Detailed Rationale

CRISIL Ratings has removed the rating on the bank facilities of Seamec Limited (Seamec) from ‘Rating Watch with Developing Implications’. The rating has been reaffirmed at ‘CRISIL A’ and a ‘Stable’ outlook has been assigned.

 

Earlier, CRISIL Ratings had placed the rating on ‘watch developing’ as the company’s management, in its board meeting held on November 2, 2021, had approved a proposal of restructuring the business with its parent, HAL Offshore Ltd (HAL; ‘CRISIL A/Stable/CRISIL A1’). Since the proposal was in its initial stages, the impact of this restructuring on the credit risk profile of Seamec was not ascertainable. As on December 31, 2021, HAL held 70% stake in Seamec.

 

Now, Seamec’s board in its meeting held on March 28, 2022, approved a draft scheme of arrangement wherein the marine, EPC, and other ancillary businesses of HAL would be transferred to Seamec. While the corresponding operating assets and liabilities of the company would also be transferred, the cash investments and asset/liabilities not related to operations would remain with HAL. As a consideration for this transaction, Seamec would issue 20.17 equity shares of Rs. 10 each, credited as fully paid up, to the equity shareholders of HAL for every 100 equity shares of Rs 10 each held in HAL. Further, Seamec would also issue 33.76 optionally convertible preference shares of Rs 10 each, credited as fully paid up, to the equity shareholders of HAL for every 100 equity shares of Rs 10 each held in HAL. This restructuring is subject to requisite regulatory approvals and is expected to be effective April 01, 2023.

 

This business restructuring would consolidate Seamec’s market position in the vessel hire charter business while establishing its presence in the EPC services business, along with synergy benefits expected from streamlining of assets.

 

The rating continues to reflect the established market presence of the company in providing multi support vessels (MSVs) on charter-hire basis under long-term contracts to offshore exploration and production (E&P) players in India. The company has a healthy financial risk profile too, with a net debt-free position maintained as on December 31, 2021.These strengths are partially offset by its moderate scale of operations, ageing vessels, exposure to client concentration risks and susceptibility of operating performance to fluctuations in vessel charter rates.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Seamec and its subsidiaries, as these entities are in a similar line of business and have strong operational, managerial, and financial linkages.

 

Further, to factor the strategic importance of Seamec to HAL, CRISIL Ratings has applied its parent notch-up framework to arrive at the final rating.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Strategic importance to HAL with established market presence in the vessel hire business

Seamec along with its parent, HAL, has established its market presence in providing MSVs on a charter- hire basis to offshore E&P players in India, namely Oil & Natural Gas Corporation Ltd. (ONGC). These services continue to be of importance to the E&P players, considering the increased focus on enhancing output from the domestic oilfields and their own ageing assets. While there could be continued requirement for the existing vessels owned, future growth opportunities from this segment could however be limited.

 

Seamec currently contributes more than 20% to the consolidated revenues of HAL. It is expected to be of continued importance to the latter, given the parent’s focus on strengthening its presence in the oil and gas business space. Considering the adequate liquidity Seamec maintains, no financial support is projected to be required from HAL.              

 

Comfortable operating performance

The long-term contracts executed to charter the MSVs (owned or leased), provides a medium-term visibility on the expected revenue from this segment. Healthy operating margin of 50-60% is earned on the owned fleets. While the MSVs owned have secured long-term contracts in place, the diving support vessel (DSV) and bulk carriers are deployed on a short-term/spot basis. Overall revenue and margin are hence susceptible to redeployment risk associated with these vessels/carriers, which contribute to 30-35% of total revenue.

 

Transfer of HAL’s business to Seamec would result in diversification of its revenues with venturing into the EPC services segment. This segment generates operating margins of around 17-20%.

 

Healthy financial risk profile

Financial risk profile is driven by comfortable gearing and adequate liquidity. Against the outstanding debt of Rs 104 crore as on December 31, 2021, the company has maintained a cash balance of Rs 465  crore and is thus a net debt-free company. Financial metrics are comfortable, with gearing of 0.13 time as on March 31, 2021 and interest coverage ratio of 14.85 times for fiscal 2021. Even though Seamec is in the process of replacing its aged fleets, liquidity available in the books should be sufficient to fund this capital expenditure (capex) and hence dependence on external funding will be low.

 

Weakness:

Ageing fleet of vessels exposes operating performance to redeployment risk

Seamec owns four vessels, four bulk carriers and one barge, amongst which three vessels are aged more than 35 years. This increases the redeployment risk of these vessels as they may not suffice the bidding criteria of the E&P players such as ONGC. To mitigate this risk, Seamec is in the process of replacing these vessels with a younger fleet. Timely replacement within the budgeted investment would be a key rating monitorable. 

 

Exposure to client and segmental concentration risk

DSV services are provided for the offshore oilfields in India, exploration rights for which are majorly owned by ONGC. This exposes Seamec to client concentration risk. However, having a strong client is beneficial in terms of receiving timely payments. Also, since the revenue are entirely dependent on off-shore E&P activities, it exposes the entity to segmental concentration risk.

 

Susceptibility of operating performance to fluctuation in vessel charter rates

Profitability and cash flow in the offshore business depend on the offshore charter rates, which are inherently volatile. This has direct impact on the profitability of companies. However, charter rates of the vessels deployed by Seamec have however remained stable in the past, thereby mitigating this risk to an extent.

Liquidity: Strong

Seamec maintained a cash and cash equivalent of Rs 465 crore as on December 31, 2021. The company is expected to generate cash accruals of around Rs 160-190 crore in fiscal 2023. The annual accruals generated as well as the surplus liquidity maintained, would be sufficient to meet its near-term annual repayment obligations of Rs. 30 crores for fiscal 2023 and fiscal 2024. Considering sufficient liquidity maintained, the company has a low dependence on working capital funding.

Outlook: Stable

Business and financial risk profile is expected to remain comfortable over the medium term, supported by its established market presence in the vessel hire business and healthy financial risk profile maintained.

Rating Sensitivity Factors

Upward Factors

• Timely replacement of aged fleets, thereby reducing risk of delays in redeployment and improved margin with better charter rates earned
• Improvement in credit risk profile of its parent HAL, by 1 notch or more

 

Downward Factors

• Sustained delays in deploying vessels or fall in DSV charter rates to below $50,000, thereby weakening cash accruals
• Larger-than-expected capex undertaken, thereby weakening the company’s debt protection metrics or liquidity

About the Company

Seamec (a part of the MM Agarwal group) was incorporated in 1986. It operates in two distinct verticals of the shipping business - offshore support & services and bulk carrier charter business. The company owns five  vessels including one barge in the offshore support business wherein the vessels are deployed in the domestic and international market. Through its international subsidiary - Seamec International FZE and its joint venture company – Seamate Shipping FZC, the company has also diversified its presence in the bulk carrier charter business wherein it owns three carriers and one bulk carrier SEAMEC Gallant held in Seamec Ltd.

 

For the nine months ended December 31, 2021, Seamec reported profit after tax (PAT) of Rs 79  crore on revenue of Rs 265 crore, against a PAT of Rs 81  crore (including exceptional item of Rs. 62 crore) on revenue of Rs 160  crore for the corresponding period of the previous fiscal.

 

HAL, along with the promoter group, holds 72.04% stake in Seamec, with the balance stake held by the public. HAL is also involved in the similar line of business wherein it is an ‘end-to-end’ solution provider of underwater services and EPC services to the Indian oil and gas industry.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Bank Guarantee*	NA	NA	NA	25.00	NA	CRISIL A/Stable
NA	Term Loan	NA	NA	Aug-2026	80.00	NA	CRISIL A/Stable

*Rs 5 crore is interchangeable with letter of credit (LC) limit and Rs 1 crore with cash credit (CC) limit