Detailed Rationale

CRISIL Ratings has revised its rating outlook on the non-convertible debentures (NCDs) of The Great Eastern Shipping Company Limited (GESCO) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL AA+’.

 

CRISIL Ratings has also withdrawn its rating on the NCDs that matured and redeemed on January 18, 2024 upon receipt of redemption confirmation from the debenture trustee. This rating action is in line with the withdrawal policy of CRISIL Ratings.

 

The revision in outlook reflects CRISIL Ratings’ expectation that the company may sustain its strengthened financial profile with sizeable networth, strong liquidity and low leverage on back of continuing healthy operating performance across both its shipping and offshore oilfield services segments resulting in strong cash accruals. The rating action also derives comfort from company’s strong risk management policies in an inherently cyclical business (wherein a stress test is conducted on a quarterly basis to ensure sufficient cash availability to meet the debt obligations for the coming three years) and company’s measured approach towards growth, which should keep its financial profile healthy even in an event of a downturn in the business cycle.

 

The rating continues to reflect the established market position of the company in the shipping industry, supported by its relatively young and well-diversified fleet across the dry bulk and tanker segment. The company has a track record of 75 years of withstanding business cycles and headwinds in the industry. Also, it has maintained strong operating performance while sustaining high fleet utilization and deploying ships under spot charter rates. The company also operates jack-up rigs and support vessels in the offshore segment, under its wholly owned subsidiary Greatship (India) Ltd (GIL; ‘CRISIL AA/Positive’).

 

These strengths are partially offset by volatility in the operating performance of both the shipping and offshore oilfield services business. While the shipping industry is cyclical in nature, charter rates earned from the offshore oilfield services are susceptible to fluctuations in crude oil prices and availability of offshore oilfield equipment in the market.

Analytical Approach

For arriving at the rating, CRISIL Ratings has combined the business and financial risk profiles of GESCO and its subsidiaries, owing to the strong financial linkages amongst the entities.

 

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:

• Well-established track record and experienced management: Three generations of the promoter family, currently led by Mr. K M Sheth, have been involved in the shipping business and have successfully steered the company through business cycles in the past seven and a half decades. They are supported by an experienced management, which has the ability to withstand short or mid-term headwinds in the industry. The company has a dedicated team that tracks the prevailing charter rates and ship prices on regular basis, to take informed decisions on deployment as well as sale and purchase of ships.

 

• Strong business risk profile, supported by young and well-diversified fleet: GESCO maintains a relatively young and well-diversified fleet, which has better functionality and operating efficiency than older vessels and helps the company to get better market value when vessels are sold. It owns and operates 43 vessels (29 tankers and 14 dry bulk carriers) with a combined capacity of 34 lakh dead weight tonnage as on May 31, 2024. The company also keeps its fleet well maintained and compliant with various emission and safety norms, which enables it to work with the top commodity exporters of the world and operate from all the major ports of the world. Through its subsidiary, GIL, the company has established its presence in the offshore oilfield services industry, wherein it owns and operates 19 offshore-support vessels and 4 jack-up rigs. Average age of ships (~14 years), offshore support vessels (~14 years) and rigs (~13 years) is significantly lower than their useful life.

 

• Strong financial risk profile: The financial risk profile of GESCO is driven by low gearing and strong liquidity, supported by a prudent risk management approach. The company maintains adequate liquidity to sufficiently cover the debt obligations, operating expenses as well as committed capital expenditure (capex) requirements, even in a stressed earning scenario, and investment or capex decisions are taken on the basis of the liquidity available after considering the above cash requirement. As on March 31, 2024, the company was at a net cash position on a consolidated basis, with net cash of Rs 3,032 crore, resulting in net debt to equity ratio of (-0.24) time (as per normalised consolidated financials reported by the company). Despite cyclicality in the operating performance of the shipping and offshore oilfields businesses, the financial risk profile of GESCO is likely to remain strong over the medium term. Owing to its prudent risk management policy, the gearing (measured as a ratio of debt to equity) has remained below 1 time over the past 10 years.

 

Weakness:

• Operating performance remains susceptible to volatility in charter rates: Performance of the shipping business is inherently cyclical, caused by mismatch between fleet demand and supply and disruptions to the supply chain caused on account of any macro-economic and geopolitical events. Moreover, the charter rates for crude and product tankers as well as dry bulk carriers are driven by the demand-supply situation for the underlying commodities or products. Presence across multiple segments allows the company sufficient levers to mitigate the adverse impact of a drop in the charter rates of any segment during a business downturn and at the same time take advantage of the rates during an upturn.

 

During fiscal 2024, overall operating performance for GESCO’s shipping business remained healthy. While crude tankers and LPG carriers performed well due to higher charter rates, performance of dry bulk carriers remained weak due to increase in effective fleet supply as markets normalized post covid. Charter rates for product tankers remained low during first half of the year, but later increased during second half owing to increased tonne-miles due to red-sea crisis. This is in contrast to fiscal 2023 where charter rates for crude and product tankers had spiked significantly due to trade disruptions caused by the Russia-Ukraine crisis, which highlights the benefit of diversification across different segment.

 

Profitability and cash flow in the offshore business depend on offshore charter rates, which are influenced by offshore and deep-water expenditure by oil majors. Offshore and deep-water block investments, which are larger than the investments in onshore blocks, are highly sensitive to crude oil prices. While this segment grew significantly during the upcycle between fiscals 2008-2015, an oversupply situation later led to a sharp correction in the time charter rates which hit margins significantly across the industry. This downcycle reversed fiscal 2023 onwards the charter rates have been high for the offshore segment.

Liquidity: Strong

GESCO, at consolidated level, had adequate cash and equivalent of Rs 6,527 crore as on March 31, 2024. Expected cash accrual of Rs 1,700-1,900 crore per annum in fiscals 2025 and 2026 will sufficiently cover scheduled debt obligation of Rs 500-800 crore per annum. Liquidity is expected to remain comfortable considering the risk management policy followed by the company for the shipping segment, wherein adequate funds are reserved for meeting cash outflow requirement, even in case of worst 3-year period of charter rates seen over the past 20 years, prior to undertaking capex decisions.

 

GESCO’s Environment, Social, and Governance (ESG) profile supports its healthy credit risk profile.

GESCO’s has set a target to reduce greenhouse gas (GHG) emissions by 40% and 70%, by 2030 and 2050, respectively, in line with the International Maritime Organization (IMO) guidelines.  

 

Five of 44 ships owned/operated by the company are equipped with exhaust gas cleaning system with the aim to reduce Sulphur emissions. The company reported a 7.8% y-o-y fall in SOx emissions is fiscal 2023 supported by these systems. GESCO reported no instance of oil spills during its operations in fiscal 2023.  

 

Share of women employees was low at ~3% for fiscal 2023, though it was in-line with listed peers in the industry. Its lost time injury frequency rate stood at 0.38x, higher compared to listed peers, and is thus an area of improvement.

 

GESCO’s governance structure is characterized by 60% of its board comprising of independent directors, 13%-woman directors, split in positions of Managing Director (MD) and chairperson, and extensive financial disclosures.

Outlook: Positive

CRISIL Ratings expects that the company may sustain its strengthened financial profile with sizeable networth, strong liquidity and low leverage on back of healthy operating performance across both its shipping and offshore oilfield services segments as well as adherence to strong risk management policies.

Rating Sensitivity factors

Upward factors

• Sustained visibility on revenue and Ebitda (earnings before interest, taxes, depreciation and amortization) for a rolling 3-year period
• Strong cash accruals on a sustained basis leading to marked improvement in return on capital employed

 

Downward factors

• Higher-than-expected leverage or low operating profit resulting in net debt to Ebitda ratio exceeding 2 times on a sustained basis
• Sustained weakening of the operating charter rates increasing dependence on cash surplus or material change in the liquidity policy resulting in significant and sustained depletion of cash balance

About the Company

Incorporated in 1948, GESCO is the largest private sector shipping company in India. The company mainly operates under two main businesses, tankers and dry bulk carriers wherein it owns and operates 43 vessels (29 tankers and 14 dry bulk carriers) with a combined capacity of 34 lakh dead weight tonnage as on May 31, 2024.

 

Through its wholly owned subsidiary, GIL, GESCO also has diversified presence in the offshore oilfield services industry. Along with its subsidiaries, GIL provides services in the offshore energy E&P domain, and has presence in the offshore oilfield logistics support, offshore construction and offshore drilling services segments.

Key Financial Indicators*

Particulars	Unit	2024	2023
Revenue	Rs crore	5919	6171
Profit after tax (PAT)	Rs crore	2614	2575
PAT margin	%	44%	42%
Adjusted debt/adjusted networth	Times	0.29	0.40
Interest coverage	Times	12.31	7.7

*Based on normalised consolidated financials reported

Any other information: Not applicable