Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A-/Negative’ rating on the long-term bank facilities of Shreyas Shipping and Logistics Ltd (SSLL).

 

The continued negative outlook on the long-term rating factors in weak operating performance of SSLL in fiscal 2024. While revenue declined ~42% in the fiscal 2024 to Rs 282 crore against previous year, the fall in revenue was steeper in first half of the year due to higher rates prevailing in fiscal 2023. SSLL’s performance recovered in the second half despite fire incident in one of its large vessel (SSL Brahmaputra) with gradual increase in charter rates and optimum utilisation of fleet capacity. SSL Brahmaputra has since been repaired and is back into operations from April 9, 2024, and is expected to contribute to SSLL’s overall revenue.

 

Though operating margin declined to 8.2% in fiscal 2024, it is expected to improve over the medium term with expected rationalisation of excess capacity and rescheduling of services to improve operating efficiency. SSLL plans to operate its two owned dry bulk (DB) vessels by itself starting October 2024, and gradually take more DB vessels on charter and operate, depending on market dynamics. This is expected to diversify the company’s revenue profile and reduce dependence on container segment. Its impact on company’s business and financial risk profile will be a monitorable. Additionally, the management indicated that they are taking various measures to improve operating efficiency and other alternatives to generate liquidity. This is likely to result in significant increase in revenue and overall profitability improving to over 25% this fiscal.

 

The company continues to benefit from steady cashflow from long-term framework chartering agreement (FCA) with Transworld Feeders Pvt Ltd (TFPL), a group concern of Unifeeder ISC FZCO (Unifeeder). FCA ensures volume deployment and ensures steady cash flow for the company. Unifeeder is a subsidiary of DP World, based in the United Arab Emirates. DP World is among the leading port terminal operators in the world.

 

The net cash accruals to total debt moderated to 0.1 time in fiscal 2024 from 0.5 time in previous year. The interest coverage has also weakened to 1.05 times in fiscal as against 14.3 times in fiscal 2023. However, the TOL/TNW has remained below unity in last seven fiscals. Despite the weakening of debt coverage metrics, the financial risk profile is likely to remain moderate. Furthermore, the company had unencumbered cash and bank balances of Rs 55 crore as on July 15, 2024, excluding debt service reserve account (DSRA) and other lien marked fixed deposits totaling Rs 48.25 crore. SSLL is also expected to maintain liquid surplus of Rs 40-50 crore on a steady-state basis.

 

The rating continues to reflect the established market position of SSLL in the shipping business, steady cash flow from long-term FCA with TFPL, and operational and financial synergies from association with the Transworld group that has extensive experience in shipping and logistics. These strengths are partially offset by a moderate financial risk profile, modest scale of operations, susceptibility to fluctuations in charter rates, and exposure to intense competition in the global shipping industry.

Analytical Approach

CRISIL Ratings has taken a standalone view of the business and financial risk profiles of SSLL.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position: SSLL is one of the leading shipping companies in India, with a legacy of more than three decades in owning and operating ships. As on date, it has a fleet of 12 vessels (10 container and 2 dry-bulk [DB]) with total capacity of 22,066 TEU (twenty-foot equivalent unit) for container vessels, and gross registered tonnage of 2,79,962. Average fleet age stands at 19.9 years with acquisition of three new vessels in fiscal 2023. The company mitigates the risk of ageing fleet with timely dry-docking of vessels, as per requirement, scrapping and subsequent addition of new vessels.

 

• Steady cash flow from long-term FCA; plans to operate DB vessels by itself: SSLL benefits from steady revenue visibility and cashflows with the long-term FCA with TFPL. The strong position of Unifeeder in the global charter-hire market and strategic focus on India provide SSLL access to a wide global customer base for export-import (EXIM) as well as domestic cargo. The FCA has reduced cargo volume offtake and geopolitical risks as the entire container tonnage would be deployed by TFPL. However, SSLL has plans to operate its two owned DB vessels by itself starting October 2024, and gradually take more DB vessels on charter and operate, depending on market dynamics. This will diversify the company’s revenue profile and reduce its dependence on container segment. Moreover, cash flow is expected to be steady over the medium term, driven by receipt of 50% of payments upfront from TFPL on a quarterly basis.

 

• Operational and financial synergies from association with the Transworld group: Founded by Mr R Sivaswamy in 1977, the Transworld group operates in India, the Middle East, the United States of America, Europe and Sri Lanka. The group offers a spectrum of shipping logistics services, including feeder (vessel-owning companies), coastal container shipping and logistics solutions. Furthermore, the company derives operational and financial synergies from its association with the group. The group had provided financial support to the company in fiscal 2020, when it purchased a vessel from SSLL and leased it back to cushion its liquidity.

 

Weaknesses:

• Moderation in financial risk profile: Financial risk profile moderated in fiscal 2024 impacted by weak operating performance. The net cash accruals to total debt moderated to 0.1 time in fiscal 2024 from 0.5 time in previous year. The interest coverage has also weakened to 1.05 times in fiscal as against 14.3 times in fiscal 2023. However, the TOL/TNW has remained below unity in last seven fiscals. The debt coverage metrics had moderated with incremental debt of ~Rs 244 crore availed for the acquisition of new vessels in fiscal 2023 for ~Rs 325 crore, funded in a debt-equity mix of 3:1. This was done to replace three ageing vessels as part of a change in strategy and prevailing market dynamics. Despite the weakening of debt coverage metrics, the financial risk profile is likely to remain moderate.

 

• Modest scale of operations: Revenue declined ~42% in the fiscal 2024 against previous year due to lower-than-expected charter rates. While the charter rates improved in the second half of the fiscal, the overall year was impacted due to Ebitda loss in the second quarter and fire accident in SSL Brahmaputra in January 2024. The loss in Q2 fiscal 2024 was due to operational inefficiencies as many voyages took longer than their usual cycle due to extended monsoon and Biparjoy cyclone reducing the number of voyages and lower yield. However, performance improved in the subsequent two quarters as reflected in better margins and accruals. Improved performance during this period is also attributable to the geopolitical disturbances around the Red Sea leading to increase in the charter rates.

 

Though revenue over the medium term is likely to vary depending on container charter rates, it will be less volatile due to the FCA with TFPL that ensures volume deployment. Further, the impact of company’s plans to operate by itself its two owned DB vessels along with more DB vessels (on charter from market) will be a monitorable.

 

• Exposure to volatility in spot charter rates and intense competition: The company has chartered all its 10 container vessels under the FCA to TFPL. The two DB vessels purchased in fiscal 2022 have been chartered externally. While the FCA with TFPL provides stability to cash flow, the spot charter rate varies based on trade volumes, availability of ships and containers as well as demand and supply conditions. SSLL therefore remains partly vulnerable to downturns in the shipping cycle and pricing volatility, and this can increase with DB vessels not covered under the FCA. Furthermore, intense competition may continue to restrict pricing power with suppliers and customers, thereby constraining operating profitability. SSLL is also susceptible to fluctuations in foreign exchange rates. However, this risk is partially mitigated by a natural hedge as most of the borrowing is in foreign currency or by use of derivate instruments.

Liquidity: Adequate

Unencumbered cash and bank balances of around Rs 55 crore as on July 15, 2024 (excluding DSRA and other lien marked fixed deposits totaling Rs 48.25 crore), will continue to support liquidity. While financial performance has remained weak in fiscal 2024, it is expected to improve thereby generating adequate cash accrual to meet debt obligation of ~Rs 120-125 crore this fiscal. Further, SSLL is expected to maintain liquid surplus of Rs 40-50 crore on a steady-state basis. Timely, need-based financial support from the Transworld group is expected to continue.

Outlook: Negative

CRISIL Ratings believe SSLL’s scale of operations and profitability may remain constrained in the near term with tepid container charter rates coupled with sizeable debt obligation, which may also weaken financial risk profile over the medium term.

Rating Sensitivity factors

Upward factors:

• Healthy revenue growth and healthy operating margin leading to annual cash accrual of above Rs 120 crore on a sustained basis
• Healthy cash generation and prudent working capital management, leading to improvement in debt protection metrics

 

Downward factors:

• Weaker-than-anticipated operating performance leading to annual cash accrual below Rs 60-80 crore
• Deterioration in debt protection metrics due to larger-than-expected and debt-funded capital expenditure/acquisition or sizeable stretch in working capital cycle
• Change in stance of support from the Transworld group

About the Company

SSLL was incorporated in 1988 by the late Mr R Sivaswamy to own and operate vessels for container feeder operations between Indian and international container trans-shipment ports. The company has diversified into logistics, transportation, warehousing and distribution services. It was the first to provide coastal trans-shipment services at several domestic ports, including Jawaharlal Nehru Port Authority (‘CRISIL AAA/Stable’) in Nhava Sheva, Maharashtra. Post-sale of its containerised domestic coastal and EXIM feeder shipping business to TFPL, the company follows an asset-heavy business model with owning and long-term chartering of vessels.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Foreign Currency Term Loan	NA	NA	31-Aug-2025	11.95	NA	CRISIL A-/Negative
NA	Foreign Currency Term Loan	NA	NA	31-Mar-2030	103.08	NA	CRISIL A-/Negative
NA	Foreign Currency Term Loan	NA	NA	31-Mar-2026	17.42	NA	CRISIL A-/Negative
NA	Foreign Currency Term Loan	NA	NA	30-Nov-2029	52.68	NA	CRISIL A-/Negative
NA	Rupee Term Loan*	NA	NA	31-Mar-2025	3.93	NA	CRISIL A-/Negative
NA	Rupee Term Loan*	NA	NA	30-Jun-2026	33.92	NA	CRISIL A-/Negative
NA	Rupee Term Loan*	NA	NA	31-Mar-2031	140.79	NA	CRISIL A-/Negative
NA	Rupee Term Loan*	NA	NA	27-Mar-2031	46.03	NA	CRISIL A-/Negative
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	66.2	NA	CRISIL A-/Negative

*Swapped both interest and principal with foreign currency