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Varun Shipping Company Ltd.

BSE: 500465 Sector: Infrastructure
NSE: VARUNSHIP ISIN Code: INE702A01013
BSE 00:00 | 04 Mar Varun Shipping Company Ltd
NSE 05:30 | 01 Jan Varun Shipping Company Ltd
OPEN 4.55
PREVIOUS CLOSE 4.53
VOLUME 149436
52-Week high 4.74
52-Week low 0.00
P/E
Mkt Cap.(Rs cr) 68
Buy Price 4.53
Buy Qty 2179.00
Sell Price 4.64
Sell Qty 1500.00
OPEN 4.55
CLOSE 4.53
VOLUME 149436
52-Week high 4.74
52-Week low 0.00
P/E
Mkt Cap.(Rs cr) 68
Buy Price 4.53
Buy Qty 2179.00
Sell Price 4.64
Sell Qty 1500.00

Varun Shipping Company Ltd. (VARUNSHIP) - Director Report

Company director report

Your Directors have pleasure in presenting the Forty-first Annual Report together withthe audited statements of account of the Company for the 18 months period ended 30thSeptember, 2012.

(Figures in millions of Rupees)

18 months period ended 30.09.2012 Previous Year ended 31.03.2011
PROFIT BEFORE TAX 377.27 168.22
Less: Provision for Taxation
Current Tax 17.50 33.52
Excess provision of Income-tax for prior years written back (23.88) (12.78)
PROFIT AFTER TAX 383.65 147.48
Add: Surplus brought forward from previous year 942.92 934.92
Amount available for appropriation 1,326.57 1,082.40

Your Directors have recommended payment of dividend of Rs. 0.50 per equity share forthe 18 months period ended 30th September, 2012, which will absorb Rs. 75.00 million.Additional amount of Rs. 12.17 million will be absorbed towards dividend distribution tax.After the above appropriations, your Directors propose to carry forward a balance of Rs.1,239.40 million in the Profit and Loss Account.

Freight and charter hire income for the 18 months period ended 30th September, 2012 wasRs. 4,655.02 million compared to Rs. 4,914.27 million for the year ended 31st March, 2011.Profit before tax was Rs. 375.27 million for the 18 months period ended 30th September,2012 as against Rs. 168.22 million during the year ended 31st March, 2011 . Net profitafter tax was Rs. 383.65 million for the 1 8 months period ended 30th September, 2012 asagainst Rs. 147.48 million during the year ended 31st March, 2011.

During the 18 months period ended 30th September, 2012, Company sold its AHTS vesselSuvarna and Amba Bhargavi on Bareboat Charter cum Demise (BBCD) basis to Varun CyprusLimited, Cyprus and Varun Asia Pte. Ltd., Singapore respectively and thereaftertransferred the ownership of the vessels to the said companies. Further, the ownership ofthe vessels Amba Bhakti and Amba Bhavanee sold earlier on BBCD basis was transferred toVarun Asia Pte. Ltd., Singapore and the ownership of AHTS vessels Subhiksha and Sudakshasold earlier on BBCD basis was transferred to Varun Cyprus Limited, Cyprus. The Companyhas also sold its AHTS vessels Subhadra and Suchandra to Varun Cyprus Limited. Due toflexibility of crewing under foreign flag and financing and fiscal benefits available tocompanies incorporated overseas, the subsidiaries/associate companies overseas have beenable to obtain long-term low cost financing and long-term contracts/employment for thevessels acquired by them. The sale has also enabled the Company to reduce its debt fromRs. 27,036.5 million as on 31st March, 2011 to Rs. 13,434.7 million as on 30th September,2012.

The Company together with its associates is the 5th largest in the world in terms ofnumber of fully refrigerated LPG carriers and 7th largest in the world in terms of cbm,i.e. cargo carrying capacity under 10,000 + cbm category. The LPG carrier fleet presentlyowned and/or operated by the Company is the largest in India in terms of both fleet sizeand cargo carrying capacity.

With a view to realign businesses and increase focus on individual growth strategies ofeach business, the Company together with other companies has proposed to rearrange itsbusinesses by segregating its traditional shipping business, ship management (technicaland commercial management) and shipping investment business (presently confined to holdinginvestment in group companies) into separate entities through a Composite Scheme ofArrangement and Amalgamation (the "Scheme") under the provisions of theCompanies Act, 1956 thereby resulting in enhancement of business prospects andshareholder's value. The Company has received approval of Competition Commission of Indiaand in-principle approvals from Bombay Stock Exchange Limited and National Stock Exchangeof India Limited for the said Scheme. The necessary application has also been made to theHon'ble High Court of Judicature at Bombay for approval of the said Scheme.

During the period under review, following companies became wholly owned subsidiarycompanies of the Company:

Varun Gas Infrastructure Limited - the Company holds 1,000,000 equity shares of Rs. 10each.

Varun Global Private Limited - the Company holds 100,000 equity shares of Rs. 1 each.

Varun Resources Private Limited - the Company holds 150,007,773 equity shares of Rs. 1each.

Further, Varun Asia Pte. Ltd., Singapore was a wholly owned subsidiary of the Companyfor the period from 3rd April, 2012 to 28th September, 2012 and is now an associate of theCompany.

Further, Varun Cyprus Limited, Cyprus became a wholly owned subsidiary of the Companyon 15th December, 2011 - the Company holds 1,000 equity shares of US$ 1 each.

The consolidated financial statements presented by the Company include financialinformation of its subsidiaries prepared in compliance with applicable AccountingStandards. The Ministry of Corporate Affairs, Government of India vide its Circular No.51/12/2007-CL-III dated 8th February, 2011 has granted general exemption under Section212(8) of the Companies Act, 1956 from attaching the balance sheet, profit and lossaccount and other documents of the subsidiary companies to the balance sheet of theCompany, provided certain conditions are fulfilled. Accordingly, annual accounts of thesubsidiary companies and the related detailed information will be made available to theCompany and subsidiary companies' shareholders seeking such information at any point oftime. The annual accounts of the subsidiary companies will also be kept for inspection byany shareholder at Company's Registered Office in Mumbai and that of the subsidiarycompanies concerned.

Details of subsidiaries of the Company are covered in this Annual Report.

Management Discussion and Analysis :

(a) Industry Structure and Development :

Transportation by sea is the leading and also most preferred mode of transportation theworld over. The international shipping industry transports hydrocarbons and bulkcommodities in wet bulk, dry bulk, liquefied gas, bulk chemicals and container sectors.Further, specialized vessels are also used to carry passengers, automobiles and projectcargoes the world over. In addition thereto, offshore support vessels are used to provideservices to offshore oil and gas exploration and production industry. The Company ownsand/or operates a diversified fleet of 20 vessels, in the oil, gas and offshore supportservices sector.

According to Platou Report 201 2, the steady relationship between the global GDP growthand sea-borne trade growth continued in 2011. Tonnage demand rose by 6.7 per cent comparedto world GDP growth of 3.8 per cent. The respective figures were somewhat below observedlong-term averages but broadly confirmed the 2:1 relationship between tonnage demandgrowth and GDP growth. However, had it not been for the strong increase in LNG volume,tonnage demand growth would have been weaker than expected based solely on the GDP vs.trade relationship. The main factor behind the slump in tonnage demand growth was thecontainer trades which were hit hard by the weakness in the US and European economies. Inaddition, the continued strengthening of the Chinese yuan caused Chinese export growth toslow to 20 per cent from more than 30 per cent in 2010.

According to Platou Report 2012, the start of the year 2011 turned out to be a toughtwelve months for the shipping industry overall. Market performance was weak, with thenotable exception of LNG, despite relatively strong trade growth. With expectations forthe world economy undergoing a marked shift to the negative and scheduled newbuildingdeliveries still high for 2012, any meaningful increase in capacity utilisation will behard to come by for the main segments.

Further, overall capacity utilisation of 84 per cent was above the very depressed levelof 2009 and in line with the low levels seen at the start of the previous decade which wasnot a satisfactory time for shipping. Big differences among segments still exist.

According to Platou Report 2012, the year 2011 turned out to be one of the mostvolatile and eventful years ever for the global shipping environment. Three sets of eventsstand out; another financial crisis raised its head, the social upheaval in the MiddleEast (known as the Arab Spring) continued and, lastly, it was a major year for naturaldisasters with the two biggest - a tsunami and earthquake in Japan and the "flood ofthe century" in Australia, having a direct impact on shipping. While the effect ofthese disasters varied among segments, the overall impact was negative for world growthand hence for tonnage demand.

High new building deliveries for the third year in a row continued to drive a largeincrease in fleet capacity. Total fleet growth came in at 8.2 per cent, the highest levelin more than 20 years.

A marked slowdown in tonnage demand growth added to the tanker market's supply problemsin 2012 and brought average freight rates down to the lowest level since 1994. Seabornetrade volume showed only marginal growth from the previous year. Fleet capacity continuedits steady increase with a 6.2 per cent gain. Overall fleet utilisation fell by more than3 percentage points to an estimated 83 per cent in the tanker market.

The dry bulk market weakened in 2011, average freight rates fell by more than 40 percent with Capesize rates leading the way with a 50 per cent drop. A sharp jump in fleetcapacity outweighed continued strong albeit volatile, tonnage demand, which grew at 10 percent. Fleet capacity growth was massive, despite ongoing delays, slippage andcancellations. Net fleet growth topped 15 per cent, a modern day record. Fleet utilisationfell by 4 percentage points but at 88 per cent remained well above the low levels seen fortankers and containers.

Average freight rates for container vessels rose in 2011 but market performance wasvery uneven. Demand growth was only half of the previous year's sturdy pace, at 7.5 percent. Fleet capacity added another 8.0 per cent resulting in a modest fall in capacityutilisation, keeping it below 80 per cent for the third straight year.

The LNG market had a fantastic year, in contrast to the rest of the industry. It isestimated that tonnage demand grew by more than 20 per cent while the active fleetincreased only by 10 per cent. This led to a significant tightening of marketfundamentals.

According to Platou Report 2012 in the year 2011 in the crude oil tanker market, fleetcapacity continued its above-trend expansion but the real negative surprise was thatseaborne trade growth slowed to a trickle, only a year after one of the strongestperformance on record. Fleet utilisation thus moved significantly lower. VLCCs led thesharp drop in rates. Suezmaxes and Aframaxes also suffered, but rates did not fall asdramatically as for VLCCs. The seasonal upturn during the winter months was remarkablyshort and from the start of the second quarter and well into the fourth the market wasexceptionally low for all segments.

LPG markets began a transition period in 2008. The year 2009 was the end of thisbeginning and start of a new era of sharply rising seaborne LPG supplies. The year 2012has started seeing better utilisation of LPG vessels. Due to large expansion of Qatar Gasand Ras Gas LNG plants and establishment of new LNG export/import terminals, more LPGproduction and transportation is expected to take place during the times to come. SeaborneLPG supply is forecast to rise 47 percent to 83 mm t/year between 2008 and 2016. Thegrowth a difference of 27 mm t/year of exports in 2016 v/s 2008 will alter the way LPGmarkets trade, changing trade dynamics and forcing product to new buyers.

According to Platou Report 2012, spending on oil and gas E & P accelerated furtherin 2011 and rose by an estimated 14 per cent, a very impressive figure considering that itcame on top of robust double-digit growth in 2010. The sustained jump in oil prices toabove $ 100 was an obvious catalyst. The demand for offshore support vessels (OSVs) in2011 clearly benefited from significant increase in global offshore activity. The increasein offshore activity came on the back of rising oil prices and an estimated 14 per centrise in global E&P spending. The rise in upstream investments produced growth acrossall the major drivers of OSV demand.

While day rates for large AHTS vessels generally increased in 2011, smaller sizedvessels were left struggling to perform in many regions throughout the year.

Brazil was the epicentre of activity and increasing demand there attracted a number ofAHTS vessels from other regions.

(b) Opportunities and Threats :

Indian flag ships have a "Right of First Refusal" for any cargo of IndianPublic Sector Undertakings which are imported into India. This enables Indian companies toensure better utilisation of its vessels in Indian trade.

India is the 4th largest consumer of LPG in the world after USA, China and Japan, butIndian LPG consumption per capita is very low compared to other countries. There is atremendous growth prospect for LPG consumption/demand in India in future and total LPGdemand is expected to grow at the rate of 8-9 per cent per annum. With vision 2015 of theGovernment of India, the Rajiv Gandhi Gramin Vitrak Yojna, LPG penetration in rural areaswill improve.

The freight rates are mainly determined by the fine balance between future demand andsupply of vessels and therefore may get adversely affected in case of mismatch betweendemand and supply of vessels over a period of time.

The Indian shipping industry continues to be burdened with several taxes such asservice tax and withholding tax on interest which prevent healthy growth and developmentof shipping industry. In order to be globally competitive, it is essential that taxes arerationalised to ensure that Indian shipping companies are able to achieve a level playingfield in the international arena.

Also, shortage of skilled and quality manpower due to continuous drifting of qualifiedseafarers to foreign shipping companies on account of peculiar tax provisions continues tobe an area of grave concern for Indian shipping companies.

(c) Segment-wise Performance :

The Company is primarily engaged in the business of shipping and hence there are noseparate reportable segments.

The Company together with its subsidiaries and associates, owns and/or operates a fleetof ten LPG carriers, including seven mid-size Gas Carriers (MGC's), one Large Gas Carrier(LGC) and two Very Large Gas Carriers (VLGC's), which have been deployed on a mix of timecharters and spot charters with charterers such as Indian Oil Corporation Limited,Hindustan Petroleum Corporation Limited, Bharat Petroleum Corporation Limited, RelianceIndustries Limited and Pertamina.

In the crude oil sector, as a ship manager, the Company operates three double hullAframax crude oil tankers, which are placed in the Sigma Tanker Pool, trading globally.The benefit of working in the pool is that earnings of group of vessels owned by differentowners are pooled together and distributed amongst various owners.

In the offshore support services sector, as a ship manager, the Company operates afleet of five large Anchor Handling Towing and Supply (AHTS) vessels. The 3 large AHTSVessels are on time charter to Petrobras, Brazil for a firm period of four years with fourextension options of one year each. The other 2 large AHTS Vessels are on charter to TopazGroup in Caspian Sea for ultimate charter to BP Exploration (Caspian Sea) Limited for aperiod of two years with two extension options of one year each.

(d) Outlook :

There are encouraging signs that market mechanisms are being allowed to work and onemay hope that a more balanced situation will emerge from 2013 onwards, world economypermitting.

One of the few bright spots for owners in 2011 has been the substantial reduction inthe newbuilding order book. New orders fell by almost 20 per cent, with conventionalshipping segments seeing a decline of more than 50 per cent. That has brought the overallorder book down to around 20 percent of the fleet, in line with the long-term pre 2007trend. Another year of relatively high deliveries and limited ordering should take theratio below trend. This is positive for everyone involved because the first step towards abalanced market and adequate earnings begins with a manageable supply side.

It appears that 2012 is another challenging year for world shipping markets, in linewith 2011.

According to Platou Report 2012, freight market in the three major shippingsegments-tankers, bulk carriers and container ships is expected to be subdued. However,less demand from the major segments may result in higher focus on smaller, industrialsegment.

Increasing focus on fuel efficiency and new regulations for new tonnage might helpboost ordering activity, as shipyards respond by offering new, improved designs. Anotherfactor that will affect the balance in the new building markets is the potentialdownsizing of the building capacity. In difficult time shipbuilders will have to closedown facilities due to lack of employment, but historically this has proven to be a slowprocess. However, yards may adopt conventional ship building capacity to offshore capacityor even utilize their capacity for other means than shipbuilding.

In conclusion, we foresee an oversupplied new building market in the coming year.

On the tanker markets, the supply side of the market will be the biggest challenge asmore than 10 per cent of the fleet is scheduled to be delivered and considering otherfactors a net fleet growth of 6 per cent is expected. This will continue the downwardpressure on fleet utilisation through 2012.

LPG demand growth has been strong in Asia and the Middle East and while Asia is thelargest LPG consuming region, it is still expanding. The Middle East has become asignificant LPG demand centre due to rapid expansion of petrochemical industry andcontinued growth in both residential and commercial sectors. Overall demand in Europe andNorth America is reasonably flat but could increase if price sensitive LPG supplies areavailable. Also, demand will continue to expand slowly in Latin America due to risingconsumption in residential and commercial markets. In the LPG sector, the order book isbalanced considering the increased LPG demand in Asia, Middle East and Latin America. Itis therefore expected that the freight rates will remain firm.

On a global basis, OSV day rates and fleet utilisation for OSVs are forecast to risebut will vary by asset and region. OSV demand growth is likely to be driven by a furtherfocus on exploring and developing deepwater assets. It seems likely that the main regionpropelling demand further will be Brazil. As vessels per unit serviced in Brazil tend tobe relatively high compared to other regions combined with longer distances offshore,demand for Offshore Supply Vessels is expected to receive an additional boost.

(e) Risks and Concerns :

Shipping industry being global in nature is prone to several risks and uncertaintiesincluding international competition, state of global economy, marine mishaps andaccidents, force majeure such as tsunami, floods, earthquakes, volcanic eruptions, etc.,amendments in Government policies, rules and regulations, new regulatory compliances, portstate control, increase in financial costs, exchange rate fluctuations, changes in taxlaws, acts of terrorism, wars, piracy, arrest of vessel by maritime claimants, shortage ofqualified seafarers, global recession etc. Incidences of attack by pirates are stillcontinuing. However, international forces including India are taking maximum measures tomonitor and protect shipping companies.

The Company endeavours to counteract these risks by adopting certain measures likehedging its freight rates through long-term time charter contracts, complying withinternational ship management practices, and also insuring its vessels against variousmaritime risks with hull and machinery underwriters and Protection and Indemnity Clubs.The companies are also adopting "Best Management Practices" to counter piracyrisks.

The Board of Directors periodically reviews and assesses the adequacy of riskassessment and minimisation procedures so that various risks can be assessed and minimisedthrough well defined framework/procedures.

(f) Internal Control Systems and their adequacy :

The Company has proper and effective internal control systems commensurate with itssize of operations in order to ensure that all systems and procedures are functioningsatisfactorily. Internal audit function is carried out by the Chief Internal Auditor on aregular basis.

The Audit Committee of the Board of Directors regularly reviews the effectiveness andadequacy of the internal control systems to monitor due and proper implementation thereofand for due compliance with various applicable laws, rules and regulations, accountingstandards and regulatory guidelines.

(g) Discussion on financial performance with respect to operational performance :

The details of the financial performance of the Company have already been dealt with inthe earlier part of the report.

(h) Human Resources :

The relations between the employees and the Company remained cordial throughout theyear. The Company had 88 shore based staff and 412 floating staff employees as on 30thSeptember, 2012. The committed shore based staff provides its prompt and efficient supportand guidance to the floating staff on a continuous basis, which helps to maintaineffective performance and operational efficiency at all times. The Company continues tofocus on safety and training and development of the employees.

The Board of Directors and the management is deeply saddened by the incident onCompany's vessel Maharshi Krishnatreya on 5th November, 2012 in which 5 officers/crewmembers lost their lives. The Board of Directors and the management is with their familiesin this hour of grief. Upon the preliminary investigation carried out by the Company, itappears that the team of officers and crew disassembled a spectacle blank (which preventsflow through the pipe) on a pipeline carrying inert gas while the vessel was undergoing astandard 'gas freeing' operation. The removal of the spectacle blank without shutting offthe inert gas supply and failure to ensure that there was no inert gas in the pipe causedan inert gas release into the compressor room causing asphyxiation of the team. There wasno event of any LPG leakage, fire, explosion or damage to the vessel.

The Company continues to conduct post-sea training programme for its marine officers.The Company under the said programme imparted 19440 man-days of training. Further, underits expanded Trainee Marine Engineer (TME) and Deck Cadet Programme, the Company on anaverage trained 36 TMEs and Deck Cadets on its fleet during each month. These programmesare helping the Company to build up an efficient and well qualified cadre of experiencedseafarers for its fleet.

(i) Social Responsibility :

As a socially responsible corporate citizen, the Company supports a wide spectrum ofcommunity initiatives through NGOs as well as programmes for health, education andenvironment.

Total foreign exchange earned and saved including deemed earnings of the Company forthe 18 months period ended 30th September, 2012 was Rs. 29,846.40 million and the foreignexchange used was Rs. 19,174.61 million.

As required under Section 217(2AA) of the Companies Act, 1956, your Directors confirmto the best of their knowledge and belief that:

i) in the preparation of the annual accounts, the applicable accounting standards havebeen followed;

ii) the Directors have selected such accounting policies and applied them consistentlyand made judgements and estimates that are reasonable and prudent so as to give a true andfair view of the state of affairs of the Company at the end of the financial year and ofthe profit or loss of the Company for that period;

iii) the Directors have taken proper and sufficient care for the maintenance ofadequate accounting records in accordance with the provisions of the Companies Act, 1956for safeguarding the assets of the Company and for preventing and detecting fraud andother irregularities; and

iv) the Directors have prepared the annual accounts on a going concern basis.

As required by the Listing Agreement with Stock Exchanges on which shares of theCompany are listed, a Report on Corporate Governance together with the certificate fromthe Auditors of the Company regarding compliance with Corporate Governance is attached tothis report.

Mr. Arun Mehta retired as Chairman & Managing Director of the Company with effectfrom 1st October, 2012. Mr. Mehta has been instrumental in the growth and development ofthe Company through its various stages of expansion and under his able leadership theCompany was listed on the stock exchanges in 1986 and became a force to reckon with forLPG transportation. The Board places on record its deep appreciation for the valuableguidance, contribution and support given by Mr. Mehta during his tenure of services withthe Company.

Mr. Praveen Singh and Mr. Khurshed M. Thanawalla retire by rotation and being eligible,offer themselves for re-appointment. Separate resolutions are being proposed for theirrespective re-appointments.

You are requested to appoint Auditors of the Company and fix their remuneration. Theretiring Auditors Messrs. Sorab S. Engineer & Co. being eligible, offer themselves forre-appointment.

In view of the continuing downturn in the shipping industry, the Company'sprofitability is adversely affected. Consequently, since profits of the Company for theeighteen months period ended 30th September, 2012 are not adequate, the Company isapplying to Central Government for seeking its approval for payment of minimumremuneration to Mr. Arun Mehta for the period 1st April, 2012 to 30th September, 2012.Accordingly, separate resolution is being proposed at the ensuing Annual General meetingfor your consideration.

Your Directors have re-appointed Mr. Yudhishthir D. Khatau as Vice Chairman &Managing Director for a period from 25th August, 2012 to 18th October, 2012 and asChairman & Managing Director for the period from 19th October, 2012 to 24th August,2017 subject to shareholders approval. Accordingly, resolution is being proposed for hisre-appointment at the ensuing Annual General Meeting for your consideration.

As required by Section 217(2A) of the Companies Act, 1956, read with Companies(Particulars of Employees) Rules, 1975, as amended, the names and other particulars of theemployees are set out in the Annexure to the Directors' Report. However, as per theprovisions of Section 219(1)(b) (iv) of the Companies Act, 1956, the Report and theAccounts are being sent to all shareholders of the Company excluding the aforesaidinformation. Any shareholder interested in obtaining such particulars may write to theVice President - Corporate Affairs, Secretarial & Legal and Company Secretary at theregistered office of the Company.

Your Directors express their thanks to all the officers of the Ministry of Shipping,Directorate General of Shipping, Ministry of Petroleum and Natural Gas, Indian Navy,Indian Coast Guard, Mercantile Marine Department, Class, oil companies and charterers forthe valuable help and co-operation extended by them to the Company. Your Directors alsothank the banks for their continued support to the Company. Your Directors also thank theshareholders of the Company for their sustained confidence reposed in the Company and itsmanagement. Last but not the least, your Directors express their deep appreciation for thesincere and hard work put in by the floating as well as the shore based officers and staffof the Company.

On behalf of the Board of Directors
yudhishthir d. khatau
Mumbai, 29th November, 2012 Chairman and Managing Director