…As Shipping Corporation of India records impressive 2008 turn over

The slowdown in the shipping industry appears to have had virtually no impact on the growth of India’s largest shipping firm; Shipping Corporation of India (SCI), in the December 2008 quarter.
The company beat the Street expectation to post a healthy 22% y-o-y growth in net sales in the quarter. That’s because nearly two-third of SCI’s fleet capacity of 79 vessels (at the end of August 2008) is utilised in the tanker segment (vessels used to transport petroleum and allied products).
In this segment, the average spot freight rates in the December 2008 quarter are still broadly holding on a y-o-y basis. For instance, in tanker segments like Suezmax, the average spot freight rate in third quarter was $42,780 per day, a rise of 9%, while in the VLCC segment, it was $46,600 per day, a fall of 20%.
In addition, nearly two-thirds of SCI’s total revenue are derived from long-term contracts with its key customers like oil marketing companies, which enables the company to minimise the impact of fluctuations in spot shipping freight rates.
However, in the dry bulk segment, which accounts for nearly 31% of SCI’s capacity, freights rates have cooled off given the global economic slowdown. For instance, the average of the dry bulk index was 1,169 in the last quarter, a fall of a whopping 90% y-o-y.
However, thanks to a hefty pay increase on account of Sixth Pay Commission, the company took a hit on its operating margins and operating profit declined 3.5% y-o-y during the quarter. Operating profit margin (OPM) declined 520 basis points y-o-y to 20%.
SCI’s salary bill during the quarter nearly doubled and now it accounts for 15.4% of net sales, highest among all shipping companies in India. However, lower depreciation charges helped SCI’s profit after tax rise 4.9% y-o-y to Rs 185.4 crore in the December 2008 quarter.
Going forward, the underlying concern is that once SCI’s long term contracts with customers come up for renewal, they could be brought closer to the prevailing spot freight rates which are lower, point out analysts at brokerage houses.
At Rs 76, the stock trades at just 3.9 times estimated FY10 earnings, given the uncertainties in the global shipping environment.