High Operating Costs Put Shipping Firms In The Dock

INDUSTRY MONITOR

The Indian shipping industry has posted a 8.2 per cent rise in operating earnings last fiscal defying falling freight rates.

However, net profit of the industry declined by 24.4 per cent to Rs 471.8 crore (Rs 623.9 crore) due to high operating cost and tax burden.

The maximum alternate tax (MAT) introduced in the 1996-97 Budget had affected the profitability of the shipping sector.

The cumulative effect of MAT coupled with the eight-year limit placed on the carry forward of unabsorbed depreciation translates into bad weather for the shipping industry.

There is also discrimination in the case of depreciation allowed under the Income Tax Act. This is because ships are allowed a depreciation of 20 per cent on written down value (WDV) method as against other modes of transport that get 40 per cent depreciation on written down value.

 

Indian shipping companies operate at relatively higher margins around 30-35 per cent of operating profit margins (OPM) than their foreign counter parts (around 25-30 per cent of OPM).

This disparity arises primarily due to the predominant presence of coastal and offshore shipping vessels in the Indian fleet compared to the international companies that have a low proportion of coastal shipping business.

The Indian shipping companies also suffer from a shortage of skilled manpower because they pay about 25-30 per cent less than their foreign counterparts.

After the training, 30 to 40 per cent of employees set sail for greener pastures.The state-owned Shipping Corporation of India (SCI) earns nearly 70 per cent of its revenue from the bulk tankers division, 27 per cent from linear division and nearly three per cent from the offshore division. SCI has a joint venture with G P Shipping of Thailand to tap the booming market in the South-East Asian region. Operating margins in the shipping industry were down recently compared to earlier years thanks to the high operating costs.

Operating profit margins of the select twelve companies were down to 36.1 per cent (39.3 per cent), gross profit margin to 26 per cent (29.4 per cent) and net profit margin to 12 per cent (16.9 per cent).

Average earning per share of these companies fell to Rs 5.36 from Rs 7.09 in the previous year.

The domestic shipping sector has not grown at a desirable pace because of constraining government policies and lower limits for external commercial borrowings.

Volatility in the business has forced shipping companies to diversify into other businesses to offset risks. The preferred routes are commodity trading and real estate.

Great Eastern Shipping Company (Gesco), one of the oldest shipping companies in India, derives more than 40 per cent of its total revenues through other business. For the year-ended March 1997, Gesco reported a fall of 10.5 per cent in the net profit to Rs 136.4 crore (Rs 152.4 crore), mainly because of slack real estate market in Mumbai and Bangalore.

The company has a noteworthy presence in real estate business. Profit from sale of ship was lower by Rs 24.3 crore as the company sold only one ship in 1996-97 as against five in 1995-96.

The company added two product tankers and a gas carrier to its fleet aggregating a total value of Rs 22.6 crore.

In terms of operational profitability, South India Shipping Corporation (Sisco) has the highest operating profit margin. Sisco posted a rise of 12 per cent in total income to Rs 183.6 crore (Rs 163.8 crore) and a 13 per cent rise in freight earnings. Yet net profit was down by 52.6 per cent to Rs 19.4 crore (Rs 40.9 crore).

Essar shipping registered a fall in operational income by 11.6 per cent to Rs 335.7 crore (Rs 379.6 crore) and net profit was down by 28.9 per cent to Rs 42.5 crore (Rs 59.7 crore), including surplus on sale of vessels of Rs 10.2 crore for the year to March 1997.

Sisco and Essar Shipping, both under the flagship of Essar group have approved in principle the proposal to merge the two companies, and the current accounting year has been extended to eighteen months ended September 1997. This decision has been considered beneficial to both the companies in view of the synergy between the companies both being in the same line of business and ability to achieve further economics of scale.

The merged entity would be in better position to take full advantage of the liberalisation of the Indian economy especially as it relates to the shipping and ports sector.

The government of India has recently classified investments in ports and terminals as high priority infrastructure sector extending several incentives for the development.

Government is trying to give incentives to the industry in the form of low interest loans, subsidy for shipbuilding at the countrys shipyard among others.

In a recent announcement the government proposed to raise the subsidy for shipyards from 20 per cent to 30 per cent which awaits clearance from the Cabinet Committee on Economic Affairs.

Indian shipping has begun to lose its share in the overseas trade. The share declined from 35 per cent in 1992-93 to 24 per cent in 1995-96.