaround
NOT RATED
Summary
Varun Shipping (VRNS) is a niche player in the LPG shipping space in India. It has a sizeable presence in the LPG shipping and offshore shipping with about 20 owned and operated vessels. The company is highly leveraged at the current stage and has reported difficulty in achieving contracts for its large size offshore vessels (160 tonnes). Also, the MGC-LPG vessel segment which traditionally offered more stable charter rates also suffered a drop in rates. The turnaround for the company which has been booking losses on an operational basis for the last six quarters will be largely dependent upon the turnaround in the offshore segment.
CMP
Rs 42
Key Stock Data Sector Shipping Bloomberg/Reuters VRNS IN / VRNS.BO Shares o/s (mn) 150 Market cap (Rs mn) 6300 Market cap (US$ mn) 136 3-m daily average vol. 71,142
Turnaround in higher end offshore category still elusive?
We believe that the turnaround in the higher end offshore category vessels has remained elusive for the company which the company had bought for about US$ 60 mn a piece. The higher end AHTSV category currently has an orderbook of 56% of existing fleet.
LPG segment to recover but remain rangebound

Price Performance 52-week high/low -1m Absolute (%) (7) Rel to Sensex (%) (15) Rs 64/41 -3m -12m (15) (25) (17) (49) We expect the LPG segment to remain recover from its lows seen in the last couple of years but remain rangebound in the coming months. The company has sold 5 of its owned vessels in the LPG segment to its group company.
Valuations
We believe that the company earnings will continue to be under stress due to its inability to lock up long term charter on the higher end offshore vessels. The company trades at 14.7x FY10 EV/EBIDTA assuming a debt of Rs 30 bn.
Shareholding Pattern (%) Promoters FIIs/NRIs/OCBs/GDR MFs/Banks/FIs Non Promoter Corporate Public & Others
Price (Rs.)
140 120 100 80 60 40 20 0 Dec-09 Oct-09 Aug-09 Sep-09 Feb-10 Mar-10 Jun-09 Jan-10 Apr-10 Jul-09 Nov-09 May-10 Jun-10
43.07 17.77 7.06 3.90 28.21
Table: Financial snapshot

Year-end: March Net sales EBIDTA Adjusted net profit EPS (Rs) P/E (x) EV/EBIDTA (x) FY06 6,429 3,874 1,808 12.0 3.6 5.5 FY07 6,726 3,731 917 9.5 8.7 6.9 FY08 8,508 4,932 1,421 6.3 5.9 6.1 FY09 9,647 5,238 947 N.A. 6.6
(Rs mn)
FY10E 6,732 2,472 (2,179) N.A. 15.1
Sensex
Varun Shipping
43
Company Report Varun Shipping Ltd.
Background
Varun shipping is a key player in the LPG shipping business with one of the largest medium sized LPG carrier fleet (10 nos) in the world. Having a fleet strength of 20 vessels the company 72% of the revenues is contributed by the LPG carriers. Varun's has one of the best dividend paying track record in the industry and provided a dividend yield in excess of 6% over FY02-07. Diagram: Fleet details
44
Company Report Varun Shipping Ltd.
Financial Summary
Year-end: March Net sales Growth (%) Operating expenses Operating profit EBITDA Growth (%) Depreciation Other income EBIT Interest paid Pre-tax profit (before non-recurring items) Non-recurring items Pre-tax profit (after non-recurring items) Tax (current + deferred) Net profit Adjusted net profit Growth (%) Net income
(Rs mn)
FY06 6,429 65.3 (2,555) 3,874 3,874 129.6 (1,296) 13 2,591 (758) 1,833 1 1,834 (25) 1,809 1,808 115.2 1,809
FY07 6,726 4.6 (2,995) 3,731 3,731 (3.7) (1,657) 17 2,091 (1,111) 980 497 1,477 (63) 1,414 917 (49.3) 1,414
FY08 8,508 26.5 (3,577) 4,932 4,932 32.2 (2,119) 26 2,838 (1,396) 1,442 837 2,279 (21) 2,258 1,421 55.0 2,258
FY09 9,647 13.4 (4,409) 5,238 5,238 6.2 (2,805) 13 2,445 (1,455) 991 280 1,271 (43) 1,228 947 (33.3) 1,228
FY10 6,732 (30.2) (4,260) 2,472 2,472 (52.8) (2,365) 59 167 (1,932) (1,765) 2,304 539 (413) 126 (2,179) (329.9) 126
45
Appendix 1: Shipping sector stats

Table: Crude
Vessel Category VLCC/ULCC Suezmax Aframax Panamax Handysize Product LR2 LR1 Medium Range General Purpose 80,000-160,000 45,000-80,000 40,000-60,000 < 40,000 Size (dwt) 200,000 + 120,000-200,000 80,000-120,000 60,000-80,000 10,000-60,000 Handysize 10,000-40,000
Table: Dry Bulk

Vessel Type Capesize Panamax Handymax Size (dwt) 80,000+ 60,000-80,000 40,000-60,000 Type of Cargo Iron ore, Coal, Cereals Iron ore, Coal, Grain, Bauxite, Phosphate Cereals, Coal, Steels, Cement, Potash, Rice, Sugar, Gypsum, Forest Prods, Scrap, Sulphur, NFM Ores, Vehicles, Salt Cereals, Coal, Steels, Cement, Potash, Rice, Sugar, Gypsum, Forest Prods, Scrap, Sulphur, NFM Ores, Vehicles, Salt
Shipping Trends
Table: Asset Price Trends
US$ mn May 2010 (Avg.) NB 5 Year Crude VLCC Suezmax Aframax Panamax Product Bulk Carriers Capesize Panamax Supramax 58.0 33.0 32.0 60.5 40.0 31.0 1.8 (2.9) 0.0 0.0 3.2 0.8 5.5 (5.7) 6.7 6.1 5.3 9.0 5.5 (5.7) 6.7 22.2 21.2 21.1 (21.6) (10.8) (3.0) 24.7 36.8 24.0 105.0 63.5 53.5 45.4 34.2 90.0 62.5 41.3 35.3 22.5 0.0 0.8 0.0 (0.3) (0.4) 7.1 0.0 (1.8) (0.8) 0.2 200.0 111.7 (9.3) 0.4 6.8 136.8 119.7 8.6 8.5 1.2 7.7 1.6 4.9 (1.6) (2.3) 18.4 21.4 (6.3) (4.7) 1.2 (19.8) (18.6) (12.3) (17.7) (16.6) (1.6) 4.2 (7.3) (11.8) (31.7) Apr 2010 (1 month) NB 5 Year % change of current price from Feb. 2009 (3 month) Oct. 2009 (6 month) NB 5 Year NB 5 Year May 2009 (1 yr.) NB 5Year
Source: BRS; Compass Maritime and Fearnleys
Table: Freight Rates Trends

May 2010 (Avg.) Tankers rates VLCC Suezmax Aframax Clean Baltic Drybulk Indices Dry Index Capesize Panamax Supramax Handysize
Source: BRS; Compass Maritime and Fearnleys
% change in the current TCY/Index from Apr. 2010 Feb. 2009 Oct. 2009 (1 month) (3 month) (6 month) (23.2) 38.6 133.0 267.5 27.4 44.8 9.5 20.8 7.6 7.2 82.6 103.6 15.3 42.7 35.9 36.4 44.8 35.6 77.5 69.1 189.1 1,411.2 (3.1) (30.7) 10.0 40.3 46.9
May 2009 (1 Year) 528.8 183.4 319.1 157.7 58.8 35.7 91.8 85.3 86.1
27,768 26,466 21,333 4,182 3,817 4,589 4,287 3,079 1,464
46
Appendix 2: Global peer set

Table: Peer Companies
MCAP (US$ mn) Tanker Companies Frontline General Maritime Teekay Omega Navigation Tsakos Energy Navigation Knightsbridge Aegean Marine Petroleum TORM Sector Median Drybulk Companies Dryships Diana Shipping Excel Maritime Genco Shipping Eagle Bulk Star Bulk Carriers Corp Paragon Shipping Safe Bulkers Sector Median Drilling Companies Transocean Diamond Offshore Noble ENSCO Pride Rowan Atwood Sector Median Offshore Boat Companies Farstad Shipping Gulfmark Offshore Hornbeck Secor Holdings Tide Water Trico Marine Servies Sector Median
Source: Bloomberg
CY09 24.4 14.0 (23.2) 3.0 12.8 15.1 20.1 (363.3) 14.0 34.2 8.0 108.5 3.5 6.7 77.3 2.6 3.2 21.1 4.5 6.2 4.8 7.4 10.8 8.2 7.1 7.1 6.1 7.1 6.2 5.4 5.6 (0.5) 5.8
PE (x) CY10E 11.0 14.0 27.7 3.0 18.4 7.5 11.5 (61.9) 11.5 43.5 7.7 7.7 3.8 11.9 130.6 9.5 4.3 9.8 6.6 8.1 6.0 10.4 13.6 9.6 6.5 8.1 10.5 14.5 20.8 7.5 8.3 (0.2) 9.4
CY11E 11.1 (33.8) 19.1 12.3 9.4 7.2 11.5 655.8 11.1 30.8 7.9 6.4 6.4 14.6 180.4 11.9 4.2 11.3 5.9 8.1 6.3 9.1 7.9 12.5 6.1 7.9 10.6 8.9 9.4 10.3 (1.1) 9.4
CY09 10.9 10.5 11.9 9.2 8.6 11.3 16.6 11.2 10.9 7.2 6.1 6.1 5.5 10.8 20.8 3.5 5.2 6.6 4.2 4.1 3.2 4.1 7.8 4.6 5.6 4.2 6.7 6.0 5.8 4.2 8.4 6.0
EV/EBITDA (x) CY10E CY11E 8.5 10.5 9.0 10.2 9.4 6.6 10.2 14.9 9.4 6.4 5.6 5.6 5.4 8.7 31.1 5.5 6.1 6.0 5.2 4.6 3.8 5.4 9.2 4.9 5.0 5.0 8.0 8.1 6.8 5.5 7.6 7.6 8.3 9.8 8.6 30.3 8.2 6.3 7.2 10.2 8.3 4.7 5.7 6.8 6.4 7.8 28.7 5.9 5.4 6.6 4.9 4.6 3.9 4.8 5.6 5.6 4.5 4.8 8.0 6.3 5.2 6.3 4.7 6.3
CY09 3.6 0.9 0.9 0.6 1.3 2.9 0.9 0.4 1.0 0.2 0.6 0.4 1.8 0.4 3.9 0.5
P/B (x) CY10E 3.2 0.9 0.9 0.6 1.2 3.0 0.9 0.4 0.9 0.2 0.5 0.4 2.0 0.4 1.8 0.5
CY11 3.0 1.1 0.9 0.6 1.2 3.0 1.1 0.4 0.9 0.2 0.4 0.4 2.0 0.4 1.5 0.4
2,638.6 595.7 2,024.5 39.3 559.3 315.2 1,021.0 3,676.4
1,101.7 1,003.2 407.6 504.3 286.4 160.1 194.7 470.3
16,793.3 8,737.8 7,698.2 5,655.2 4,216.5 2,794.3 1,717.0
6,162.0 720.3 404.2 1,642.6 2,145.4 2,145.4
Table: Indian Peer Set

Mcap (US$ mn) SCI GESCO Mercator Lines
FY10 27.6 8.6 61.6
PER (x) FY11E 10.8 7.4 16.2
FY12E 9.6 6.2 10.0
FY10 13.0 8.8 5.2
EV/EBIDTA (x) FY11E FY12E 6.2 7.3 5.3 5.2 6.2 3.6
FY10 1.6 0.8 0.5
P/B (x) FY11E 1.4 0.7 0.4
FY12E 1.2 0.7 0.3
1,512 1,002 240
47
Notes
Vikrant Oak Head Equities Sonam H. Udasi Head Research Dealing
(91-22) 4322 1385 (91-22) 4322 1375 (91-22) 4322 1150
vikrant.oak@idbicapital.com sonam.udasi@idbicapital.com dealing@idbicapital.com
Key to Ratings Stocks: Buy: Absolute return of 15% and above; Accumulate: 5% to 15%; Hold: Upto 5%; Reduce: -5% to -15%; Sell: -15% and below. IDBI Capital Market Services Ltd. (A wholly owned subsidiary of IDBI Ltd.) Registered Office: 5th floor, Mafatlal Centre, Nariman Point, Mumbai 400 021. Phones: (91-22) 4322 1212 Fax: (91-22) 2285 0785 Email: info@idbicapital.com
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Sector Report Shipping

June 24, 2010

Shipping: Range bound for now

Bottom behind us but a "new normal" to persist

Figure: Dry-bulk charter rates

VLCC Charter Rates Charter Rates for 10% IRR

Median Charter Rates

Median Charter Rates

What made the charter rates go up?

What brought it down?

What from here:

Source: Company reports; IDBI Capital Market Services

Sector Report Shipping

Sector Report Shipping

Shipping markets have traditionally suffered long term cycles

Cargo movement growth and shipping tonnage growth

Tonne mile growth supported by growth in miles

4 3 2 1 0 2001 2002 2003 2004 2005 2006 2007 2008 2011E

Cargo mov ement grow th(bn tonnes)

World tonnage grow th (mn dw t)

Sector Report Shipping

Av . Yearly grow th (%) 2006-10 - dw t

Baux ite 13%

Iron-ore,coal and grain 25%

Sector Report Shipping

Tanker markets: Recovery in sight only by 2012

Source: BP Energy Review 2010

Demand scenario: Headline projections encouraging

Source: BP Energy Review 2009

Sector Report Shipping

World GDP grow th

Ex-OECD countries to corner a bulk of incremental imports

Source: BP Energy Review 2010; IDBI Capital Market Services

but US inventories remains key indicator

VLCC charter rates(US$/day )

Sector Report Shipping

Storage demand provide little respite

295 311 326

Figure: Tankers delivery schedule

405 423 467

471 470 468 464

300 200 100 0

59.4 23.2 29 7.3

61.6 21.5 8.1 10 3.4

Aframax Ex isting Fleet

Panamax Order book

98 24.6 15.7 7.1 1.8

27.9 6 2.4 3.3 0.3

17 9.4 6.1 1.5

Small 2010E 2011E

128.5 58.8 55.4 14.3

Sector Report Shipping

Tanker delivery still onerous

Remov als in addition to phase out

Max Phase Out Surplus 4% Trade Grow th

Single hull tanker scrapping

Figure: Older vessel fleet relatively younger

Orders - 30% Panamax VLCC

Fleet - 100% Aframax

0-5 y ears 15-20 y ears

5-10 y ears 20+ y ears

Net tanker fleet development

Fig.: Conclusion: Tanker tonnage growth & cargo growth