Shipping & Offshore Services - Q3FY12 Results Preview - Outlook bleak; low:: Centrum

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Q3FY12 Results Preview

Shipping & Offshore Services

Outlook bleak; low profitability to continue

Indian shipping companies are reeling under the global supply glut which has kept the day rates under pressure. The net profit for Great Eastern Shipping (GE Shipping) is expected to be down 10.3% YoY to Rs1.1bn. Shipping Corp of India (SCI) is likely to be hit the hardest due to its presence in the container liner segment. It is likely to be impacted by higher bunker cost, lower freight rates and higher depreciation and interest costs. It is expected to report losses of Rs149mn at net level vs. a net profit of Rs1,231mn last year. These companies are diversifying their operations into offshore support and drilling services to ride the downturn in the shipping cycle.

m  Bunker costs remains high; up 39% YoY; container and spot charter segment to remain impacted:Price of bunker oil (fuel for shipping vessels) continued to remain at record levels of $675 per barrel during Q3FY12 vs. $485/bbl last year. We believe this would impact shipping companies and lead to increase in cost of operation. SCI, which is present in the container liner segment, would be most impacted. Its bunker costs increased 125% in Q2FY12, is likely to go up by 63% in Q3 to Rs3.4bn leading to a 827bp decline in operating margins to 9.9%. 

m  Offshore oil services (drilling) industry too remains under pressure: The offshore drilling industry continued to remain under pressure during Q3FY12. According to Rigzone.com the global overall rig utilisation rate remained low at 77.6%, although it improved from 76.5% last year. Offshore rig day rates remained stable, while jack-up market continued to face pricing pressures. Utilisation of jack-up was at 77% vs. 75% recorded last year. Demand for deepwater rigs was strong globally, as fleet utilisation for Semi-subs remained above 80%.

m  Top Pick: GE Shipping (Buy with TP of Rs331): We believe GE Shipping is better placed compared to peers due to its diversified presence in the offshore segment and strong under-leveraged balance sheet which is likely to help it take advantage of the current downturn and increase fleet at lower costs. Further, it is expanding only in the offshore segment giving its better visibility and higher profitability

m  Neutral on SCI, Sell on Aban: We have a neutral stance on SCI with a target of Rs60.  We maintain Sell on Aban Offshore as concerns persist with two of its assets remaining idle and others coming for re-negotiations at the bottom of the day-rate cycle, over-leveraged balance sheet and high exposure in Iran.