Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A-/Stable' rating on the long-term bank facilities of Shreyas Shipping and Logistics Limited (SSLL).

 

CRISIL Ratings takes note of SSLL acquiring three container vessels (SSL Godavari, SSL Thamirabarani and SSL Kaveri) in the last quarter of fiscal 2023, for ~Rs 325 crore funded through a debt-to-equity mix of 3:1, as replacement for three of its ageing vessels -- SSL Kochi, SSL Chennai and SSL Ganga. The company sold SSL Kochi and SSL Chennai in fiscal 2023 for total consideration of Rs 57 crore and SSL Ganga is expected to be sold in the first quarter of fiscal 2024 (all three older vessels were due for dry-docking with expected capital expenditure [capex] envisaged at Rs 64 crore). SSLL acquired these vessels following a change in strategy and prevailing market dynamics. The average fleet age reduced to 19.1 years (from 22 years) as the age of all three new vessels is less than 18 years old. These vessels also have higher capacity of 2,350 twenty-foot equivalent (TEU) than the vessels being replaced, which is likely to result in higher charter revenue.

 

The incremental debt for this acquisition has moderated the debt coverage metrics, with the total outside liabilities to tangible networth (TOL/TNW) ratio expected to increase to around 0.70 time as on March 31, 2023 against 0.45 time as on March 31, 2022. While other debt protection and coverage metrics are also expected to moderate, they remain healthy. Further, the company is expected to maintain unencumbered cash and bank balances of Rs 80-100 crore in the near to medium term to meet any contingencies providing liquidity cushion for its repayment obligation. Additionally, SSLL would maintain ~Rs 55 crore of fixed deposits (FDs) for debt service reserve account (DSRA) and other lien-marked FDs.

 

The operating margin improved to 54.7% in the first nine months of fiscal 2023, (9m-2023) from 44.4% in fiscal 2022, driven by higher freight charter rates. SSLL has benefited from steady cash flow with the long-term framework chartering agreement (FCA) with Transworld Feeders Pvt Ltd (TFPL). TFPL is a group concern of Unifeeder ISC FZCO (Unifeeder), which in-turn is a subsidiary of DP World. DP World is headquartered in the United Arab Emirates and is among the leading port terminal operators in the world. Higher freight rates coupled with optimum utilisation of fleet capacity resulted in SSLL maintaining its scale in fiscal 2023. Operating margins are expected to moderate over the medium term with the expected rationalisation of charter rates. Nevertheless, the company will continue to benefit from high revenue visibility with the long-term FCA with TFPL; all the three recently acquired vessels have already been chartered to TFPL.The strong market position and wide global customer base of Unifeeder will limit business volatility, as the entire container tonnage volume will be deployed by TFPL.

 

The rating continues to reflect established market position of SSLL in the shipping business, steady cash flow from the long-term FCA with TFPL, healthy financial risk profile, and operational and financial synergies from association with the Transworld group, having extensive experience in shipping and logistics. These strengths are partially offset by modest scale of operations, susceptibility to fluctuation in charter rates and 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

The company is one of the leading shipping companies in India, with strong legacy of more than three decades in owning and operating ships. It has a fleet of 14 vessels (12 container and 2 dry-bulk [DB]) including SSL Ganga). The fleet has total capacity of 26,085 TEU, for container vessels, and gross registered tonnage of 3,21,500 metric tonne. Average fleet age reduced to 19.1 years with the acquisition of three new vessels. Further, the ageing fleet risk is largely mitigated with timely dry-docking of vessels, as per requirement and market dynamics.

 

• Steady cash flow from long-term FCA

SSLL benefits from high revenue visibility and steady cash flow with the long-term FCA with TFPL. Strong market position of Unifeeder in the global charter-hire market and strategic focus on India provides SSLL access to wide global customer base for export import (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 the entire container tonnage volumes would be deployed by TFPL. Revenue and cash flow would be steady over the medium term, driven by receipt of 50% of payments upfront on a quarterly basis.

 

• Healthy financial risk profile, albeit expected moderation

The financial metrics remain sound, with TOL/TNW of below unity in the last five fiscals. However, the debt coverage metrics are expected to moderate with the incremental debt of ~Rs 244 crore availed for the acquisition of new vessels. The TOL/TNW ratio is expected to moderate to ~0.7 time as on March 31, 2023 from 0.45 time as on March 31, 2022. The net cash accruals (NCA) to total debt and interest coverage ratios are also likely to moderate to below 0.5 time and 9.9 times respectively, for fiscal 2023, from 1.13 times and 19.1 times, respectively, in the previous fiscal, given the debt-funded capex and expected moderation in margins.

 

Despite the expected moderation in debt coverage metrics, the financial risk profile is likely to remain healthy after factoring in part debt-funded capex of ~Rs 300 crore for new vessel purchases (depending on market dynamics) and dry-docking expenses over next three fiscals (fiscal 2024-2026). This would be supported by healthy cash generation and part funding of capex from internal accruals.

 

• 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 in the past, when it purchased a vessel from SSLL in fiscal 2020 and leased it back to cushion the liquidity of SSLL.

 

Weaknesses:

• Modest scale of operations

Despite recent rationalisation in charter prices, SSLL’s annual revenue is expected to witness limited decline of ~10% in fiscal 2023, owing to higher freight rates prevailing in the first half of the fiscal and optimum utilisation of fleet capacity. While the revenue in the future years is likely to vary (depending on the prevailing charter rates), it will now be less volatile due to the FCA that ensures volume deployment. Additionally, with acquisition of higher capacity vessels in fiscal 2023, the revenue visibility has improved; all three vessels have already been chartered to TFPL as part of the long-term FCA.

 

• Exposure to volatility in spot charter rates and intense competition

The company has chartered all its 12 container vessels (including SSL Ganga, expected to be sold in the first quarter of fiscal 2024) 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 addition of new DB vessels, not covered under the FCA with TFPL. 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 borrowing is in foreign currency or by use of derivate instruments.

Liquidity: Adequate

Liquidity should remain supported by unencumbered cash and bank balances of Rs 96 crore as on March 31, 2023, excluding DSRA and other lien marked FDs of Rs 55 crore. The cash accruals are expected to be adequate to meet annual debt repayment obligations of Rs 110-120 crore and part-fund the capex through fiscals 2024 to 2026. SSLL has capex of ~Rs 300 crore planned for the next three fiscals for dry-docking and purchase of new vessels. SSLL is also expected to maintain liquid surplus of Rs 80-100 crore on a steady-state basis. Timely, need-based financial support from the Transworld group is expected to continue.

Outlook: Stable

SSLL will continue to benefit from its long-term FCA with TFPL and maintain its healthy financial risk profile, despite high capital intensity.

Rating Sensitivity factors

Upward factors

• Healthy revenue growth and healthy operating margin, leading to annual cash accrual of above Rs 150 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 accruals below Rs 80-100 crore
• Deterioration in debt protection metrics due to larger-than-expected and debt-funded capex/acquisition or sizeable stretch in the working capital cycle

About the Company

SSLL was incorporated in 1988 by 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.

 

For the nine months ended December 31, 2022, the company generated profit after tax (PAT) of Rs 179 crore on operating income of Rs 409 crore against Rs 177 crore and Rs 367 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators

As on/For the period ended March 31		2022	2021
Revenue	Rs crore	519	564
PAT	Rs crore	251	44
PAT margin	%	48.4	7.8
Adjusted debt/adjusted networth	Times	0.37	0.49
Interest coverage	Times	19.1	5.1

 

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	Rupee Term Loan*	NA	NA	31-Mar-31	162.47	NA	CRISIL A-/Stable
NA	Foreign Currency Term Loan	NA	NA	30-Nov-29	67.23	NA	CRISIL A-/Stable
NA	Foreign Currency Term Loan	NA	NA	31-Mar-26	30.07	NA	CRISIL A-/Stable
NA	Foreign Currency Term Loan	NA	NA	31-Aug-25	22.49	NA	CRISIL A-/Stable
NA	Foreign Currency Term Loan	NA	NA	31-Mar-30	105.45	NA	CRISIL A-/Stable
NA	Foreign Currency Term Loan	NA	NA	31-Dec-23	3.99	NA	CRISIL A-/Stable
NA	Rupee Term Loan*	NA	NA	30-Jun-26	51.76	NA	CRISIL A-/Stable
NA	Rupee Term Loan*	NA	NA	31-Mar-25	7.44	NA	CRISIL A-/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	25.1	NA	CRISIL A-/Stable

*Swapped both interest and principal with foreign currency