Mumbai, August 1
In an interview with Great Eastern Shipping’s managing director (MD) and Deputy Chairman, Bharat Sheth, tells BusinessLine that India’s biggest private ocean carrier is getting better at playing market volatility. Excerpts:
What has been the focus of the Great Eastern Shipping in the last 3-4 years?
One is capital allocation. In other words, when is a good time to buy (ships), when is a good time to sell, when is a good time to go long freight, when is a good time to trade in the spot market.
On capital allocation, we have acquired 16 assets and sold two assets since FY17. We have internally set a target to get a dollarised return on unlevered capital (without the effect of debt) of somewhere between 12 to 15 per cent on anything that we buy. On all our 16 assets, we have successfully achieved that, all based on a marked to market basis as of June 30 valuation.
We sold two assets and the way we track the two assets, we look at whether were we better off holding on to that asset or were we better off selling that asset. And even on the two assets that we sold, we were clearly better off selling the assets.
Our second big focus area has been operational excellence. We have achieved an uptime across our 46 ships at 99.5 per cent. It’s possibly the best performance since the company’s inception. Equally gratifying is that we have done it with a cost saving of a little over Rs 50 crore. This has only been for the last 12 months. The first quarter continues to show a strong operational performance, we have achieved an uptime on the ships of 99.4 per cent and I hope that we can continue with this. Because, this means multi million dollars of annual savings.
The third area is on the way we now manage the cash.
There are always competing demands on cash and the way we have prioritised it is we must always have sufficient cash on what we call risk capital just to ensure that we have cash, whatever happens, to meet all our debt servicing obligations. We must have an extended runway due to the volatility of our business and an extended runway should never compel us to take poor quality decisions.
Cash gives us plenty of operational freedom. The worst thing you can do in poor markets is start shorting trade. We have unfortunately done this in the past, we wanted to get away from that in the future and am happy to state now that we have the luxury of actually running all 46 ships, if we so chose, on the spot market even in very poor freight structures.
We will only short freight market in future when we see strong double-digit dollarized return on book value and that’s a big change from the way we’ve run the business in the past.
So, I believe the superior way of capital allocation, significant enhancement on operational performance, sitting on plenty full of cash that allows us to ride that market, invest in that market because that’s when you really should be leveraging the balance sheet, having the luxury of running all 46 ships on spot trade however bad the market is, will stand is in very good stead in the years to come.
Shipping is a highly volatile business. How positioned are you to playing volatility?
Shipping is an industry which is much more dependent on events rather on the supply-demand: demand for commodities and supply of ships. That is one of the reasons why it is extremely difficult to read the markets. We started Q1 this year believing the crude market will earn $14,000 dollars a day and we ended up earning $40,000 a day.
So, the way we want to be positioned is, we got to learn to play the volatility, that’s amongst the most important things we can do. And if we can play the volatility, ie, benefit from strong market and equally benefit from weak market, that will eventually lead to much better results in future.
We’ve just positioned ourselves to benefit every which way, good markets, bad markets, we should be able to exploit the situation.
Despite the heft that cash affords to buy assets, are you conservative?
No boom is good for any commoditized industry because more money is lost in booms than in busts. So, we don’t like a secular boom. We got caught in it ourselves in the boom market of 2003-08. We made multiple mistakes, we don’t wish to repeat those mistakes, we’ve got to be very disciplined in strong markets. There is a saying … when the music is on, you can’t be on the side lines, you’ve got to join the party. But, as nights follows days, things like these can happen again and you lose every bit of discipline. I’m a great believer that eventually you need the volatility rather than a secular bull market.
So, what do you do with the cash?
While ship values have come down by about 7 per cent on an average, we would like to see cheaper price points. Events like this pandemic can happen again, we haven’t even overcome the current pandemic. We just want to be positioned whereby if we buy the assets, that’s got to be so cheap that we can ride very comfortably through these kind of Black Swan events and until we get to those price points we are happy to sit on the cash. Or, we can think of something else to do with the cash, there is always restructuring of capital, as an alternative there is dividends. There are multiple uses of the cash, it just does not have to be steel (buying ships).
What do you mean by shorting the freight market?
When we have a ship, we have multiple options of either trading the vessel what we call in the immediate spot market or fix it on four months, two years or five years charter.
If you fix the ship for two years, effectively you’ve gone short of the market because you have sold freight for two years. For example, had we sold freight a year ago for one year, we would have the missed the big rise in the market that we witnessed in April and May this year.
We would have clearly missed it because we wouldn’t have had the ship. And because our markets can turn so quickly; we had an LPG market on June 27 this year earning $10,000 a day and on July 27, a ship is earning $40,000 a day. If you just think about it, your delta is $30,000 on a 40-day business. that’s an extra $1.2 million or about Rs10 crore cash to your bottom line.
In shipping, we can really massage the transactions in multiple ways and therefore, we are focussed on really building our skills to play that game better than we have in the past. That’s where all our energies are going now.
Your priority as a shipping company is always to buy assets cheap. But, if you don’t, what are the options?
We have 46 ships. we are under no pressure to go and fix the assets for any fixed income business unless we think that’s the right thing to do. In a business like ours, having that level of cash just gives us lots of comfort that we will never be put in a corner where we are taking sub-optimal decisions.
What we don’t wish to do is build up the cash and then misallocate it in terms of capital. It has unfortunately happened to us in the past, we just don’t want to repeat those mistakes again.
Are you sector agnostic for investments?
We are very agnostic to which sector we invest in. But, we will focus on the four sectors where we have currently build up significant skill sets – crude oil, petroleum products, LPG and dry bulk. We are not at this stage thinking of going into a fifth because we really want to be the best there is in the world in these four sectors.
Within these sectors we are agnostic. But, having said that, we would never place a 100:0 bet on any one of these four sectors, even though we believe that we are improving on the way we handle the volatility. So, we have kept internal caps that however bullish we are on a sector, we will not have more than X hundred million dollars exposed to that particular sector.
If we get better at playing volatility, and I hope we will eventually get much better than we have been in the past, we will prefer to buy more of the assets which have a much greater volatility.
For example, very large crude carriers (VLCCs). It’s the most volatile of all asset classes in the tanker segment and if we see the right opportunity, absolutely we will get into that bet.
Would you consider buying companies?
I don’t think so and the reason is because there is always a challenge on cultural fit. We want to preserve our culture to the best we can.