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Great Eastern Shipping Company Ltd
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Good evening, ladies and gentlemen. Thank you for standing by. Welcome to GE Shipping earnings call on declaration of its financial results for the quarter and year ended March 31, 2022. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. G. Shivakumar, CFO at The Great Eastern Shipping Company Limited to start the proceedings. Thank you, and over to you, sir.
Thank you, Aman. Good afternoon, everyone, and welcome to the results conference call for Great Eastern Shipping. Thank you for being here.
Let me first take you through the highlights of the results. We also have Mr. Bharat Sheth, our Managing Director and Deputy Chairman with us and we will be happy to take questions after the presentation. So let's first run through the presentation. So standard disclaimers.
Market is volatile, and we don't know how it's going to pan out. We can give you some views on how the fundamentals are stacking up, but we don't really know how market can pan out. First, let's look at the P&L, and we are looking at the reported financial highlights. We have declared a -- we had declared earlier an interim dividend of INR 4.5 per share. We have now declared -- the Board has now declared another interim dividend of INR 5.40 per share, taking the total dividend declared to INR 9.90 per share for FY '22.
On a reported basis, and again, these are the reported numbers. Those who have been attended these calls in the past know that we also discuss something called normalized numbers, which we believe give a better picture of how the business is doing. So we have a drop in consolidated profit from INR 919 crores to INR 630 crores. The normalized drop is not as much, but we'll come to that in a bit.
And on a stand-alone basis, we have dropped from INR 1,030 crores to INR 812 crores in PAT. But the important thing to focus on always in our business, and the one special characteristic of our business is that it produces very strong cash flows.
So let's look at what has happened with the cash flows during the year, and how we've used it and we've tried to put together a short, simple explanation for what we've done with the cash flows to give you an idea of how much cash is generated. So we're looking at about $140 million of cash generated in the business, of which just under $50 million, and I've looked at all the numbers in dollars because our business is basically in dollars. So about $50 million in net CapEx. This is ships that we bought, dry docks that we did and equipment that we fitted onto our ships, retrofitted, minus the sale proceeds from the ships that we sold during the year. That's $48 million of new investment, in new capacity effectively. We have reduced our debt by $62 million, the gross debt during the year, again, freeing up borrowing capacity for the future.
We've also done 2 returns to shareholders, one in the form of dividends. This includes the final dividend of FY '21 and the first interim of FY '22, which were paid out during FY '22. That's $26 million, about just under INR 100 crores. And last, we -- up to 31st March, we had spent about INR 163 crores, equivalent to about $22 million on the buyback. This is including the buyback tax that we paid. After all this, we drew down cash to the extent of between $10 million and $15 million. This is I'm talking -- I should have clarified, these are stand-alone cash flows. We have drawn down our stand-alone cash balances by between $10 million and $15 million during the year. After having accomplished all this, which you can see that this is about $150 million of uses of cash.
Coming to the normalized results. This is an explanation for the normalized results. Basically, we are stripping out the impact of foreign currency revaluation on loans and current assets and liabilities, which are point-to-point impacts. We have also taken out the impact of the derivatives gains or losses. These derivatives are on our borrowings, which are in rupees and have been swapped into dollars and effectively should be treated as dollar loans.
So on a normalized basis, the difference in performance between last year and this year is not as stock. So you'll see in the stand-alone results have dropped from INR 842 crores to INR 787 crores, so a drop of only about INR 55 crore. And even on a consolidated basis, the drop is only about INR 80 crore between last year and this year, FY '21 and FY '22.
Now what drove these results? And -- so -- okay, sorry, the net asset value, and this has been a big impact. In March '21, the NAV per share was INR 489 on a stand-alone basis. This has gone up very significantly during the year to INR 618 per share. And we'll come to the -- how it's grown later on in the presentation. On a consolidated basis also, it has gone up. There's not much impact on the offshore business -- in the offshore side of things on the NAV. So it has gone up similar to what has gone up on the stand-alone NAV movement.
Looking at the performance, the business performance during the year. You can see that crude tankers and product tankers had a terrible year, probably the worst year in 3 decades, and therefore, earnings, you can see the crude tankers are -- our crude tankers, on average, earned about $13,000 per day less than in the previous year, about 50 -- that's a 50% drop in the rates. And product tankers had a 1/3 drop in the rates. LPG carriers, which tend to be on time charters -- our LPG carriers tend to be on time charter. In any case, the market was sort of similar to where it was in the previous year. So not much change.
Dry bulk has been the highlight for this year. $10,900 on average has gone to $26,900. This despite crude and product carriers forming 60% of our fleet and dry bulk forming only about 30% of our fleet, this outperformance by dry bulk has canceled out the underperformance by the product and crude tankers. And that's why we have produced almost a similar result to the previous year. This, again, sort of underlies the logic in our being in these different sectors because they are able to smooth out the earnings cycles, while also offering opportunities for investment at different points in that cycle.
Just looking at what happened in Q4 versus Q3. Crude tankers picked up a little bit towards the end of Q4 after the Russia, Ukraine conflict started in end of February. So we had slightly stronger earnings. Product tankers were more or less the same as they were in Q3, maybe marginally lower. LPG, of course, around time charter. And dry bulk was significantly lower than it was in Q3. Of course, the first quarter of the calendar year, or Q4 of the financial year is traditionally a very weak period for the dry bulk market. So this is sort of expected.
I mentioned the change in the net asset value, the stand-alone net asset value. Now let's see what went into it. So you started at INR 489 in March '21. The cash profit, which is PAT plus depreciation, and these are rough numbers that I'm talking about. The PAT plus depreciation is about INR 85 per share. So that's built up because that is cash in the bank when we -- the cycle of depreciating actual cash flows.
The fleet value has gone up during the year. So by about $100 million, which when you divide by number of shares, et cetera, works out of about INR 52 per share. Then you have a dividend payout. So we paid out INR 13.5 as dividend between the final dividend of FY '21 and the first interim of FY '22. So that's a negative to the net asset value because it's gone out from the cash balance. And the buyback has contributed about INR 6 per share to the net asset value.
Basically, this is -- we bought back about 42 lakh shares at a discount to the net asset value, which adds value to the remaining shareholders by improving their net asset value because we bought back almost 3% of the equity at a significant discount. And that's how we've reached this NAV of INR 618 in March '22. I want to highlight here that a very significant portion of this increase is that INR 85, which is cash profit, which is actual cash accrual, which has happened from the business.
Just as an update on the buyback. As I mentioned, we -- up to date, we've bought back just under 42 lakh shares at an average price of INR 316.21. We utilized about INR 133 crores in this, which is just under 3% of the equity. We had to pay tax on this buyback, which is about INR 30 crores. And so the remaining amount, which is -- we had allocated and taken a Board approval for a total buyback of INR 225 crores, of which we have spent only INR 132.79 crores, so we have a remaining amount of INR 92.21 crores of buyback approvals. And -- of which we have 2 months more. Our buyback opened on 7th of January 2022. So we have up to July, early July, in which we have to execute the buyback. The maximum price, just in case you need reminding, was INR 333 per share.
Coming to fleet supply. We have -- and we reiterate this. We are at one of the lowest order book-to-fleet ratios. It's at 6.6% for dry bulk, 5% in product tankers. These are historically low order book numbers. And we have mentioned several times in the past, this gives us hope for the future because the supply -- potential supply is limited. Again, the order books are full all the way up, probably up to end of '24. You may get one slot here and there in '24 itself, but even that would be very rare, and it would be very expensive. So it's unlikely that this is going to significantly change for the next 2, 2.5 years.
Asset prices have been high. And so they were already up for tankers, which are the top 2 graphs. And in recent times, they've gone up a little bit more, and so significantly above the levels at which -- a lot of these assets are significantly above the levels at which we are -- which is our comfort level for purchase. But let's see if we get opportunities. Dry bulk, again, because of the markets being very strong, the prices have gone up 40%, 50% in the last year, 1.5 years. While LPG continued to be strong, they hit the bottom about 3, 3.5 years ago and continue to be pretty strong.
Scrapping has been low because of what markets have been doing. Crude tankers and product tankers have seen some scrapping, but still not much. For the whole quarter, it's only less than 0.5% of scrapping. This is, again, possibly because of optimism. Though scrap prices have been very high and, again, hitting historically high levels. Dry bulk has been very little and which is understandable because rates are so firm that there is no real incentive to scrap the ship. You might as well run the ship. If you had to spend money to do a drydock and extend the life, you can do it because the rates justify it.
Coming to the oilfield services business. This is again the same chart that we looked at. There's a large proportion of the fleet, which is very old. There are lots of cold stacked rigs, which may not come back. So 50 rigs have been cold stacked for more than 3 years. And these rigs will find it difficult to come back without spending a lot of money to reactivate them. Similarly, for offshore supply vessels as well. We have quite a few, which have been cold stacked for significant amounts of time.
One thing which is happening is that there has been a gradual improvement in utilizations. We are now getting close to the 70% utilization level, which is the highest we have been for a significant period of time. Just before COVID struck, we were at these numbers -- almost at these numbers, and then it went down significantly again. But now we have crossed those levels. There is a little bit of excitement and activity in the market. We haven't seen significant price changes in recent tenders for rigs. However, there is certainly more activity from the oil companies, especially in the Middle East, for taking in more rigs on contract. They seem to be increasing their level of activities. So these are new requirements which are coming in.
From our point of view, that's Great Ship's point of view, the next rig pricing is in H1 of FY '24. So that's this time next year where our rig comes off contract. We have a rig, which has come off contract now -- which will be coming off contract anytime in the next couple of months. She has already got her next contract for 3 months after this one. So the next pricing actually, we have to worry about in rigs is 12 months from now, which hopefully should get done by the end of this calendar year.
In vessels, we have 4 vessels, which are to be repriced in H1 FY '23, that is before September, and 2 vessels in the second half of FY '23. In recent times, and people who have been following us for some time will know that when the crisis hit and utilizations went down in international markets, we used to operate about 25%, 30% our fleet internationally. This is a vessel fleet. We brought most of them back into India because we were getting contracts in India. This was one market which was -- while the rates were not very lucrative, at least we were getting utilization. So we brought most of our vessels back into India. Recently, we took 1 vessel out into the West African market because markets -- international markets are beginning to look up, pricing is beginning to look up. And we might look at taking out 1 or 2 other vessels as well. One thing we do see is that the level of activity and inquiries for especially the larger, more specialized vessels, is quite strong.
Just a couple of slides on -- these are standard slides showing, how we went up the leverage curve between 2016 and -- FY '16 and FY '19. And how we've come back down. Again, this gives us a lot of headroom for expansion, and we'll have to see whether we get those opportunities for expansion.
This is what has happened to our consolidated net asset value over the years. So we were at about INR 450 per share. In FY '16 and '17, actually, the INR 450 was sort of a holding number because we were not able to get valuations for our offshore assets because the market was really broken. So we have -- so the consolidated NAV has gone up from INR 400 per share over the last 4 years. So this is from March '18 to March '22. It's gone up to INR 679 per share.
Just to reiterate before we close the presentation, we are disciplined buyers. We look to buy only where we can see value. We don't see a value in growth for growth sake. We are careful with our investments, and we are -- we'd like to ensure that we -- any CapEx that we do results in a good return, which has passed our hurdle. We will also have low balance sheet leverage, which will enable us to run a large proportion of our fleet on the spot market, and do time charters only on an opportunistic basis. We have back-tested these.
We are aware that having a strategy of being very disciplined in our price levels could result in large cash holdings for significant periods of time. However, we have back tested this. We have back tested both the purchase model that we follow and spot versus time model that we follow over the past 10, 15 years and found that this is the model that gives best results, and that is what we will be further.
So we found that even holding cash, the cash drag over 2, 3 years from holding excessive cash is usually compensated by the drop in the value of the assets and the ability to buy the ships cheaper. So with that, I come to the end of the presentation, and we are happy to take questions from you.
[Operator Instructions] Our first question is from the line of Himanshu Pathak from Oaktree Capital.
Hello? Am I audible?
Yes.
Yes, sir. You are audible. Please go ahead.
Yes. So my first question was on offshore, okay. In last few years, we have seen a number of consolidation deals, okay, Noble and Maersk, Tidewater and GulfMark, Ensco and Rowan, et cetera. What impact and opportunities do you see operating in the next few years? In last call, we had stated or previously answered you've stated that we want to look at some stability in that market and improvement in offshore business before doing anything on that segment. So what is your current reading? And how are you looking at the market for opportunities?
Yes. I don't know about the merger. Hopefully, the mergers will help to improve pricing as you get less players. Again -- but even if these are leading to improvements in international pricings, what happens in our market may sometime. We may sometimes not follow the international pricing. We hope it will. But in any case, the market seems to be -- at least the slack seems to be getting taken up. And we've been hearing of Saudi Aramco and ADNOC are looking for rigs, several rigs and reports are of maybe 20 to 30 rigs additional requirement, which hopefully will reduce the oversupply of rigs in the market.
And one thing, we are reading that the price of offshore vessels and rigs is increasing with the rates also steadily improving. Any rough estimate, what would have been the increase in ask price for a jackup rig, which is 10 years' old from the bottom in what we are owning?
We've seen -- okay, one thing which has happened is that we've seen several transactions in the last couple of months. And again, these transactions have typically been tailored towards putting them on contract in the Middle East. The problem is that the price points are at least 30% to 40% different and pricing within the same week, okay? So it's very tough to put an estimate of how much the pricing has gone up because it depends on the individual -- sort of individual circumstances. So we had pricing at below $40 million for a rig, we've had pricing at $70 million for a rig as well. The only thing that we can say with certainty is that there is much more volume of transactions, there is much more buying interest than we have seen for quite some time.
And one thing, should you have very clearly stated up to Q4, what happened, okay? But after March, there has been a lot of volatility in the rates, okay? And what we are seeing is smaller vessels has started doing much better, whether it is on crude side or product and even dry bulk. Do you think these smaller vessels doing better will continue for this year? Or you think it will start getting reflected for larger ships and so, let's say, Capesizes on the dry bulk and VLCCs on the offshore tankers side and again the -- so some thoughts on that.
Yes, 1 minute. Let me check if Mr. Bharat Sheth has...
Yes, yes, I'm on the call.
Because he would be...
Hello?
Yes, sir. Could you answer that he's asking about how do we see the performance of the smaller ships, the outperformance of the smaller ships in both dry bulk and tankers. And whether we see that continuing going forward?
Clearly, we don't know whether it will continue or not. But clearly, today it's an outperformance across these asset classes. So let's take crude oil first. You have VLs, you have Suezs, you have Afra. On the nominal supply side, the Afras have seen the least supply growth as compared to the VLs and as compared to the Suezmax tankers. That's number one.
Number two, if you see some of the dislocation that has happened with the Russian oil being supplied into Europe, that's much more of an Afra trade. The VL trade is predominantly a trade emanating from the Middle East and West Africa, and that's not got impacted. So we have seen these spikes in the Afras, which we think, give and take, should remain relatively strong. Suezmaxes had -- soon as the war began, there was a lot of immediate disruptions. The Suezmax has benefited a lot in the first 15 to 30 days. It's now come off a bit, but it can spike again easily and quickly.
The VLs haven't really benefited yet from any of this disruption. But I can't see a situation on a sustained basis where you can have 1 or 2 of the sub-asset classes doing well and 1 particular asset class not doing well. So on a sustained basis, eventually, there will be some level of catch-up either all the 3 sectors will average better than last year or not. Our guess is that it will almost certainly average better than last year.
And even on the dry bulk side or the situation heading that way is...
On the dry bulk side, as you know, China has reduced its import of iron ore, which is -- which, initially, for the first quarter, if you take the Jan-Feb-March data, China imported less iron ore and a little bit less of coal that tended to impact the Cape. The Kamsarmax has predominantly gained from the grain trade, which has been very robust. You've seen what has happened to food prices globally. And the smaller ships, the Supramaxes, the Handymaxes, the Handysize, they all benefit from a multitude of what we call minor bulks. Although the sum total of all these minor bulks now exceeds 1 billion tonnes of cargo per annum. And that we have seen has benefited a lot more export from Indonesia on coal.
As you know, coal suddenly became desired commodity for a lot of people. And recently, we have seen the Capes do a quick catch up because suddenly -- and a lot of you might have read it in the media that India, too, wants to import an extra 15 million to 17 million tonnes of coal. It's all going to come very quickly. And if it has to come quickly in this volume, really, it has to come in Capes. So we've seen the Cape rates also, just from March to now, have gone up 50%, 60%, 70% depending on the day you take.
And one last thing on the asset prices, okay, we have seen the new building prices have increased very dramatically and the crude prices have also increased. So the scrubber-fitted ships, are they getting any advantages? And is it in the asset prices also, are we seeing -- there is a significant difference between eco and non-eco-ship and scrubber fitted, non-scrubber fitted. And if we look at historical facts, okay? Do you think the market is fairly valued, expenses, so let's say, 15-, 20-year track record all the 3 important categories for us, how are you looking at the market now?
As said in multiple calls, we never look at the market, right? Because we don't understand the market. So there's no point looking at something you don't understand. We just are price takers. We play the spot market, and we've seen that in bad markets, you obviously, like last year, we had a pretty tough tanker market, and you've seen where the earnings have been. And now you are benefiting because you have everything spot. So these things all have a way of averaging out. And we will only short trade at elevated price points. Otherwise, we just take each day as it comes.
As far as your question on the scrubber, et cetera, is concerned, the spreads keep changing by the day. They peaked at about -- so the least of the differential was in the second half of 2020, where it dropped to some $30, $40 a tonne. It then widened to $100, then went on to $170, and now it's just shy of $100. So the spreads also keep changing. I think -- so you've got now effectively a 3-tier market. You've got 1 market for eco and scrubber. You've got 1 market for eco non-scrubber. You've got another market for scrubber non-eco, and then, of course, you've got a market for nothing, nothing, no scrubber, no eco.
But eventually, it doesn't matter because everything is on capital, right? So the capital that you pay for top-tier ship is so much more than you pay for a ship, which is -- doesn't have any of these bells and whistles. And what we focus on is just return on capital.
We will move to our next question that is from the line of Archan Pathak from Centra Advisors.
Am I audible?
Yes, you are audible.
Yes. I have been joining this call since past year, and I hope to see your insights and views are always very interesting and helpful to reason to. So thank you for that. And my first question would be regarding the line item of profit and loss on sale of asset, which has been shown in the payments. So has there been any sell-off in the offshore assets?
In the offshore side, we had a vessel which unfortunately, if you recollect last year had a fire and became a total loss. So that asset has now been sold and delivered to a scrap buyer. And the vessel is now, as we speak, is at a scrap -- at one of the beaches where scrapping takes place.
Got it, got it, got it, sir. And secondly, our enabler cost for the issue of debentures normally used to range around INR 100 crores to INR 200 crores. But for this time, we have increased it to INR 1,000 crores. So any specific reason for that?
What is that? Can you repeat that question? I can't -- it's not very audible. Can you repeat that question for me, please?
Sir, I've got that. Yes. His question was the enabling resolution that we do for issue of debentures was usually INR 100 crores to INR 200 crores. This time, it was INR 1,000 crores. Actually, that's wrong. Our enabling resolution was always at INR 1,000 crores. We use to issue in tranches of INR 100 crores to INR 200 crores.
Correct.
Okay, okay. Got it, sir. I might have interpreted wrongly. And lastly, I was going through our details, and I noted that many of our tankers are 2003, 2004 built and very close to picking out the life cycle. So just wanted to get your view over any sort of modernization front. I looked at the asset pricing chart and they are quite used, charts the pricing they are at quite history. We discussed even in the last quarter regarding that with the lower freight rates, but the asset prices is hiking. And we talked about how we are -- how there are challenges that the tanker owners are waiting for price to hike up to a level and utilize spot price and exit the market. So just wanted to get your view over how do you see that now with the rise in the tanker freight rates, which happened with the recent war situation? There could be a slight off in the asset prices and whatever the modernization plan or any plan regarding increasing of fleet size?
So asset values, as we've already -- as the CFO said in one of the graphs you've seen asset values continue to go up for the modern assets as well as for the older assets. Now as far as our modernization program goes, we would love to modernize because we recognize that we have older tanker fleet than we would like. We are okay on dry bulk, and I guess we're okay on gas as well. But on the tanker fleet, we would like to bring that age, the average age of the tanker fleet a few years younger than it currently is.
But the price points are very elevated, and we just think that we are better off eventually, maybe not in the short term, but possibly in the medium to long term, just remaining disciplined and only modernizing the fleet -- even at the cost of maybe losing some ships, we'll only modernize when we think the price points are right.
The next question is from the line of Samraj N from Dwarka Share Brokers Private Limited.
[Technical Difficulty]
Mr. Samraj, use the handset.
You can't hear me. Okay, now?
If you are closer to any speaker device, Samraj, request to please be a little away from that.
Okay. 1 minute. Okay now?
There is still an echo. In the meanwhile, while we check your line, Samraj, we'll move to our next question. That is from the line of Faisal Hawa from H.G Hawa and Co.
So what is our total debt of foreign debt as on date?
So basically, as you know, we have -- the bulk of our debt has been done through bond issuance. So it starts with the rupee debt and the rupee liability, which then gets converted into dollars. So we swap the rupees into dollars on the currency, and consequently, get a benefit on the interest rate. And then we determine whether we are effectively taking that into floating of swap. So I guess, if your question is, what is our total debt? Our net debt is just over INR 700 crores. We are sitting on cash of approximately INR 3,000 crores. So I guess our gross debt is about INR 3,700 crore to INR 3,800 crores. Shiv, would that be right?
Cash debt is only INR 700 crores?
No, that's net debt. So that's debt minus cash is about INR 800 crores. Yes, it's about a little over $100 million, $108 million.
Okay. So $108 million around -- around INR 2,400 crores is what debt.
Sorry, sorry, just hold on for a moment. What is that INR 2,400 crores?
No, no, we had about $108 million on net debt. Yes, that's a little over INR 800 crores.
Net debt is INR 800 crores, and total debt is cash would be INR 3,800 crores?
That is correct, yes.
Okay. So my question now is to Mr. Ravi Sheth. I mean just...
I don't know if Ravi Sheth is on the line.
Okay. So no problem. We used to be a SENSEX company, not many -- at least 2 or 3 decades ago, and almost a bell weather on the stock market. We have survived the last 2, 3 decades. I mean if you were to say only 3 factors which have changed over the last 3 decades, which have resulted in kind of a underperformance of the company, what would be those 3 factors which have changed over the last 3 decades on the industry as well as our company?
So I don't know exactly what the question is. But from the company perspective, I have no idea of SENSEX. I don't follow it. I don't understand it. As far as the company -- what?
This has nothing to do with the SENSEX. What I'm saying is that we used to be a bell-weather company around 3 to 3, 3.5 decades ago. And what within the industry and within the company has changed that now we are way beyond the mainstream companies of India?
Well, I don't know who...
If you were to enumerate only 3 factors.
I don't understand valuation, I must admit because you see these flavors change. And we went through a phase very recently where the greater the cash burn and the greater the losses, the better the valuation you've gotten. And so the only thing we can do is to apologize to you for not producing a cash burn and for producing a profit as opposed to producing losses because that's the thing that seems to get fancy of people.
Having said that, let me refer to the company itself. I think where the big change has come, we were not very good at capital allocation, I guess, about 10, 15 years ago. We significantly improved on it. And if you see -- if you just break up the last 10 years into 2 lots of 5 years, our average return from '12 to '17, which was 7% to 8% has now improved, Shiv, correct me if I'm wrong, but to somewhere around 12% to 15% from '17 to '22.
Yes, 12% to 15%.
So the company has, I believe, gotten much better on capital allocation, which I think will stand us in good stead for time to come. And -- that's the big one change. Values, as I said, I don't understand, because the superior the return, the greater the price to match.
In the latter part of the answer, I got the answer to my question. So basically, you mean to say that for a better part of the last 3 decades, we were not good capital allocators. Now that is constantly changing.
Yes. That's what I believe.
And what is our -- what will be our ROCE and ROE at the end of FY '22?
Yes. So I think it was a little ahead at 12% on reported numbers. And I guess on invested capital, so if you just strip out cash, which we keep for investment opportunities, I think we'll be closer to the high teens, maybe 19% to 20% on invested capital.
And sir, once you feel that this capacity utilization of 70% in the industry moves up to, say, 80%, 82%, you feel a lot of pricing power to come into the hands of the shipping companies? And what is the sense of other shipping companies, who are...
Hang on, you're getting confused. So the 70% utilization is not in shipping. We -- the slide that the CFO showed to you was the capacity utilization in the drilling business. And in the drilling business, which is now at around the 70%, I think as it crosses the 80% and moves closer to the 85%, the pricing power significantly changes from customer to service provider.
Okay. And that time may be quite near?
Well, that time will tell.
Yes. And sir, do you feel that this entire deglobalization, which is now happening, could have a very big effect on shipping rates or shipping companies because, all the time, we may be looking at some shortages in some country or the other, and the spot rates could always be higher.
So we have seen that -- eventually, this deglobalization, whether it's going to work, not work, et cetera, it's too premature to say. Eventually, people will keep producing from countries, which tend to have a lower cost base, be it in terms of capital or taxation or whatever it is, and there will be different sources of demand. That's as far as the consumer is concerned.
Now when you look at other commodities like, let's say, a natural resource, right? I might suddenly say that I want instead of India importing 100-plus million barrels of oil, we should have around 100-plus million barrels of oil and stop importing. That's not going to happen overnight, right? So on natural resources, the challenge so much more than on the consuming side of the transportation business.
The next question is from the line of Samraj N from Dwarka Share Brokers Private Limited.
If you could just take me on the spot -- current spot rates from the Suez right up till the -- this Bulk SUPRAs, I'll be really happy, I really needed for my Excel sheet, Excel.
But I'll tell you, I mean, I'm happy to give it to you, but the piece of advice, in shipping, there is nothing like current because it...
Not in current. Because we have the FFA. I'm quite aware of it in Excel sheet.
Yes. So the best is to be guided by FFA. And FFA changes daily. So just to give you an example on the safe side, the FFA between last week and this week has gone up significantly.
Could you speak a little louder, could you speak a little louder, sir?
Yes. My volume is on maximum. Can you hear me now? I don't know what more I can.
Yes, I can hear you very clearly now. Yes, I can hear you very clearly.
Yes. Now FFA is also -- you should recognize change, as you know, every day, right? And the liquidity in the tanker space in the FFA is not as good as the liquidity in the dry bulk space in the FFA. So for dry bulk business, being guided by FFA is some basis on which you can prepare your Excel sheet. On the tankers because of the lack of liquidity, it's a bit more challenging. And this current -- the only reason -- I'm happy to give you any number you want, but it's only valid for...
Just as a guideline. So we want...
Yes, so let me just complete. So as I said earlier, we are now in multiple asset classes because you have vessels which are eco, scrubber fitted. You have another category, which is eco-non-scrubber. You have a third category, which is scrubber non-eco. And you have a fourth category, which is non-scrubber non-eco, right? There are 4 -- so the same ship, the same ship, if it's in the top category, will have one earning. And if it's in the bottom category, will have a completely different earning, right? So it's very, very...
We just take it for our ships. So that is non-eco, non-scrubber.
Yes. So the bottom of the pile is non-eco, non-scrubber. On the VLCCs in the spot market today, the earnings are negative $5,000 to $7,000 a day. On the Suezmaxes, currently, they are positive between $5,000 and $10,000 a day, depending on where you are. On the Aframaxes, they are somewhere between $15,000 and $30,000 a day, depending on where you are. On the product tankers, the MRs are $20,000 to $30,000, the LR1s are $30,000 to $40,000, the LR2s are $40,000 to $50,000. On the...
A little slow. I didn't get it from the MR. Could you take me from the MR onwards, sir?
Yes. So on the MRs, again, everything is depending on where you are and what position you are in, so on and so forth. I'm only giving you the bottom category, right? Non-eco, non-scrubber.
Correct, correct. Agreed.
So the MRs have a range of $20,000 to $30,000.
Okay.
The LR1s, they're called the LR1s, long range. Yes, these are roughly 74,000 deadweight. So it's like the Panamaxes for the product business. So they vary between $30,000 and $40,000.
Okay.
And the LR2s are varying between $40,000 and $50,000.
$40,000 and $50,000, okay. So that leaves us just with the Kamsars and Supras if you please?
Yes. So the Kamsars currently are again varying between, you can say, $20,000 and $30,000. And the Supras are in a similar range, $20,000 to $30,000.
Right. Okay. So thanks so much for this guideline. Sir, I just wanted to ask you, are we -- I understand that you have back-tested your model for CapEx and all this. But are we being very ultra-cautious because if you see the recent -- of course, these people were in a bit trouble before the rates went up. I'm talking about Scorpio, and they sold off their entire -- almost the entire -- I think, yes, the entire LR1 to Hafnia. And Hafnia purchased it in 1 stroke. And of course, now they have done a leaseback to manage their balance sheet. But -- and I think day before yesterday, Navios has gone in for 4 products, and that also new builds. That is I'm talking about the product tankers for...
They've gone in for LR2 against a long-term factor. But that is not business model. We don't like to do 8- and 10-year charter transaction. Our preference is...
But sir, now...
Hello?
I agree, it is your whole model today rest on being more on the spot now.
Spot market and playing the volatility, the best we can. Sometimes it works in your favor and sometimes it works against you. So it's a very different business model, right? Now on the question of whether we are being overly conservative, I mean my view is, look, in a rising market one will always feel where we being too conservative? Because when you have a rising market at every price point, you can make money. What we have learnt in the past, and it's a mistake we would not like to be repeated, is that long term, and I repeat the word long term, which means in the life, I mean, in a life, who knows what the life of the organization will be, I truly believe that we will be much better served and so will our investors be better served if we are much more disciplined on capital allocation. In the short term, it may be painful.
Sir, just being the devil's advocate again, you see if you -- I'll totally agree with you, when you're talking about the container liner part of the market because, there, the order book is now closing at almost 33%. And there was really a panic buying over there. So I'll leave that out. But if you just see the product side of it that I'm talking about the MRs and the LRs, there the cost advantage, the yield, the freight yields on the capital investment of the ship works absolutely in our favor right now. So why can't we consider product tankers?
If you're going by the going by the current logistics because of the -- going by the current logistics in the Ukraine, Ukraine, et cetera, and refineries shutting down and opening up elsewhere. The -- at least, on the product side, we can consider purchasing a few that would be my humble observation.
No, no, it's a very valid observation, and I'll tell you where the trap lies. It's a death trap. No business I have come across is sustainable at these kind of current deals, right? Now what are the mistakes, one of the mistakes we made in the past is because we got tempted with very strong current deals, which were 40%, 50% on capital. It was obviously there a temptation that we should invest in steel, which has a current yield of 40%. Why keep money in the bank when you're running 1% and 2%, right? That's basically the logic.
Now this was the exact trap that a lot of people fell into when Lehman happened, right? Or even when the virus hit the world, right? So at the time of the pandemic, you think what the product tanks were doing before Russia decided to invade the Ukraine. These product tankers were earning $8,000 and $9,000 a day, right?
Now the death trap is when you get tempted, when yields are this strong. This is -- actually, when yields are -- you should be selling a 40% yield asset, not buying a 40% yield asset. Because you know it's not sustainable. Which business is going to allow you a 2-year payback on a sustained basis?
So -- even at these -- I would say that LR1s at $30,000 to $40,000 and $40,000 to $50,000 is really not that of the lean because we've gone to a very low patch. That is why we are working in systems that they've gone higher.
It is significantly higher than the median.
So what would be the mean according to your model, sir?
About $18,000.
$18,000, okay. I see. Okay. Now I get a point. Yes, fine.
Okay?
Okay. Right, right. But sir, just last question, Mr. Bharat, even going by some of the models, which are getting simulated from the year and the end of this particular calendar year, right up until 2025, '26, they are saying the supply and demand of vessels in almost all categories except containers could be very, very favorable for owners. So I was just still wondering whether we should hold -- keep up to the $18,000-mark or raise the mean a little bit up say, $25,000, $30,000, something like that. We can raise it up for purchasing.
We can raise it to anything you suggest, but by me raising it is not going to change things, right? We have seen what you need. Yes, a nominal supply clearly helps the market. But also, think of what happened. The nominal supply was as nominal when the COVID hit the world and when demand got destroyed. Now think, today, if you see the Jan to April data, China, which is one of the big players on energy imports, their demand is lower.
And if you get another wave or some other thing, we are living in very, very uncertain geopolitical times. So I can raise it to anything I like, but that's not going to help. So all we are saying is, yes, in a rising market, you will get penalized for being overly conservative, and that's why we keep our operating fleet in the spot market, you see, so we at least significantly benefit in the spot market. But I know that only -- we will be left belling the cat if we bought expensive assets and there was an unforeseen event, which then brought markets down. So we don't want to fall into that trap again.
Yes. Just to clarify, that $18,000 is not our number. It is a history. It is not some number that we have put as our cut off or anything. It is the actual history of the market that we are talking about.
Yes.
So we have no role in increasing it to...
No, no, we have nothing to do with it. But look, I'm saying I don't know what the market will be on a Monday morning. If I had a ship to fix today, and if I have a ship to fix on Monday morning, I honestly cannot tell you what rate I'll fix it on Monday. So what is the use of taking any medium? And here, I've just taken out the precise number is $17,000 on the LR1.
The next question is from the line of Samarth Singh from TPF Capital.
Hi, am I audible?
Yes, Samarth. Yes, please go ahead.
Yes.
I just have 2 questions. My first question was, is there any opportunity to purchase assets from any Russian shipping companies who are looking to sell at a discount or in distress?
So number one. we would have to look at whether any of the Russian entities we deal with are they sanctioned, not sanctioned. If they are sanctioned, the answer is no, whatever be the price. And if the entity is not sanctioned, it is something that we could consider. But we've got to be very, very careful because we've got to go through multiple layers of corporate veil to ensure that the end beneficiary is not sanctioned also. So it's not an easy exercise.
Okay. I was referring to, I think there was news of Sovcomflot undergoing a massive tanker sale and...
Yes, we are aware, We are aware of that.
Yes. So would -- is that something that we will be looking at or not?
No. So again, as I said, there are multiple entities involved and we would have to get a sign-off from multiple layers of legal checks and balances before we can answer that question. Because every day is a moving target. And every day, there are new entities getting sanctioned or not sanctioned.
Right. Okay. And just a question on capital allocation. I'm just trying to understand this buyback that we are currently going through. Is it fair to say that we will continue to repurchase the shares as long as the discount to NAV continues up to whatever, I guess, until the 75% promoter shareholding. Is that a fair assumption?
No. So we only look at what is the discount to NAV and at what price point is your NAV, okay? Now when we announced the price, which was INR 333, we believe that the discount to the NAV was excessive. And hence, we announced a price of INR 333. if you ask me, of course, today we can't buy because we've crossed that discount to NAV, although our NAV has gone up, the share price has gone up, so we can't buy. I mean the point is the NAV value of the business also changes every quarter, every 6 months, every year. And we will keep looking at what is the discount to NAV. And ideally, your best allocation is for if the market -- if the shipping market is saying steel is worth a dollar, but the paper market, which is represented by investors, is saying that we think the steel is worth $0.50 on the dollar and not $1, why would we want to pay a $1. You are better served buying paper at $0.50, right, or $0.60.
Right, right. I guess my question was...
So earlier, people said, why don't you buy a ship. But if I buy a ship for $1, the investors are saying, it's not worth $1. It's worth $0.60. So how can the same investors say buy a ship?
Right. No, I agree. I guess my question was 1 year from now, if the NAV, if the discount on NAV is excessive again, would you institute another buyback?
Yes. So it will depend on -- our window will only open a year from now, or a year from 2 months from now, so 14 months from now. And we will look at what is the need -- so we will always -- our priority will always be to buy steel, okay? Paper -- to buying paper is second priority to buying steel. So let's say my paper is cheap, my steel is cheap, my preference would be to buy steel. But if my steel is expensive, but my paper remains cheap, and I have surplus capital, then I'll buy paper.
The next question is from the line of Vaibhav Badjatya from Honesty and Integrity Investment.
Yes. Can you hear me?
Yes.
Yes, we can.
Yes. So just one question. whatever has happened on the Russia, in that term, if we take the situation prewar, whatever was the crude and the refined products export from Russia, if we were to assume that all these products will get redirected to, say, China and India instead of Europe, what would be the demand side impact includes the increase in ton-mile first. Then second, on the supply side, if -- so how much is the Russian supply of ship is what I wanted to understand. So I just wanted to say what the demand and supply side impact so that we can make a judgement of what is going to happen.
I think all that we can say is that if what Europe is importing currently from Russia is imported for -- from areas which are further away, like, for example, the Persian Gulf, or from China, nonpipeline from China, et cetera, that -- obviously that supports the market and it adds to ton-mile.
The question also is that, that particular product has got to be in surplus. Because if somebody wants product A and that product A is not available in the market, then that demand remains unsatisfied until somebody can supply the product A. So it's not -- it's something that has to be dynamically looked at and managed, and that's what we are doing in order to try and play the spot market and determine what we think is to happen today and tomorrow, and do we fix a ship today, do we fix it tomorrow, et cetera. But it's -- again, these are very, very...
I was not talking from the bulk up market but I'm talking from the energy market.
I'm also talking about energy market. I'm talking about the energy market. So I look at petroleum products. I look at crude oil, I look at gas, all the energy-related markets, coal is an energy-related market. Looking at all these commodities, everything will hinge on, where is the surplus capacity. From where can it be sourced. And that is something that we'll never have any immediate answer.
That's actually the one part of the equation in the sense that how Europe is going to alternatively source it. But -- and that will have incremental demand in fact. But what I was asking was another part of the impact of Russian supply of -- to some extent, it will be reduced, but it will be available. And if it gets -- due to geopolitical reasons, if it gets diverted towards China and India, then what would be the ton-mile in that? Because that supply is in front of us right now. That will be available maybe...
Sorry, what will be available, you mean the Russian ship?
Russian supply of crude oil, and whatever refined oil or refined products.
Yes. So for the Russian supply crude oil into China, there is the pipeline, which has been laid multiple years ago. So a lot of the import from Russia into China is happening on the pipeline. Of course, there is also a trade from Russia to China on ships. Some of it is carried on Chinese ships. Some of it is carried on Russian ships and some of it's carried on third-party ships. So that trade, at the moment -- but some of that trade is short haul. So if you take there's a Russian port in the Pacific called Kozmino and Kozmino to China is a very short haul trade. So again, it depends, is it the Baltic, is it the Black Sea, is it Asia Pacific? None of these things are easy to answer. I mean unless one truly get deep into the business, it's difficult to answer and even more difficult to understand.
Understood.
But we are only focusing on energy, got to think of the grain market as well because between Russia and Ukraine, I think they were approximately 30% of the grain market. And is that easily -- can that easily be sourced from other grain growing areas? I don't know. These are very, very difficult questions to answer.
Right. Right. Yes, that's what -- was it -- the supply would be there with Russia because then there's no alternate. So I think it would be just the redistribution of who is supplying to who rather than Russia supply going off the market completely because practically that's not feasible and that is why what I could understand impact from the China. But I understand. It's too much.
Our next question is from the line of Amit Khetan from Laburnum Capital.
Sir, in one of your earlier calls, you -- I believe you had indicated that you expect product tankers to lead the recovery. And if you look at what has happened over the last couple of months, there seems to be significant improvement there. So in your opinion, has the cycle finally turned, or is this a short-term phenomenon?
Again, I would hate to really stick my neck out on this because these -- again, one thing we must all understand, whether it's on this call or any subsequent call that these markets are determined by events. And there are certain events that have a bigger impact, there are certain events that have a less bigger impact. Now the longer the disruption that takes place of cargoes moving into Europe and other destinations that either to win from Russia, if there is a lot of disruption there and there is cargo movement, then logically, you should get the strength in the market continuing.
Having said that, we are also hearing, right, this word called stagflation. And whether the demand for certain commodities is just going to get reduced because of inflationary pressures that the consumer is feeling or whether the inflationary pressure means there are some places where the demand will reduce, you're also getting issues like China where lots of cities are in complete lockdown. The demand for oil has come off, and these are important consumers of energy. So there are so many moving parts that are playing simultaneously that it becomes extremely, extremely difficult to say that this is going to be sustained or not sustained a rally. I just don't know, and I want to be honest about it.
Our next question is from the line of Samraj N from Dwarka Share Brokers.
We will move to our next question that is from the line of Himanshu Pathak from Oaktree Capital.
Yes. I had one question. When you replied that the market has become multi-tiered to eco, non-eco and scrubber, non-scrubber the combination, how different are the rates between the base, which is non-eco, non-scrubber and eco and its scrubber ship you are able to get? And again, the asset prices, how different are they even within 1 class, are the asset prices significantly different? And the rates are also significantly different and are people ready to pay for more -- less polluting ships more 2%, 3% or 4% higher.
No. The market is...
Eco ship versus a non-eco ship.
Yes. See, the rate is the same. What happens is when -- suppose I have a vessel that is eco and a colleague of mine has a vessel that is non-eco, on the same rate, my eco ship makes me more money than my colleague's ship, which is non-eco, right? Having said that, you've got to remember that as far as the customer is concerned, he's paying you in x dollars per tonne, right? So he is not necessarily going to pay you unless now when you convert all that into time charter rates. So first, I'm discussing just simple voyage calculations. Then when you go into time charter, obviously, the customer does the same calculation as you saying, look, if I take in a vessel on time charter and I've got an eco ship, this is what I burn in terms of fuel. And so I don't mind paying $2,000 a day more. But remember that, that asset is also that much more in capital, right?
So at the end of the calculations, it is -- whether eco scrubber-fitted ship produces a superior return to capital to a vessel that is non-eco, non-scrubber depends on a multitude of factors and not just eco and scrubber. It depends whether ship -- if you are playing ships in the spot market. Now obviously, the better the ship in terms of eco and scrubber, the easier it is to market, especially if you want to fix up for 2 years or 3 years or 5 years. Many owners like to do. But that's not the game we play. In the spot market, it doesn't make much of a difference.
Okay. And is the difference similar between single hull and double hull it was like in early 2000s?
No, no. It varies. There's nothing standard differential because today, say, the scrubber differential, I think I said it to one of the earlier speakers, that differential now is down to $85. It was $100 a few weeks ago. Prior to that, it was -- it peaked at $180 in the immediate cycle. In 2020, it was down to only $30. So that is also changing all the time. The eco is a lot more constant, but the scrubber benefit varies depending on the differential. And these differentials like any other commodity are changing all the time.
So the FX prices are also very volatile between the scrubber ship versus ecos?
Asset prices are volatile per se. Now some people will prefer a scrubber ship. Some people may not prefer a scrubber ship. So if you take, for example -- I'll give you a simple example. Take the Indian PSUs, right? They say we will not pay you any premium for the scrubber. So if I have a scrubber ship, and if I put it into an Indian trade, am I going to make any money from the fact that I have a scrubber? Answer is no, I will not.
We have the next question from the line of Samraj N.
Can you hear me, sir?
Yes.
So Mr. Bharat, I just wanted to ask you whether you or management subscribes to the super cycle model, say, between end of calendar year '22 right up to say, '26, '27 because of the reasons of EEXI, CII and the yard slots not there, no one knowing, which is going to be the new design as far as fuel and propulsion is concerned. So don't -- do you expect a squeeze in those years? And then what probably could be the -- just your hypothesis on the freight rates.
I have said often enough. I have no hypotheses on the freight rate. And I don't know what will be the impact of EEXI, CII, new types of fuel. I just don't know. So I don't want to fabricate something when I don't know. All we can tell you is that there is going to be a lot of upheaval. There's going to be a lot of uncertainty. And traditionally, whenever there have been upheaval and there has been uncertainty, it has tended to benefit shipowners.
Okay. Great. And that would be the ideal condition for you because you will be getting a volatility there?
Well, nothing is ideal or not ideal. We -- as I've said, I think maybe 5, 6, 8 quarters ago, a bad market is good for us as well. A good market is also good for us. So we are positioned where we can benefit from a bad market, hopefully, by getting cheaper assets to expand. We benefit from a good market because we build up more cash because of the operating leverage. We run a very high operating leverage. We are very conservatively leveraged on the balance sheet, we are highly leveraged on revenue.
Our next question is from the line of Amit Khetan from Laburnum Capital.
We were operating largely on the spot market on the tanker side. Have we increased our time charter exposure over the last couple of months, or have time charters not moved that much as the spot rate?
The time charter, so we have increased it marginally. Out of 17 product tankers, for example, we have time chartered out, let's say, for the next 6 to 9 months, a little over 2 ships, right? Out of the 17 that we operate in the spot market. So if the answer is -- have you time chartered out? Answer is yes, we have at, of course, numbers that were meaningfully higher than the average of last year. Will we time charter out more? It will again vary on what the rates we get. So we are always assessing it. And we would not like to time charter out everything, nor would we -- in bad markets, we are happy to run everything spot. But in strong markets, I don't think we are happy to charter everything out.
Got it. And lastly, if you could provide some commentary in terms of how has your strategy changed for the different segments as a result of the war? Are you -- you would have done some situation or scenario analysis. So any -- what's your sense of how it's going to impact the industry? And if there has been any change at your end in terms of how you are thinking of the different segments?
No, we are not, we are not thinking at all of changing our strategy, which has played out pretty well, let's say, over the last 5 to 7 years, 6 years. So if something is playing out well, you might will stick to it.
Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Ms. Anjali Kumar for closing comments. Thank you, and over to you, ma'am.
Thank you very much. And this was a rather engaging discussion we have today. So thank you to everybody who participated. And as usual, this -- the transcript and the audio link of this call will be up on our website in the next couple of days. And also, please feel free to reach out to our team at any time that you like. Thank you so much, everybody.
Thank you.
Thank you very much. Thank you. Ladies and gentlemen, on behalf of The Great Eastern Shipping Company Limited, that concludes today's call. Thank you all for joining us, and you may now disconnect your lines.