Corporates 

Transportation 
India 
Indian Shipping Outlook 2010 
Special Report  Not Smooth Sailing 

Ratings  Summary 
National Sector Coverage Fitch Ratings takes a negative outlook on the Indian shipping industry in 2010. The
Essar Shipping Ports and F2+(ind) sector is closely linked to trends in global trade, and a weak demand/supply
Logistics Ltd
Varun Shipping Company A(ind)/F1(ind) scenario has led to increased competition — and consequently low freight rates.
Limited Assets acquired in the last two to three years (and hence at peak prices) are now at
Pratibha Shipping Company BBB(ind) 
Limited
very low yields — at times below break‐even points. Companies with long‐term
contracts have been shielded to some extent from the sharp decline. However,
Outlooks  these contracts generally have a tenor of around one year, and it is likely that
charter rates will see some reduction upon renewal.
Varun Shipping Company Negative
Limited The industry is plagued by excess capacity across the various sectors — tankers,
Pratibha Shipping Company Stable  bulk carriers and container ships — and declining freight/charter rates. Fitch
Limited
expects rates to remain low in 2010, and this will be reflected in ship valuations.
The fall in ship prices may increase loan‐to‐value (LTV) ratios, and may require
Analysts  companies to increase their equity contribution or provide additional assets as
Vinay Khare collateral. The liquidity and leverage position of some of the companies are already
+91 22 4000 1783
vinay.khare@fitchratings.com
stretched, and any additional collateral requirement from banks may lead to
downward pressure on the ratings.
Tahera Kachwalla
+91 22 4000 1705 Companies are faced with a difficult choice. While liquidity constraints entail a
tahera.kachwalla@fitchratings.com
postponement of capex, falling ship prices present an attractive opportunity to
Nikhil Gupta increase the fleet size. Companies with committed capex are in a difficult spot;
+91 22 4000 1732 with high prices contracted to acquire the vessels, the companies are now not in a
Nikhil.gupta@fitchratings.com 
position to deploy them at attractive freight rates. Owing to cabotage, the coastal
shipping is still protected to some extent, but with development of the Indian ports
Related Research the competition from international vessels is set to intensify in the medium term.
· Asian Shipping: Outlook 2010
(January 2010) The agency expects liquidity and leverage to remain stressed in 2010, with margin
pressures and stretched balance sheets. 

Indian Shipping in the Global Context 

Demand for Indian shipping is going to remain subdued in 2010 and 2011 due to the
decline in overall global trade volumes. Although there has been a number of order
cancellations for new ships, there will still be far more ships coming on to the
water than those going to the breaking yards. With global trade volumes expected
to be range‐bound, charter rates will be kept low — and will add to margin pressure.

Freight Rates Remaining Depressed

Since March 2009, there have been significant improvements in freight rates —
including very large cargo carriers (VLCCs) and Aframax tankers. But despite this,
rates are significantly lower than their historical highs in 2008.
The offshore supply vessel segment — which had looked attractive at the time when
crude oil touched its all‐time high in September‐October 2008 — faced under‐
utilisation in H209 and H110 owing to reduced spending in exploration activities.
Fitch expects supply vessels to stabilise along with crude oil rates, however the
margins in this business will remain under pressure owing to excess supply in
offshore supply vessels in 2010 and 2011.
Varun Shipping Company Limited (Varun, ‘A(ind)’/Negative) will indeed face margin
pressures after increasing capacity in this segment. Essar Shipping Ports & Logistics
Ltd (ESPL, ‘F2+(ind)’) has a presence in this sector through its oil rigs — with 12 

www.fitchratings.com  15 February 2010 
 Corporates
land rigs and one semi‐submersible rig, and is planning to expand its oil rig fleet
with deliveries of new rigs in financial years 2011 and 2012 (FY11 and FY12, ending
March 2011 and March 2012, respectively).

Freight Rates
VLCC USD 000/day (LHS) Aframax (points) (LHS) Baltic dry index (RHS)
(USD 000) (Points)
350 11,000
300 9,500
250 8,000
200 6,500
150 5,000
100 3,500
50 2,000
0 500
Jan 08 Jul 08 Jan 09 Aug 09 Feb 10

Source: CMIE and Bloomberg

High Leverage and Stretched Liquidity

In FY08, companies conducted significant capex when charter rates were touching new
highs virtually every day. Varun bought its entire anchor handling, tug and supply
vessels (AHTS) fleet during the time when charter rates were almost at their peak.
Similarly, ESPL set forth a huge capex plan — to increase its shipping fleet size from 1.4
million deadweight tonnage (DWT) at end‐December 2009 to 2.4 million DWT by end‐
March 2012; delivery of two jack‐up rigs in 2011; and plans to expand its terminal
capacity by around 140 million tonnes per annum (mtpa) by 2013.
Charter rates have significantly declined, and so has the value of shipping vessels.
This has led to shrinkage of banks’ collateral margins, as there has been no instance
of a bank asking any covered company to provide additional collateral. Given the
stretched liquidity of the shipping companies, if such a situation arises it could
increase the downward pressure on the ratings.
Long‐Term Contracts
Long‐term charter contracts have reduced volatility to some extent, and provide
some revenue visibility. In FY08, shipping companies obtained better returns in the
spot market, owing to the rising charter rates. Subsequently, however, with the fall
and rise in volatility of the charter rates, shipping companies are now preferring
long‐term contracts to hedge the risk.
Pratibha Shipping Company Limited (Pratibha, ‘BBB(ind)’/Stable) and Varun have
contracts mainly with public sector units like Indian Oil Corporation Ltd (IOCL,
‘AAA(ind)’/Negative) and Bharat Petroleum Corporation Limited (BPCL), while ESPL
has contracts with the Essar group companies — apart from Steel Authority of India
Limited (SAIL, ‘AAA(ind)’/Stable/‘F1+(ind)’) and Baoshan Iron & Steel Co. Ltd
(Baosteel, ‘A‐’/Stable/‘F2’).
Pratibha derives 100% of its revenue from time charter, Varun about 65%, and ESPL
about 80%, with contracts generally set for a one‐year term. However, with the
significant volatility over the past 15‐18 months, there have been downward
revisions in the new contracts signed. Moreover, the vessel‐hiring companies are
reluctant to enter into longer‐term contracts with shipping companies owing to the
expectation that the rates are going to remain low. Fitch feels that the downward
pressure on contract renewals will continue in FY11 in the tankers and offshore
segments.

Indian Ports – Constraints and Natural Barriers

Since 2008, there has been a decline in traffic handled — in contrast with the
growth in tonnage capacity and port handling capacity. Fitch expects traffic

Indian Shipping Outlook 2010

February 2010  2 
 Corporates
volumes to remain range‐bound in FY10 and FY11. Moreover, the gross tonnage
remained flat during this period, and remained around the 9.3 million‐9.4 million
tonne range at December 2009.

Indian Ports ‐ Key Metrics

Traffic handled (LHS) Port capacity (LHS) Tonnage (RHS)
(MMT) (MGT)
650 10.0
600 9.5
550 9.0
8.5
500
8.0
450
7.5
400 7.0
350 6.5
300 6.0
2004 2005 2006 2007 2008 2009 Dec 09

Dec 09 traffic handled is annualised

Source: Ministry of Shipping, Govt. of India

Modernisation may Lead to a Fall in Barriers

The modernisation of Indian ports has led to an increase in competition from the
international vessels at the country’s domestic ports. Indian shippers had previously
been able to afford to keep smaller vessels, as the larger vessels were unable to
drop anchor at most ports due to limited depth. This had provided a shield for
Indian companies which maintained a fleet of smaller vessels. However, with
modernisation, larger ships can now enter some Indian ports, and companies will
have to modify their fleet portfolio accordingly.
This trend was particularly notable in the case of Varun, which has a large market
share of Indian gas transport. India now has a very large gas carrier (VLGC) terminal,
and Varun bought a VLGC in FY08 to match its requirement — while Fitch expects
that it may face completion from FY11 as global ships will be able to service Indian
ports.

Cabotage
Indian‐flagged ships continue to get the first right of refusal for coastal shipping
requirements, but the competition is set to increase with modern ports as more
vessels will now qualify for bidding for domestic routes as well. Varun gets the
benefit when bidding for the liquefied petroleum gas (LPG) transport and offshore
supply facility for Indian public sector units. However, similar clauses are there in
some other countries as well, and Varun has had to form a JV in Indonesia to enter
its coastal market. 

Capex Dilemma 
A Necessary Evil
About half of the cargo ships under the Indian flag are due to be decommissioned in
2010, due to the International Maritime Organisation’s (IMO) directive to replace
the single‐hull ships with double‐hulls — and also on account of the tightening of
emission norms. The older age of ships is also a factor contributing to the necessity
for further capex. The average age of Varun’s fleet is 15 years, Pratibha’s 22 years,
and ESTL’s 14.7 years.
Declining global trade and freight rates has forced many ship‐owners in advanced
countries to go for a distressed sale of their commissioned vessels — as well as
those under construction — thereby opening attractive opportunities for buyers.
The price of vessels is significantly lower than at the peak of the current cycle, due
to reduced demand and lower freight rates.

Indian Shipping Outlook 2010

February 2010  3 
 Corporates
Opportune Time to Buy Vessels
Shipping companies with the ability to acquire new vessels can reduce average
break‐even operating costs by adding new vessels to their fleet at lower costs, and
phasing out the older vessels. But most of the Indian companies have limited room
to purchase new vessels, due to the paucity of availability of funds — and the
reluctance of banks to lend to this sector.
However, companies like Varun and ESPL are highly levered, and may therefore not
be in a position to capitalise on this opportunity. Varun has postponed its capex
plan to purchase a multi‐platform supply vessel (MPSV), given the pressure on
utilisation of its existing fleet of offshore supply vessels. Pratibha has some room to
buy a vessel, but this can lead to increased leverage given its smaller revenue base.
A large number of new vessels are touching the water in 2010, which will have
lower valuations and operating costs than the existing fleet. This new fleet can out‐
compete an older fleet — owing to lower break‐even costs — and will increase the
margin pressures in the industry. Order cancellations/postponements, and the
phasing‐out of single‐hull vessels, have to some extent staggered the availability of
excess capacity, but the global shipping market is bound to face excess supply over
the medium term.

Key Metrics
Essar Shipping Ports and Varun Shipping Pratibha Shipping
Company Logistics Ltd Company Limited Company Limited
FY09 financials
Revenue (INRm) 18,424 8,508 2,837
Net debt (INRm) 29,933 21,307 2,852
Net debt/EBITDA (x) 8.0 4.0 1.8
EBITDA margin (%) 21.00 58.00 57.10
EBITDA/interest (x) 1.0 4.0 5.0
Debt/capitalisation (%) 47.00 70.00 60.00
Key operating highlights
Issues High committed capex and High leverage and Age profile of vessels
high leverage pressure on margins and business
concentration
Comforts Diversified business Diversified presence in Committed contracts
(shipping, oil rigs and oil gas tankers, crude and comfortable
terminal) and committed tankers and offshore leverage position
contracts supply vessels
Oil terminal: the terminal is
capable of handling crude
capacity of 27mmtpa, and
for other petroleum products
with a capacity of up to
Fleet of 20 vessels,
6.5mmtpa
comprising 10 LPG
Shipping: 25 vessels, and 12 9 vessels ‐ crude
Fleet/capacity carriers, 3 crude oil
vessels are on order, with an carriers
tankers and 7 AHTS
expected commitment of
vessels
USD0.6bn
Rigs 13 onshore rigs and one
super‐specialty semi‐
submersible offshore rig; 2
new jack‐up rigs on order
Average age (on DWT 14.7 14.6 22.7
basis)
Total fleet DWT 658,380 1,400,000 52,123
Source: Fitch

Indian Shipping Outlook 2010

February 2010  4 
 Corporates

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Indian Shipping Outlook 2010

February 2010  5