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Shipping (Subdued earnings, valuations compelling)
Negative
⇒ China has hiked its interest rates for the second time in the last two
months and the trend is expected to continue in CY11. This would
lead to a moderation in growth and a resultant drop in demand for
commodities. As China is the main driver of dry bulk trade, a drop in
commodity demand from China would lead to subdued demand for
dry bulk carriers
⇒ US and Europe are the main drivers of crude and refined oil products
demand. As the recovery in both countries is likely to be modest, the
demand for crude/product carriers is also likely to be subdued
⇒ Global dry bulk fleet capacity is 464 million dwt and an additional 285
million dwt i.e. 61.4% of the existing fleet is likely to be added over
the next two years. Global crude and product carrier capacity is 382
million dwt and an additional 170 million dwt i.e. 44.5% of the
existing fleet is likely to be added over the same period. Hence, there
will be a substantial overhang from the large fleet addition over the
next couple of years
⇒ Freight rates are expected to be under constant pressure on account
of demand moderation and supply overhang. Hence, the operating
performance of shipping companies is expected to be subdued.
Companies with high debt could also report a negative bottomline
⇒ However, the offshore shipping segment offers the best play in the
entire shipping space on account of firmness in crude oil prices.
Utilisation levels have inched up with semi-sub and jack up utilisation
levels at 85% and 75%, respectively. Vessel day rates are also
expected to rise in the near to medium term
⇒ Our preferred picks are Mercator Lines on account of diversified
earnings stream, Great Offshore on account of improvement in
operating performance and Bharati Shipyard on account of benefits
from the acquisition of Great Offshore
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