Detailed Rationale

CRISIL Ratings has removed its rating on the long-term bank facilities of Shreyas Shipping and Logistics Ltd (Shreyas) from 'Rating Watch with Developing Implications' and assigned it a 'Stable' outlook; the rating on the long-term bank facilities of the entity has been reaffirmed at 'CRISIL BBB+'.

 

CRISIL Ratings had earlier placed the rating on watch following the announcement on August 19, 2020, that its Board had approved the transfer of its containerised domestic coastal and export-import (EXIM) feeder shipping business along with 29.22% stake in Avana Logistek Ltd (ALL; CRISIL A/Stable/CRISIL A1) to Unifeeder ISC FZCO (Unifeeder; a subsidiary of DP World). With the receipt of approval from the Competition Commission of India on June 3, 2021, the transaction was completed effective June 30, 2021, for a gross consideration of USD 31.003 million. Post this transaction, Shreyas will continue with its asset-heavy business model owning the vessel fleet, a large part of which has been under a long-term framework chartering agreement (FCA) with Unifeeder.

 

The rating action follows expectations that the tie-up of Shreyas with Unifeeder will result in better revenue visibility and steady cash flow over the medium term; which is a key monitorable. Unifeeder’s strong market position and wide global customer base will help limit business volatility, as 97% of tonnage volume will be deployed by Unifeeder.

 

The transaction has also reduced the working capital requirement, with sale of the feedering business as well as 50% of upfront cash flow from Unifeeder and remaining within the defined timeframe. The company has utilised gross consideration of USD 31.003 million (Rs 229 crore) to fully repay its working capital debt of Rs 76 crore, part funding of proposed capital expenditure (capex) plans and remaining in liquid surplus.  

 

The operating performance was strong with 20% on-year growth in business volumes to 5.3 lakh twenty foot equivalent unit (TEU), resulting in revenue of Rs 564 crore in fiscal 2021. This was driven by favourable industry dynamics, significant increase in freight rates and recovery in business volumes from the second quarter of fiscal 2021, post a Covid-19 pandemic-impacted first quarter. Consequently, operating margin improved to 12.1% in fiscal 2021 from 7.6% in fiscal 2020. Operating margin improved further to 24% in the quarter ended June 30, 2021 and is expected at healthy double digit levels  in fiscal 2022, backed by the FCA with Unifeeder.

 

With the retirement of working capital debt using part of the proceeds received from Unifeeder, Shreyas’ financial risk profile witnessed an improvement in the first quarter of this fiscal. Supported by better cash flow generation and liquid surplus of Rs 140 crore (July 1, 2021), the financial risk profile is expected to remain healthy after factoring in debt-funded capex of about Rs 325 crore for new vessel purchase and dry-docking expenses over two fiscals. Furthermore, timely financial support is expected to continue from the Transworld group, in case of any exigency, as demonstrated in the past.

 

The rating continues to reflect established market position in the shipping business, steady cash flow from the long-term FCA and assured deployment of vessels with Unifeeder, moderate and  -improving financial risk profile and expected financial support from the Transworld group. These strengths are partially offset by modest scale of operations and exposure to volatility in spot charter rates and intense competition in the global shipping industry.

Analytical Approach

For arriving at its rating, CRISIL Ratings has combined the business and financial risk profiles of Shreyas, and a joint venture (Shreyas – Suzue Logistics (India) Pvt. Ltd) because of its considerable operational and financial linkage. 

 

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

Key Rating Drivers & Detailed Description

Strengths

Established market position

The company is one of the leading shipping companies in India, with a fleet of 11 vessels having total capacity more than 22,000 TEUs and average age of 22 years. The company has a strong legacy of more than three decades in owning and operating ships.

 

Steady cash flow from long-term FCA

Shreyas now benefits from high revenue visibility and steady cash flow with the long-term FCA with Unifeeder. Unifeeder’s strong market position in the global charter-hire market and strategic focus on India provides Shreyas access to wide global customer base for EXIM as well as domestic cargo. The FCA has de-risked the cargo volume risk and reduced geopolitical risks of operating in a particular geography, as 97% of the tonnage volumes would be deployed by Unifeeder. While there would be a reduction in revenue as the agreement with Unifeeder provides two-third earnings before interest and taxes to Shreyas, the revenue and cash flow would be steady over the medium term. Furthermore, there would be no foreign exchange (forex) risk, 50% of which would be received upfront.

 

Moderate and improving financial risk profile

Adjusted gearing was 0.5 time as on March 31, 2021, and improved to 0.3 time as on July 1, 2021, with repayment of working capital debt from the sales proceeds. Gearing is likely to remain adequate over the medium term, after factoring in capex plan of Rs 325 crore for purchase of new vessels and dry-docking over two fiscals, supported by healthy cash generation and part funding from liquid surpluses. Interest coverage ratio was more than 5 times in fiscal 2021 and is expected at above 8 times over the medium term. Debt to earnings before interest, tax, depreciation and amortisation improved to 3.02 times in fiscal 2021 from 5.72 times in fiscal 2020, and should moderate in fiscal 2022, given the partly debt-funded capex plan.

 

Also, the asset-heavy business model continues to impact the return on capital employed; the metric improved to about 11% in fiscal 2021 (3% in fiscal 2020) and should remain at 10-15% over the medium term.

 

Expected financial support from the Transworld group

Founded by Mr R Sivaswamy in 1977, the Transworld group operates in India, the Middle East, Sri Lanka, the US and Europe. The group offers a spectrum of shipping logistics services, including feeder (vessel-owning companies), coastal container shipping and logistics solutions. Furthermore, the group is likely to provide timely financial support to its subsidiaries during any exigency, as witnessed in fiscal 2020, when the group purchased a vessel from Shreyas and leased it back to cushion the latter’s liquidity.

 

Weaknesses

Modest scale of operations

With divestment of feedering business to Unifeeder, revenue of Shreyas may decline by 30-35% to less than Rs 400 crore from fiscal 2022. While the revenue generated will now be less volatile due to the FCA, scale has moderated from earlier levels. That said, with an improved balance sheet and sizeable liquid surpluses, Shreyas is likely to go in for opportunistic purchase of bulk cargo vessels to take advantage of the good growth prospects and favourable charter rates. Successful deployment of newly acquired vessels can provide a fillip to revenue.

 

Exposure to volatility in spot charter rates and intense competition

The company has chartered 10 of its 11 vessels under the FCA to Unifeeder while one vessel is chartered externally. While the FCA with Unifeeder 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. Shreyas remains therefore partly vulnerable to downturns in the shipping cycle and pricing volatility, and this can increase with addition of new vessels, if not chartered to Unifeeder. Furthermore, intense competition may continue to restrict pricing power with suppliers and customers, thereby constraining operating profitability. The company is also susceptible to fluctuations in forex rates on externally hired vessels. This risk is mitigated to a large extent by a natural hedge as the borrowings are in foreign currency.

Liquidity: Adequate

Shreyas has liquid surplus of Rs 140 crore as on July 1, 2021, which is expected to part fund its capex requirement and for exigencies. The company has capex of Rs 280 crore planned in fiscal 2022 for purchase of new vessels and dry-docking, which will be largely be debt funded. The additional debt would be long-term and low-cost foreign currency borrowing, thereby resulting in lower annual debt servicing obligation. Cash accrual is expected to be adequate to meet debt repayment obligation of Rs 51 crore in fiscal 2022 and about Rs 70 crore in fiscal 2023. Shreyas is expected to maintain liquid surplus of Rs 40-50 crore on a steady-state basis. Timely financial support from the Transworld group is expected to continue, in case of any exigency.

Outlook Stable

Shreyas will continue to benefit from its long-term FCA with Unifeeder and maintain its moderate and improving financial risk profile, despite high capital intensity.

Rating Sensitivity factors

Upward factors

• Sustained revenue growth and healthy operating margin, leading to annual cash accrual of above Rs 80-100 crore
• Healthy cash generation and prudent funding of capex, leading to adequate debt protection metrics
• Sustenance of liquid surpluses of Rs 40 crore, post proposed purchase of vehicles

 

Downward factors

• Weaker-than-anticipated operating performance, leading to annual cash accrual below Rs 30-40 crore
• Deterioration in debt protection metrics due to larger-than-expected and debt-funded capex/acquisition or sizeable stretch in the working capital cycle or weaker-than-expected cash generation

About the Company

Shreyas was set up in 1994 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 Trust in Nhava Sheva, Maharashtra. Post sale of its containerised domestic coastal and EXIM feeder shipping business to Unifeeder, the company follows an asset-heavy business model with owning and long-term chartering of vessels.

 

The company reported operating income and profit after tax (PAT) of Rs 189 crore and Rs 47 crore, respectively, for the first quarter of fiscal 2022, as against Rs 111 crore and PAT loss of Rs 8 crore for the corresponding period of last fiscal.

Key Financial Indicators

As on/For the period ended March 31		2021	2020
Revenue	Rs crore	564	616
PAT	Rs crore	44	-66
PAT margin	%	7.8	-10.7
Adjusted debt/adjusted networth	Times	0.49	0.72
Interest coverage	Times	5.10	1.95

PAT is fiscal 2020 factors in provision for impairment of Rs. 85.5 crores related to investment in associate company

Any other information: Not applicable

Annexure - Details of Instrument(s)

* Swapped both interest and principal with foreign currency

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Shreyas – Suzue Logistics (India) Pvt. Ltd	Moderate	Joint venture