Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Seamec Ltd (Seamec) to ‘CRISIL A+/Stable’ from ‘CRISIL A/Positive’.

 

The upgrade factors in a revision in the credit rating of the parent company, HAL Offshore Ltd (HAL; upgraded from ‘CRISIL A/Positive/CRISIL A1’ to ‘CRISIL A+/Stable/CRISIL A1’) as well as expected improvement in the business risk profile of Seamec. While assessing Seamec’s overall rating, CRISIL Ratings continues to factor in the company’s strategic importance to its parent, wherein it continues to receive the necessary operational and managerial support from the latter.

 

The rating takes comfort from the healthy business risk profile of Seamec backed by its established market position in this industry, in terms of providing multi support vessels (MSVs) on charter-hire basis under long-term contracts to offshore exploration and production (E&P) players in India. Revenue has continued to grow at healthy compound annual growth rate (CAGR) of 9% over fiscals 2019-2023, supported by growth in revenue days (led by vessel additions) and higher deployment rates of vessels owned; as business prospects remain healthy amid continued focus on oil E&P activity in India. The company reported 58% on-year growth in revenue to Rs. 493 crore during the first nine months of fiscal 2024, with operating margin maintained at ~31%.

 

To comply with regulatory requirements of replacing an aged fleet as well as to increase its fleet size, over the past three years, Seamec replaced one aged vessel with three new ones, with plans to replace two more aged vessels over the next 3-4 years. This transition towards having more younger aged fleets will further mitigate redeployment risks with E&P players and reduce maintenance costs.

 

The financial risk profile remains strong, supported by healthy cash accrual, despite capital investments to be undertaken to replace the aged fleets. In the near term, the company plans to replace aging vessels with newer ones, requiring capital expenditure of ~ Rs 250-300 crore, to be funded through internal accruals. The gearing is expected to remain comfortable at 0.13-0.4 time in the near term, from 0.17 time as on March 31, 2023. 

 

These strengths are partially offset by the moderate scale of operations and exposure to client concentration risk.

 

Additionally, CRISIL Ratings understands from the company’ management that the proposal for restructuring its business with the parent has been put on hold and there are no restructuring plans under consideration as of now.

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 with strong operational, managerial and financial linkages. Furthermore, to factor in the strategic importance of Seamec to its parent, 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 HAL, has established its market position 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 E&P players, given the increased focus on enhancing output from domestic oilfields and their own ageing assets. While there could be continued requirement for existing vessels to be owned, future growth opportunities could be limited.

 

Seamec is expected to contribute to ~30% of the consolidated revenues of HAL in fiscal 2024. It is likely to remain critical to HAL, given the parent’s focus on strengthening its presence in the oil and gas segment. Considering the adequate liquidity that Seamec maintains with strong net cash accrual, the company is unlikely to require any financial support from HAL.             

 

• Comfortable operating performance

Long-term contracts spanning 3-5 years, executed to charter the MSVs, offer medium-term visibility on the revenue expected from this segment. A healthy gross margin of 50-60% is earned on the MSV fleet. While the company has secured long-term contracts for its MSV fleet and diving support vessel (DSV), barge and bulk carriers are on short-term/spot basis. Seamec is in the process of replacing its two aged vessels, which would then reduce the redeployment risk associated with these vessels. Over the past three years, the company has replaced one aged vessel with four new ones, with plans to replace two more aged vessels over the next 3-4 years. However, operating margin is susceptible to redeployment risk associated with vessels that are deployed on a spot basis.

 

• Moderate financial risk profile

The financial risk profile remains strong, supported by healthy cash accrual, despite capital investments undertaken to replace the aged fleets. In the near term, the company plans to replace aging vessels with newer ones, requiring a capex of approximately Rs 250-300 crore, to be funded through internal accrual. The gearing ratio is expected to remain comfortable at 0.13-0.4 times in the near term, from 0.17 time reported as on March 31, 2023. 

 

Weaknesses:

• Susceptibility of operating performance to redeployment risk, owing to ageing fleet of vessels

Seamec owns six vessels, two bulk carriers and one barge, amongst which three vessels are more than 40 years old. This increases the redeployment risk of these vessels as they may not meet the bidding criteria of E&P players such as ONGC. The company had already replaced one of its vessels with a younger fleet, with the balance expected to be replaced over the next 3-4 years. Timely replacement within the budgeted cost is a key rating monitorable.

 

• Exposure to client and segmental concentration risk

MSV services are provided to offshore oilfields in India, for which E&P rights are majorly owned by ONGC. This exposes Seamec to client concentration risk. However, the company does benefit from having a strong client in terms of receiving timely payments. Also, since revenue is entirely dependent on offshore E&P activities, the company remains exposed to segmental concentration risk.

 

• Susceptibility of charter rates to inherent volatility in crude oil prices

Profitability and cash flow in the offshore business depend on charter rates, which are influenced by offshore and deepwater expenditure by oil and gas majors. Offshore and deep-water block investments, which are larger than those in onshore blocks, are highly sensitive to crude oil prices. In the past, the slowdown in global oil and gas E&P capex has led to a decline in demand for offshore equipment.

 

However, charter rates of vessels deployed by Seamec have been stable in the past, despite fluctuations in crude oil prices, given the continuous production activities taken up by domestic E&P players and owing to contract ranging to average 3-5 years.

Liquidity: Strong

Seamec maintained cash and cash equivalent of more than Rs 136 crore as on September 30, 2023. The company is expected to generate cash accrual of ~Rs 170-220 crore over fiscals 2024 to 2027. The annual accrual generated would be sufficient to meet near-term annual debt obligation of Rs 60-70 crore for fiscals 2025 to 2027. The company has not utilised any bank limit for the 12 months ended January 31, 2024, which will act as a buffer during exigencies.

Outlook Stable

CRISIL Ratings believes the business risk profile of Seamec will improve with reduction of redeployment risk for its vessels, supported by its established market position in the vessel hire business, while maintaining a healthy financial risk profile.

Rating Sensitivity factors

Upward factors

• Timely replacement of aged fleets, thereby reducing risk of delays in redeployment with sustained operating margin of 30%
• Improvement in the credit risk profile of its parent, HAL

 

Downward factors

• Sustained delay in deploying vessels or fall in MSV charter rates to below USD 50,000, thereby weakening cash accrual
• Larger-than-expected capex, thereby weakening the debt protection metrics or liquidity
• Deterioration in the credit risk profile of HAL, or change in its strategic importance to the parent

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 vessels & services and bulk carrier charter business. The company owns six vessels and 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– Seamec Shipping FZC, the company has also diversified its presence in the bulk carrier charter business wherein it owns two dry bulk carrier.

 

About the parent

Incorporated in 1996, as part of the MM Agarwal group, HAL is an end-to-end solutions provider of underwater and EPC services to the Indian oil and gas industry. Over the years, it has developed a diversified portfolio, which includes turnkey projects involving sub-sea and marine services and EPC contracts. Services offered by HAL are certified by independent agencies such as the American Bureau of Shipping (ABS), DNV, LR as per requirements of the client.

 

HAL along with the promoter group holds around 72% stake in Seamec, with the balance held by the public.

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	75	NA	CRISIL A+/Stable
NA	Term Loan	NA	NA	Sep-2026	68	NA	CRISIL A+/Stable
NA	Term Loan	NA	NA	Jun-2028	150	NA	CRISIL A+/Stable
NA	Term Loan	NA	NA	Jun-2028	90	NA	CRISIL A+/Stable

*Interchangeable with letter of credit (LC) limit of Rs 10 crore, cash credit (CC) limit of Rs 1 crore and working capital demand loan (WCDL) of Rs 1 crore