India: The government’s best time to exit Shipping Corp. may have arrived

Shipping Corp. of India Ltd’s (SCI’s) investors would do well to pray that the government will move quickly on NITI Aayog’s proposal of a 26% strategic stake sale in the company.

The Shipping Corp. stock, which has been trailing the broader markets in recent years, has gained quite a bit on stake sale reports.

Given that the ship rates are closer to the lower end of long-term prices, the current asset valuations may not reflect the true potential of the company, says an analyst with a domestic broking firm.

Freight rates (Baltic Dry Index), which influence asset prices, are significantly lower than their historic highs.

Still, that should not deter the government from bringing in a strategic investor. As the analyst cited above says, the current business environment requires active capital allocation and quick decision-making. For a public sector enterprise, that may be difficult.

As an example, the analyst points to how Great Eastern Shipping Co. Ltd is more aggressive—buying younger ships when prices are low and offloading older ones—and is delivering far superior returns and profitability than Shipping Corp. Infusion of a strategic investor will help Shipping Corp. improve efficiency, creating better value for shareholders.

Kotak Securities Ltd’s private client research echoes the sentiment. “We expect the stake sale to shift control of the company to the strategic player, which is expected to make SCI a) more professional; b) well managed; c) constrain free with PSUs working under severe government restrictions and; d) more profitable. All of the above would be healthy for the minority shareholders of the company,” Kotak Securities said in a note.

While the asset prices may not be alluring, one thing that is in the government’s favour is consolidation and signs of stability in the shipping industry. Slowdown in new capacity additions, collapse of the Hanjin Shipping Co. Ltd, COSCO Shipping Holdings Co. Ltd’s decision to buy Orient Overseas (International) Ltd, and the resultant consolidation can improve profitability of the container industry, maritime consulting firm Drewry said in a note.

Capacity trends in the tanker business from which Shipping Corp. derives a large part of its revenues are also on the mend.

According to Kotak Securities, the global order book has become favourable with reduction in order backlog.

“The sharpest reduction was seen in the bulk segment,” the brokerage firm said in the note. “The reduction in global order book bodes well for the shipping sector and SCI.”

According to Kotak Securities, asset prices are either showing signs of stability or improvement.

These trends, Shipping Corp.’s access to India which continues to consume a copious amount of fossil fuels (favourable to the tanker and bulk cargo businesses), and vast scope for improvements in asset utilization and profitability can help the strategic investor take a favourable view of the company. The government should seize the opportunity.