Shipping & Logistics Monthly Report: Oct 16

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1 Freight Forward Sector Shipping - Neutral Logistics - Overweight Freight rates/indices & container volumes - Sept 216 VLCC Suezmax Aframax Capesize Panamax Supramax Handysize Container Volume (YoY) Railway Earnings (YoY) Research Analyst Bharat Chhoda bharat.chhoda@icicisecurities.com Ankit Panchmatia ankit.panchmatia@icicisecurities.com November 1, 216 Shipping & Logistics Monthly Report: Oct 16 Baltic Dry Index continues to recover for a third consecutive quarter to a yearly high of ~825 levels. The improvement in BDI could be attributed to both consolidation within the shipping industry (through bankruptcy/merger) and seasonality attributed to BDI, which typically sees a relative increase heading into October-December period. For H2FY17, BDI is expected to be on a much better footing compared to beginning of the year when it tumbled to an all-time low of 29 points. Average BDI for September grew 22% MoM (down 7% YoY) to 825. Re-stocking activity for China before going on national holiday led to an improvement in BDI. Higher traction was realised in larger bulk vessels like Capesize, which sequentially doubled to 172 in September compared to 867 in August. Index levels for medium size vessels like Panamax, Supramax and Handysize remained flattish Average Baltic Clean Tanker Index (BCTI) for September de-grew 13% MoM (down 27% YoY) to 395 levels. In contrast, Baltic Dirty Tanker Index (BDTI) grew 13% MoM (down 13% YoY) to 527. The YTD (January-September) average levels for BCTI de-grew 26% YoY to 52. However, YTD levels for BDTI de-grew 12% to 712 levels. Daily tanker rates remained diverse across all asset classes. VLCC rates were at yearly low rate of $128/day as compared to $ 45/day in September 215. Sequential recovery in daily rates for Suezmax, Aframax and Clean continue to remain down (YoY) by 36%, 71% and 71%, respectively Total volumes handled by rail for September de-grew for a fourth consecutive quarter due to continued softness in coal volumes. Total volumes de-grew 3% YoY (up 1% MoM) to million tonnes (MT). Notably, container volumes for domestic route grew for a second consecutive month, indicating a recovery due to moderating rail freight. Key commodities like iron ore & food grains managed to grow 13% YoY and 7% YoY, respectively. Total traffic at major ports grew 5% YTD basis (April to September) to 315 MT compared to 3 MT. Container volumes for the month de-grew 2% YoY to 679 TEUs Outlook Tankers remain weak; Dry bulk stays firm Subsequent to the outperformance in FY16, tanker rates continue to remain significantly low over FY17. Oversupply in certain routes coupled with lower refining margins continues to plague spot rates. Baltic Dry Index (BDI) continues to remain supportive due increased shipping demand on the back of end of the summer holiday season and nearing winter. However, national holiday in China from November 1-7, could impact bulk operations for the subsequent month. The offshore markets also continue to remain at historic low utilisation levels. The Hanjin event indicates the grim shipping scenario which the global shipping industry is going through. Subsequently, we remain cautious on SCI and Great Eastern Shipping with a HOLD rating. Surge in truck rentals, domestic container volumes; revival visible According to Indian Foundation of Transport Research and Training (IFTRT), road freight rates for September on trunk routes grew 4-5%. Growth rates were supportive of strong output from agricultural and SME sector. In contrast, container volumes (indicating Exim) for September degrew 2% YoY to 679 TEUs (up 3% YTD to 4.2 million TEUs). The uptrend in domestic trade activity would result in earnings visibility for companies like Concor. However, surface operators like Gati and TCI would be key beneficiaries.

2 Exhibit 1: Spot Freight rates (US$ per day) VLCC rates were at the lowest levels since September 214. Rates for VLCC de-grew for a fifth consecutive month to $128. Smaller size tankers like Suezmax and Aframax bucked the trend BDI index expanded 22 percentage points (pps) MoM to 825 levels. Higher demand for large size vessels like Capesize resulted in expansion of index levels. We expect Panamax, index levels for Panamax and Supramax to follow the trend Asset class CY14 CY15 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Tankers VLCC Suezmax Aframax Clean Bulk Indices Baltic Dry index Capesize Panamax Supramax Handysize Exhibit 2: China's monthly iron ore inventory 12 1 Post sequential growth of China s iron ore inventory over the past five month, inventory for September degrew 3% MoM to 95.3 MT. However, YoY growth trend of >25% continued for a fourth consecutive month Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Mar-16 mn tonnes Sep-16 Exhibit 3: Country wise China iron ore import 7 With a slight improvement of manufacturing activities in China, total iron-ore imports for September grew 6% MoM at ~93 MT. On a YTD basis, total imports were 763 MT (up 9.1% YoY). Imports from Australia grew for a third consecutive to eight month high of 6.4 MT. YTD Imports from India were at 1.4 MT compared to 1.5 MT in the same period previous year mn tonnes Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Jan-16 May-16 Sep-16 Australia Brazil India S. Africa Page 2

3 Exhibit 4: China iron ore inventory trend analysis Post higher imports during the month, the average monthly iron ore imports attained a growth of 7% (vs. earlier 5%) on YTD basis to 84.8 MT CY9 CY1 CY11 CY12 CY13 CY14 CY15 CY16 China Iron Ore Imports Avg Monthly Chinese iron ore imports Exhibit 5: China s monthly steel production 8 Chinese monthly steel output continues to remain flattish at 68.2 MT. Also the YTD volumes (January to September) output remained flattish at 65 MT 7 6 mn tonnes Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Mar-16 Sep-16 Exhibit 6: Coal Index The World Coal Index and Asia Pacific Coal Index continued to remain subdued at yearly average levels of 352 and 192 respectively. Index Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Jan-16 May-16 Sep-16 BWCOAL Index BPRCOAL Index Page 3

4 Exhibit 7: Dry bulk indices 3 The average BDI for September 216 grew by 23% MoM to 828 levels (one year high). The recent upturn in economic activities in China positions BDI on firm footing going ahead. The YTD average (April- September) for BDI stood at 571, de-growth of 23% as compared to an average of 744 levels in the same period previous year. Index 2 1 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Mar-16 Sep-16 BDI BPI Exhibit 8: Tanker indices 14 The BDTI and BCTI reflected a diverse view in the month of September. The average BCTI for the month of September de-grew by 13% MoM to 395 levels; (down 26% on YTD basis) to an average of 51. However, BDTI recovered by 13% MoM to monthly average of 572 levels. The YTD volumes continue to remain down by 12% to an average of 712 levels Sep-13 Mar-14 Sep-14 Mar-15 Mar-16 Sep-16 Index Baltic clean tanker index Baltic dirty tanker index Exhibit 9: International crude oil prices trend International crude prices for September remained flattish at $ 46. However on YTD basis (Apr to September), average stood at a steep discount of 24%, as compared to same period pervious year $/barrel Sep-12 May-13 Jan-14 Sep-14 May-15 Jan-16 Sep-16 Page 4

5 Exhibit 1: Tanker rates trend 1 The tanker rates continue to remain sluggish as compared to elevated levels of March and April. For the month of September, tanker rates for VLCC degrew by 3% MoM (down 71% YoY) to $ 128/day. Rates of other asset class like Suezmax and Aframax buck the trend which stood at $ 145 and $ 5 respectively. US$/day Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Jan-16 May-16 Sep-16 VLCC Suezmax Aframax Exhibit 11: Container volume at major ports ('s TEUs) FY12 FY13 FY14 FY15 FY16 YTDFY16 YTDFY17 % change Kolkata % Paradip % Vizag % Container volumes for September 216 tapered to 679 TEUs compared to earlier run-rate of ~7 TEUs. Container volumes for September de-grew 2% YoY to 679 TEUs. Post current month weakness, the YTD volumes (April-September) grew 3.3% to 4.2 million TEU s. Volumes at JNPT and Kolkata de-grew by 4% YoY and 15% YoY, respectively. Volumes at smaller ports like Vizag and Kolkata remains upbeat with a YoY growth of 33% and 9% respectively. Ennore % Chennai % Tuticorin % Cochin % New Mangalore % Mormugoa % Mumbai % JNPT % Kandla % Total % Source: Indian Ports Association, ICICIdirect.com Research Exhibit 12: Container volume at major ports For September 216, container volumes at major ports de-grew by 2% YoY. Volumes at JNPT (largest port) degrew by 4% YoY to 36 TEU s. Container volumes at Chennai continue to remain subdued at 116 TEU s. Kolkata and Tuticorin continue to maintain its monthly run-rate of handling ~63 TEU s and >5 TEU s respectively. However smaller ports like Cochin and Vizag grew by 14% YoY and 33% YoY, respectively. The YTD (Apr September) growth in container volumes at major ports stood at 3.3% to 4.23 million TEU s as compared to 4.9 million TEU s in the earlier period. (' TEUs) Nov-15 Jan Mar May Jul Sep Source: Indian Ports Association, ICICIdirect.com Research Page 5

6 Exhibit 13: Railways Segment-wise Earnings The YTD (April August) revenues for Indian Railways stood at 6437 crore as compared to crore in the same period earlier year. Major drag to the total earnings was due to goods segment which is the largest contributor (~64% of total revenue). Lower EXIM traffic coupled with competition to roads led freight earnings to de-grow by ~1%. However on the other hand, increase in price for cancellation charges/tatkal charges/platform ticket rates; the passenger earnings grew by 4% YTD to 2117 crore. Improved utilization of advertising space has resulted consistent growth in sundry and other coaching revenues Crore FY12 FY13 FY14 FY15 FY16 YTDFY16 YTDFY17 YTD Growth (%) Passenger % Other Coaching % Goods % Sundry % Total % Source: Indian Railways, ICICIdirect.com Research Exhibit 14: Railways Commodity wise Earnings Crore FY12 FY13 FY14 FY15 FY16 YTDFY16 YTDFY17 YTD Growth (%) Freight earnings continue to remain the mainstream income for Indian railways. Commodity per se, Coal continues to remain the largest contributor to the total railway earnings. However, post lower import of coal, the revenues from the same declined by 1% YoY to 39 MT for the month of August. Abolishment of port congestion charges coupled with reduction of busy season surcharge led domestic container volumes grow for the 1 st time since August 215. Coal % RM for steel plants except iron-ore % Pig Iron & Finished Steel % Iron Ore % Cement % Foodgrains % Fertilizers % POL % Other Goods % Domestic Container % EXIM Container % Total Container % Grand Total % Source: Indian Railways, ICICIdirect.com Research Exhibit 15: Railways Commodity wise Tonnage For August, the total tonnage de-grew by 4% YoY (down 4% MoM) to 85.6 MT. With reduction in imports, Coal continues to de-grow for the 2 nd consecutive to 39.5 MT for the month of August as compared to earlier run rate of >4MT. Cement continues to de-grow for the current month, however volumes for Fertilizers and Food grains which were earlier carried trucks could have shifted to railways. On YTD basis, the total tonnage de-grew by 1% to 446 MT. Coal which is the largest commodity de-grew by 3% on YTD basis to 217 MT. However, de-growth continued from other commodities like Cement, Fertilizers and Foodgrains stood at 8%, 3% and 3% respectively. Total container volumes on YTD basis grew by 2% YoY; EXIM grew by 5%, however the de-growth tapered to 12% (vs. earlier 15%) Million Tonnes FY12 FY13 FY14 FY15 FY16 YTDFY16 YTDFY17 YTD Growth (%) Coal % RM for steel plants except iron-ore % Pig Iron & Finished Steel % Iron Ore % Cement % Foodgrains % Fertilizers % POL % Domestic Container % EXIM Container % Total Container % Other Goods % Grand Total % Source: Indian Railways, ICICIdirect.com Research Page 6

7 ICICIdirect.com coverage universe (Shipping) CMP Mcap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector/Company ( ) TP ( ) Rating ( Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E G.E Shipping HOLD 5, Reliance Defence & Eng BUY 4, NA NA NA SCI 7 63 HOLD 3, Dredging Corp Ltd HOLD 1, Source: ICICIdirect.com Research ICICIdirect.com coverage universe (Logistics) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E Container Corporation 1,365 1,6 BUY 26, BlueDart 5,86 6, BUY 12, Gati Ltd BUY 1, Gujarat Pipavav (GPPL) HOLD 8, Source: ICICIdirect.com Research Page 7

8 Glossary Tankers VLCC Suezmax Aframax Small Tankers Very large crude carrier - capacity 3 DWT Capacity 12 to 2 DWT Capacity 8 and 12 in DWT Capacity 1 to 6 DWT Bulkers Capesize Panamax Handymax Handysize Capacity 8 to 2 DWT Capacity 6 to 1 DWT Capacity 4 to 6 DWT Capacity 1 to 4 DWT Offshore Drill ship Offshore drilling vessel capable to drill in water depths up to 6 meter. (Deepwater drilling) Semi submersible rig Offshore drilling vessel capable to drill in water depths up to 2 meter. (Deepwater drilling) Jack up rig AHTS PSV Offshore drilling vessel capable to drill in water depths up to 35 meter. (Shallow water drilling) Anchor handling tag supply vessel used for positioning of jack up rigs. Platform support vessel used for transport of men and material to oil platform and jack up rigs. LPG VLGC LGC MGC Very large gas carrier capacity 7+ CBM Large sized gas carrier capacity 5-7 CBM Mid sized gas carrier capacity 2-5 CBM Miscellaneous DWT LDT TCY TEU Dead weight tonne Light displacement tonne Time Charter Yield measures the operating profit of a ship on a daily basis. Twenty-foot Equivalent Units Page 8

9 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Sector view: Over weight compared to index Equal weight compared to index Under weight compared to index Index here refers to BSE 2 Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1 st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com Page 9

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