Detailed Rationale

CRISIL Ratings has revised its rating outlook on the long-term bank facilities of Shreyas Shipping and Logistics Ltd (SSLL) to ‘Negative’ from ‘Stable’ while reaffirming the rating at ‘CRISIL A-’.

The revision in the outlook factors in weak operating performance impacted by decline in charter rates over the past few quarters and weak industry dynamics. SSLL’s revenue in H1 fiscal 2024 declined by ~58% on year to Rs. 121 crore impacted by lower charter rates and lower operating efficiency. Other factors like mark-to-market losses and revenue loss due to percentage of completion also impacted the revenues in Q2 fiscal 2024. The company incurred operating loss of Rs 1.4 crore in the first half of the fiscal, against operating profit of Rs 77 crore in the corresponding period previous fiscal. The profitability was impacted by both decline in charter rates over the last few quarters as well operational inefficiency as many voyages took longer than their usual cycle due to an extended monsoon, while cyclone Biparjoy reduced the number of voyages and led to lower yield.

 

Annualised net cash accrual to total debt ratio moderated to below 0.1 time (for the first half of fiscal 2024) from 0.5 time for fiscal 2023. The interest coverage has also weakened this fiscal given Ebitda (earnings before interest, taxes, depreciation, and amortisation) losses as against 14.3 times in fiscal 2023. However, total outside liabilities to tangible networth  ratio has remained strong (below unity) in the last five 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 84.6 crore as on October 31, 2023, excluding debt service reserve account (DSRA) and other lien marked fixed deposits totaling Rs 44.5 crore. SSLL is also expected to maintain liquid surplus of Rs 60-80 crore on a steady-state basis.

 

The company benefits from steady cash flow following a long-term framework chartering agreement (FCA) with Transworld Feeders Pvt Ltd (TFPL), a group concern of Unifeeder ISC FZCO (Unifeeder), which is in turn a subsidiary of DP World, based in the United Arab Emirates. DP World is among the leading port terminal operators in the world.

 

Though operating margin has declined this fiscal, it is expected to improve over the medium term with expected rationalisation of excess capacity and rescheduling of services to improve operating efficiency. Few vessels have been recently sub-leased by TFPL, and one vessel is being operated by SSLL. The company will continue to benefit from revenue visibility due to the long-term FCA. Also, 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. Additionally, the management has indicated that they are taking various measures to improve operating efficiency and other alternatives to generate liquidity. This is likely to result in overall profitability improving to over 25% in fiscal 2024.

 

CRISIL Ratings takes note of the failure of the delisting process to acquire the public shareholding by one of the shareholder and promoter, Transworld Holdings Ltd. Consequent to the acquisition, SSLL would have delisted the equity shares from BSE Ltd and National Stock Exchange of India Ltd. However, this development was not expected to have any material impact on the company’s credit risk profile.

 

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. It has a fleet of 13 vessels (11 container and 2 dry-bulk [DB]) with total capacity of 24,544 TEU (twenty-foot equivalent unit) for container vessels, and gross registered tonnage of 3,05,331 tonne. Average fleet age reduced to 19.8 years with the acquisition of three new vessels. The risk of ageing fleet is mitigated with timely dry-docking of vessels, as per requirement and market dynamics.

 

• Steady cash flow from long-term FCA

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 and geopolitical risks as the entire container tonnage volumes would be deployed by TFPL. However, SSLL is currently operating one vessel on Indian waters to rationalise the excess capacity. Moreover, cash flow is expected to be steady over the medium term, driven by receipt of 50% of payments upfront 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

The company reported significantly lower revenue in the first half of fiscal 2024 due to lower-than-expected charter rates and Ebitda loss in the second quarter. The loss was also due to operational inefficiencies as many voyages took longer than their usual cycle due to extended monsoon and some impact of Biparjoy cyclone reducing the  number of voyages and lower yield.

 

The NCA to total debt has moderated to below 0.1 time (for first half of fiscal 2024) from 0.5 time for fiscal 2023. The interest coverage has also weakened this fiscal given Ebitda losses as against 14.3 times in fiscal 2023. However, the TOL/TNW has remained below unity in last five fiscals. The debt coverage metrics had moderated with incremental debt of ~Rs 244 crore availed for the acquisition of new vessels last fiscal SSLL bought three container vessels in fiscal 2023 for ~Rs 325 crore, which was 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 ~58% in the first half of fiscal 2024 against corresponding period previous fiscal due to a steady fall in charter prices. The fall in revenue is steeper due to higher rates prevailing in the first half of last fiscal and optimum utilisation of fleet capacity. While revenue over the medium term is likely to vary depending on charter rates, it will be less volatile due to the FCA that ensures volume deployment. However, some vessels have been recently sub-leased from TFPL to Unifeeder and one vessel is being operated by SSLL (deployed in Indian waters) to rationale excess capacity and improve efficiency by rescheduling of services.

 

• Exposure to volatility in spot charter rates and intense competition

The company has chartered all its 11 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 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 the borrowing is in foreign currency or by use of derivate instruments.

Liquidity: Adequate

Unencumbered cash and bank balances of Rs 84.6 crore as on October 31, 2023 (excluding DSRA and other lien marked fixed deposits totaling Rs 44.5 crore), will continue to support liquidity. While financial performance has deteriorated in the last two quarters, it is expected to improve; thereby generating adequate cash accrual to meet debt obligation of Rs 48.5 crore in the second half of the fiscal. Further, SSLL is expected to maintain liquid surplus of Rs 60-80 crore on a steady-state basis. Timely, need-based financial support from the Transworld group is expected to continue.

Outlook: Negative

Scale of operations and profitability may remain constrained by the declining trend of 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 100 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 50 crore in fiscal 2024, with accrual remaining weak in the next fiscal as well.
• Deterioration in debt protection metrics due to larger-than-expected, 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 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-2031	162.47	NA	CRISIL A-/Negative
NA	Foreign currency term loan	NA	NA	30-Nov-2029	67.23	NA	CRISIL A-/Negative
NA	Foreign currency term loan	NA	NA	31-Mar-2026	30.07	NA	CRISIL A-/Negative
NA	Foreign currency term loan	NA	NA	31-Aug-2025	22.49	NA	CRISIL A-/Negative
NA	Foreign currency term loan	NA	NA	31-Mar-2030	105.45	NA	CRISIL A-/Negative
NA	Foreign currency term loan	NA	NA	31-Dec-2023	3.99	NA	CRISIL A-/Negative
NA	Rupee term loan*	NA	NA	30-Jun-2026	51.76	NA	CRISIL A-/Negative
NA	Rupee term loan*	NA	NA	31-Mar-2025	7.44	NA	CRISIL A-/Negative
NA	Proposed long-term bank loan facility	NA	NA	NA	25.1	NA	CRISIL A-/Negative

    *Swapped both interest and principal with foreign currency