SHIPPING & LOGISTICS
EXPECTED BUDGET IMPACT: Positive
LONG TERM OUTLOOK: Cautious
The shipping sector is facing tremendous pressure due to excess supply of tonnage entering the market over CY12-CY14E. The current order book is pegged at almost 27% of the current tonnage ( 500 mn Dwt) in the dry bulk segment and almost 25% of the current tonnage ( 400 mn Dwt) in the tanker segment. Indian companies are primarily exposed to dry bulk and tanker segment and these two segments we believe would remain subdued for the next two to three quarters. The estimated demand for tonnage would not be able to absorb such a supply of ships. Hence we are bearish on freight rates in near term. However we derive comfort from the diversification of Great Eastern Shipping Co. (GE Shipping) in the offshore segment and Mercator Lines Ltd. (MLL) in the mining segment. We believe such diversification would hedge them against the cyclical shipping business. In fact we estimate that the offshore segment for GE Shipping and mining segment for MLL would be the next growth driver. In shipping segment, with demand picking up and new build supplies tapering off, we may see the sector bottoming by Q3FY14. We believe investors should position in advance, as stocks move ahead of industry fundamentals.
We don't expect any significant measure for the shipping industry in this year's Union Budget
However we can expect the government to revive the old shipbuilding subsidy policy, as shipbuilding is a capital intensive industry and Indian yards are competing with global yards in Korea, Japan and China where their industry receives direct and indirect support from the government. .
The logistics sector in India has today become an area of priority. One prime reason for the same stems from the reason that years of high growth in the Indian economy have resulted in a significant rise in the volume of freight traffic moved. This large volume of traffic has provided for growth opportunities in all facets of logistics including transportation, warehousing, freight forwarding, express cargo delivery, container services, shipping services etc. The growth path has also meant that increase demand is being placed on the sector to provide the solutions required for supporting future growth.
Despite holding promise the logistics sector in India remains mired in several complexities which have the potential of holding it back. These include significant inefficiencies in transportation, poor condition of storage infrastructure, a complex tax structure, low rate of technology adoption and poor skills of the logistics professionals.
In the listed space in Logistics in India, companies are primarily operating in the area of warehousing, container freight station (CFS), container rail, freight forwarding, non-vessel owning container carrier (NVOCC) and trucking. In our discussion with companies, the industry is expecting the Finance Minister to announce measures for speedy implementation of the dedicated freight corrido (DFC), speedy implementation of the ongoing infrastructure projects and faster roll out of the Goods and Services Tax (GST) which would help the industry in terms of efficiency and reduced cost.
An industry status to the Logistics sector by the government would help the companies in the sector in the form of reduced interest cost, strong regulation (a regulator may be in place) and more discipline leading to increased equity investment.