| Long track record of operations along with diversified business segment
SCIL is one of the largest shipping company in India. The company has an operational track record of around six decades. SCIL benefits from its experienced management which comprises qualified professionals and nominees of GOI. SCIL’s long track record has helped it establish relationship with major PSU’s in India like IOCL, HPCL, BPCL, ONGC, etc. The company is diversified in terms of its business segments, namely, crude oil/product tankers, dry bulk, offshore services, and container operations. The company also has a presence in passenger vessels, chemicals and gas transportation. The company currently has the largest fleet size of 59 vessels. The company has a relatively young fleet, with an average age of around 8-10 years which helps the company in getting better charter rates and achieving higher operating efficiency. SCIL also manages vessels on behalf of third parties, primarily Public-Sector Units (PSUs)/ Government Departments/Union Territories, on which it earns service income. Currently, SCIL is managing 53 third party vessels.
Acuité believes that SCIL will continue to benefit from its long operational track record and established relationship with the PSU’s.
Stable business operations
The business operations of the company remained stable over the years marked by healthy growth in revenue from operations by ~25% CAGR over FY21-23 period. The consolidated company achieved revenues of Rs.5794.01 Cr. in FY23 compared against Rs.4988.08 Cr. in FY22 and Rs.3698.09 in FY21. The improvement in revenue is attributable to significant improvement in liner freight indices and bulk segment due to significant improvement in charter rates. A surge in the tanker charter hire rates helped the Tanker Segment to post significant profits. The dry bulk segment is still recovering from historically bad period and loss of key cargoes such as Iron ore exports from India, resulting in long non-profitable ballast legs thereby putting pressure on earnings. Although, in later parts of 2020, dry bulk trade recovered remarkably well on account of stimulus packages given by various governments and with China, the main driver of dry bulk demand, recovering pretty quickly from COVID-19 crisis. Simultaneous occurrence of multiple factors conducive for the dry bulk shipping business, viz., spike in dry bulk materials demand, strong trade in grain, coal and iron ore segments, low active fleet growth maintaining tonnage balance etc. gave a good push to the dry bulk rates. Also, strong trade growth and tapering dry bulk carrier deliveries bode well for the near future.
Healthy Financial Risk Profile
The financial risk profile of the company remained healthy marked by strong net worth, gearing ratio and comfortable debt protection metrics. The tangible Net worth of the company stood at Rs.6902 crores in FY2023 as against Rs.5974 crores in FY2022. The debt/equity of the company stood improved and stood comfortable at 0.37x and 0.53x as on 31 March 2023 and 31 March 2022 respectively. The TOL/TNW of the company improved and stood low at 0.66x as on 31 March 2023 compared against 0.82 times as on 31 March 2022 respectively. The debt protection matrices of the company remained comfortable marked by interest-coverage-ratio of 9.45x and Debt-service-coverage ratio of 2.30x for FY2023.
Acuité believes that financial risk profile of SCIL may remain strong owing to no major capex plans and stable profit accretions.
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| Deterioration in Profitability Margins; Operations remain vulnerability towards fluctuations in forex risks
The profitability of the company impacted and remained vulnerable owing to weakness in the global economy as marked by continuous deterioration in operating profit margins and Profit After Tax (PAT) margins over the years. The operating profit margin of the company declined to 26.86% in FY23 as against 30.62% in FY22 and 32.11% in FY21 and the PAT margin declined to 15.02% in FY23 as against 17.25% and 18.82% in FY22 and FY21 respectively.
Furthermore, SCIL’s income and the majority of its operating expenditure are predominantly USD denominated. Freight rates, as well as the sale values of ships, are determined in USD. The company has its liabilities also denominated in USD. Any significant movement in the currency or interest rates could impact the company’s financials. While there is a natural hedge, the company is exposed to foreign currency and derivative risks (MTM losses).
Proposed Strategic Divestment by GoI
The Cabinet Committee has approved the strategic divestment of GoI’s entire shareholding of 63.75% in SCIL, along with transfer of management control to a strategic buyer. During the year ended 31st March 2020, Department of Public Asset Management (DIPAM), GoI has appointed Transaction Advisor (TA), Legal Advisor (LA) and Asset Valuer (AV) for the same. The bidding process has commenced from December 22, 2020. The bids received are under evaluation in DIPAM. Further as per the directives received from Ministry, company has appointed M/s Corporate Professionals Capital Pvt. Ltd. as consultant for demerger / hive off/ transfer of non core assets and assets held for sale and M/s Confiex Data Room Pvt. Ltd has been appointed as a Virtual Data Room (VDR) Service Provider. The VDR has been opened for the due diligence process by the Qualified Interested Parties (QIPs) from 12th July 2021 and the process is on. However, the timelines for completion of the divestment process are currently being finalized. The impact of the change in ownership and management control on the business risk profile and financial flexibility of the company is yet to be determined.
Acuité believes, change in ownership of the company will be a key rating sensitivity over the medium term.
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