Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA+/Stable’ ratings to the non-convertible debentures (NCDs) of The Great Eastern Shipping Company Ltd. (GESCO). The rating on the commercial paper programme has been withdrawn at the company’s request and on confirmation of no commercial paper outstanding as on date. This is in line with CRISIL Ratings withdrawal policy.

 

The rating reflects the established market position of the company in the shipping industry, supported by its young and diverse 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 utilisation 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-/Stable’).

 

The rating also takes comfort from the healthy financial risk profile, despite cyclicality in business operations. This is majorly contributed by its prudent risk management policy, wherein a stress test is conducted on a quarterly basis to ensure sufficient cash availability to meet the debt obligation for the coming three years, under a stressed earnings scenario. The company turned net cash positive in fiscal 2023 backed by strong cash accruals and prepayment of long-term debt.

 

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 equipments 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 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 March 31, 2023. The company also keeps its fleet well maintained and compliant with various emission and safety norms, which enables it to work with the top exporters 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 (~13.5 years), offshore support vessels (~13 years) and rigs (~12 years) is significantly lower than their useful life.

 

• Strong financial risk profile

The financial risk profile of GESCO is driven by comfortable 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, 2023, the company was at a net cash position on a consolidated basis, with net debt of negative Rs 1,423 crore, resulting in net debt to equity ratio of negative 0.14 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 will remain comfortable over the medium term. Owing to its prudent risk management policy gearing 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 timing 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. Charter rates for crude and product tankers have been operating at elevated levels over the past one year owing to the higher tonne mile demand, driven by the trade disruptions caused by the Russia-Ukraine conflict, while the rates for dry bulk carriers moderated during fiscal 2023 owing to lower steel and iron ore trade from China.

 

In fiscal 2023, the performance of the shipping business improved, driven by a spike witnessed in crude and product carrier rates, while the charter rates for dry bulk carriers moderated. Average crude carrier charter rates jumped to USD 46,179/day in fiscal 2023 against USD 11,661/day in fiscal 2022 while the dry bulk charter rates were lower at USD 19,681/day in fiscal 2023 when compared to USD 26,995/day in fiscal 2022. Favorable rates for its crude and product carriers enabled the operating margins to remain in the range of 60-65% during the period.

 

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 investments in onshore blocks, are highly sensitive to crude oil prices. While oversupply of oil rigs in the market had resulted in fall in rig rates in the past few years, charter rates have subsequently rebounded with a revival in the budgeted exploration and production (E&P) capex.

Liquidity: Strong

GESCO, at consolidated level, had adequate cash and equivalent of Rs 5,047 crore as on March 31, 2023. Expected cash accrual of Rs 1,300-1,700 crore per annum in fiscals 2024 and 2025 will sufficiently cover scheduled debt obligation of Rs 600-1200 crore. 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.

 

The shipping sector has a significant impact on the environment owing to higher emissions and risk of discharge and oil spills. The sector also has a significant social impact because of its large workforce across its own operations and value chain partners, and the health hazards involved. 

 

GESCO has been focusing on mitigating its environmental and social risks.

 

Key ESG highlights:

• As part of its vision, the company aspires to lead the industry in safety standards, environmental protection, energy optimisation and quality of operations.
• The company plans to align with the 2030 strategy by the International Maritime Organisation (IMO), which aims to reduce carbon dioxide (CO2) emissions per transport work by at least 40% by 2030, compared with 2008 levels.
• All the vessels are compliant with regulation 12 of IMO MARPOL Annex VI on Ozone Depleting Substance (ODS). Around 96% of its fleet vessels do not use ODS refrigerants in their shipboard machineries.
• To reduce the consumption of single use plastic, the company has implemented Ship Execution Plan on all its vessels towards compliance with the ban on single use plastic by India and Kuwait.
• The governance structure is characterised by 69% of the Board members being independent directors, dedicated investor grievance redressal system and extensive disclosures. The company’s chairman and executive positions are also split.

 

There is growing importance of ESG among investors and lenders. GESCO’s commitment to ESG will play a key role in enhancing stakeholder confidence, given access to domestic capital markets.

Outlook: Stable

CRISIL Ratings believes GESCO will continue to benefit from its strong business risk profile underpinned by its young and well-diversified fleet and maintain a strong financial risk profile, driven by strong liquidity and prudent risk management approach.

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 March 31, 2023.

 

Through its wholly owned subsidiary, GIL, GESCO has diversified its 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	2023#	2022
Revenue	Rs crore	6,171	3,669
Profit after tax (PAT)	Rs crore	2,581	656
PAT margin	%	41.82	20.68
Adjusted debt/adjusted networth	Times	0.40	0.63
Interest coverage	Times	7.7	5.3

*Based on normalised consolidated financials reported

#Provisional

Any other information: Not applicable