Freight Forward Sector Shipping - Neutral Logistics - Overweight Freight rates/indices & container volumes - June 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 August 26, 216 Shipping & Logistics Monthly Report: Aug 16 Average BDI for July sequentially grew 16% MoM to 77. Over the past four months, the Baltic Dry Index (BDI) seems to have bottomed out, maintaining a range of 6-8 levels. Indices for Capesize improved for a fourth consecutive month with 8% MoM growth. Likewise, indices for Panamax, Supramax and Handysize sequentially grew 4%, 16% and 8%, respectively Broader indices for tankers Baltic Dirty Tanker (BDTI) and Baltic Clean Tanker Index (BCTI) declined for a fourth consecutive month to an average of 617 (down 15% MoM) and 45 (down 3% MoM), respectively. Accounting for the seasonality impact of summer, tanker rates continue to tread down for a fourth consecutive month. Daily rates for VLCC were at an average of $2/day, lowest levels since October 214. Post a decline of 22% MoM in June, the charter rates for July declined 27%. Similarly, daily rates across all the tanker asset class remained stressed throughout the month Total volumes handled by rail for July de-grew 2% YoY (down 3% MoM) to 89.3 million tonnes (MT). Volumes for key commodities like coal and fertilisers de-grew 2.6% and 9%, respectively. However, post lifting of ban; iron ore volumes continued to grow by a healthy 12% YoY. YTD (April-July) volumes for railways showed de-growth of 1% YoY at 36.5 MT. Total traffic at major ports grew 5% YTD (April-July) to 212.7 MT compared to 22.1 MT. Container volumes for the month de-grew 1.6% YoY to 718 TEUs Outlook Tankers remain bearish; dry bulk sustains Tanker rates for the month entered into a seasonally weak period due to summer. In addition to the same, in the first half of 216, ~23 VLCCs have been delivered, already equivalent to full-year deliveries for each of 214, 215. Also, 37 vessels are scheduled for delivery in the second half of the year, which would keep supplies of VLCCs elevated. This would, in turn, impact daily charter rates. Dry bulk indices continue to remain range bound at 6-7 levels. Sustenance of a recovery in the Chinese economy will remains key for a recovery in BDI. Moreover, utilisation levels for offshore vessels are at historic low levels, further denting I-direct shipping universe earnings and profitability. Subsequently, we continue to remain cautious on SCI and Great Eastern Shipping. Higher base impacts growth in port volumes; recovery on track Container volumes at major ports for July de-grew 1.6% YoY to 718 TEUs. The de growth was mainly on the back of a decline in JNPT and Chennai volumes by 12% YoY and 4% YoY, respectively. YTD port volumes (April-July) grew 5.2% YoY to 212.7 MT compared to 22 MT in the same period of the previous year. Volumes for petroleum, oil and lube (POL) continue to remain largest contributor to total volumes with YTD growth of 3%. However, following the lifting of ban in iron ore mining, YTD volumes more than doubled. Subsequently, we affirm our optimism on port ancillary companies like Gujarat Pipavav & Dredging Corporation. Step closer to passage of GST bill; pan-india surface players to benefit In August, the Rajya Sabha with majority votes cleared the decks for the passage of the GST bill. The final rollout, which is expected by April 1, 217, would trigger a shift from the unorganised to organised segment. In addition to the same, better monsoons coupled with a revival in the trade economy would be at the forefront for earnings growth of logistics players. Organised players with a pan-india reach like TCI, Gati and BlueDart are expected to benefit from the same.
Exhibit 1: Spot freight rates (US$ per day) VLCC rates de-grew for a third consecutive month to $2 compared to earlier $275. Aframax, Suezmax and Clean followed the downward trend, albeit at a slower pace BDI continues to remain range bound around 6-7 odd levels. During July, the Baltic Dry Index (BDI) grew 17% MoM to an average of 712 levels. Indices for Capesize and Supramax grew 8% and 16%, respectively. However, post de-growth of 6% each in June; indices for July sequentially grew 4% and 8%, respectively Asset class CY14 CY15 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Tankers VLCC 2178 54876 41355 46228 47162 35412 2756 25 Suezmax 11488 29777 2722 2438 28233 1741 237 15993 Aframax 11972 2339 18971 21272 17127 11838 11751 9579 Clean 593 14818 1231 1786 1574 825 5858 5797 Bulk Indices Baltic Dry index 116 746 37 383 621 62 68 712 Capesize 1875 1169 23 187 63 861 938 115 Panamax 855 719 324 445 637 61 565 792 Supramax 883 678 28 424 493 567 571 66 Handysize 469 366 197 251 288 35 33 355. Exhibit 2: China's monthly iron ore inventory 12 1 For July 216, China s inventory of iron ore grew for a fourth consecutive month with MoM growth of 3.5%. However, on an annual basis, inventory grew 28% for a second consecutive month. Given the rise in inventories, stocking is expected to taper, going ahead 8 6 4 2 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 mn tonnes Jun-16 Exhibit 3: Country wise China iron ore import 7 Chinese iron-ore imports for July grew 8% MoM (up 3% YoY) to 88.4 MT. On a YTD basis, growth in imports was at 8% YoY to 582 MT. Imports from India continue to grow with YTD volume of 8.5 MT compared to 1.2 MT in the same period of the previous year. Imports from Australia (largest exporter) and Brazil sequentially grew 4.5% MoM and 29% MoM, respectively mn tonnes 6 5 4 3 2 1 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Australia Brazil India S. Africa Page 2
Exhibit 4: China iron ore inventory trend analysis 125 1 Average monthly iron ore imports grew 5% on a YTD basis to 83.2 MT, which continues to remain significantly above the six year average level of 64.1 MT. Imports for YTD (January-July) were at 582.3 MT compared to 539.2 MT in the previous year 1 75 628 619 52.4 51.6 687 57.2 745 62.1 82 68.4 953 933 77.8 79.4 582 83.2 8 6 5 4 25 2 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 Post an uptrend in March, Chinese monthly steel output continued to taper with de-growth of 2.7% MoM for July to 66.8 MT. The YTD (January-July) output de-grew 1% YoY to 468 MT compared to 474 MT in the earlier year mn tonnes 7 6 5 4 3 2 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Exhibit 6: Coal Index 14 12 The World Coal Index and Asia Pacific Coal Index continued to decline from July 215 levels. Both indices recorded de-growth of 34% YoY each for July Index 1 8 6 4 2 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 BWCOAL Index BPRCOAL Index Page 3
Exhibit 7: Dry bulk indices 3 BDI over FY16 was mainly impacted by a slowdown in China. However, green shoots that are visible in Chinese manufacturing, coupled with a revival in commodity prices have led BDI stabilise. Average BDI remained flattish for July, up 16% MoM to 7 levels. The YTD average (April-July) for BDI was at 517, degrowth of 29% compared to an average of 726 levels in the same period of the previous year Index 2 1 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 BDI BPI Exhibit 8: Tanker indices 14 Average BCTI and BDTI levels continued to correct for a third consecutive month to an average of 45 levels (down 3% MoM) and 617 levels (down 15% MoM), respectively. The YTD average (April-July) for BDTI and BCTI sequentially de-grew 17% and 32%, respectively. 1 6 2 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Index Baltic clean tanker index Baltic dirty tanker index Exhibit 9: International crude oil prices trend 14 12 Average crude prices for July marginally corrected by 7% MoM to $45. However, the YTD (April-July) average was at a steep discount of 24%, compared to the same period of the previous year $/barrel 1 8 6 4 2 Jul-12 Mar-13 Nov-13 Jul-14 Mar-15 Nov-15 Jul-16 Page 4
Exhibit 1: Tanker rates trend 9 8 Post a sharp decline in January and February, freight rates in March and April rebounded. Post this, rates resumed their downward trend. For July, tanker rates across all asset classes remained weak. Rates for VLCC (largest carrier) de-grew 27% MoM to $2. Notably, the YoY correction across all asset classes was steep at ~5% US$/day 7 6 5 4 3 2 1 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 VLCC Suezmax Aframax Subsequent to the larger base in July 215, container volumes for July de-grew 2% YoY to 718 TEUs. Post growth of 7% in June, volumes at JNPT for July de-grew 4% YoY 382 TEUs. Smaller ports like Vizag and Kolkata continue to trend higher with MoM growth of 48% and 12%, respectively Exhibit 11: Container volume at major ports ('s TEUs) FY12 FY13 FY14 FY15 FY16 YTDFY16 YTDFY17 % change Kolkata 6 552 563 63 662 26 254 23.3% Paradip 13 8 9 4 5 2 1-5.% Vizag 248 234 263 248 293 86 121 4.7% Ennore - - - - - - -.% Chennai 1539 1558 1468 1552 1565 541 54-6.8% Tuticorin 479 477 58 56 612 26 217 5.3% Cochin 326 336 351 365 421 129 158 22.5% New Mangalore 48 45 5 63 76 27 28 3.7% Mormugoa 2 22 22 25 26 7 9 28.6% Mumbai 58 58 41 45 43 12 15 25.% JNPT 4259 4321 4161 446 4491 157 1526 1.3% Kandla 118 168 29-3 - 3.% Total 778 7779 7465 7952 8197 2723 2836 4.1% Source: Indian Ports Association, ICICIdirect.com Research Exhibit 12: Container volume at major ports For July 216, container volumes at major ports de-grew 2% YoY. Volumes at JNPT (largest port) de-grew 4% YoY to 382 TEUs. Post a revival in June, Chennai resumed its downward trend with de-growth of 12% YoY in July. Kolkata and Tuticorin continue to maintain their monthly run rate of handling ~65 TEUs and ~55 TEUs, respectively. Vizag grew 48% YoY by handling 34 TEUs. YTD volumes (April-July) grew 4% to 2.8 million TEUs. Majority of the growth was contributed by growth in Kolkata and Vizag (' TEUs) 8 75 7 65 6 55 5 9.8 1. 5.8 5.4 4.9 3.1 3.9 2.1 1.1 1.3.9.1-1.2 66 73 678 693 666 643 683 694 673 744 686 76 726 718 12. 1. 8. 6. 4. 2.. -1.6-2. -4. Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Source: Indian Ports Association, ICICIdirect.com Research Page 5
Exhibit 13: Railways segment-wise earnings Indian Railways passenger revenues for FY16 grew 4% YoY to 16365 crore compared to the budgeted estimate (BE) of 16778 crore. Passenger and goods revenues grew 6% and 4%, respectively Indian Railways passenger revenues grew 4% YoY on a YTD basis (April-July). However, goods revenue, which forms the biggest portion (64% of total revenues) de-grew 11%. Post degrowth, revenue contribution from freight declined from 68% to 64% in July 216. The sundry and other coaching revenues continue to grow at a healthy pace Crore FY12 FY13 FY14 FY15 FY16 YTDFY16 YTDFY17 YTD Growth (%) Passenger 28631.5 32536.1 37478.3 42866.2 45353.6 1567.7 16162.2 4% Other Coaching 2848.6 3197.9 3818. 435.6 4461.5 148.8 1522.7 8% Goods 69382.2 86255.4 94955.9 1774.8 1134.3 37473.4 33477.4-11% Sundry 2828.3 3913.2 459. 393.9 3493. 1.1 188.7 9% Total 1369.7 12592.6 14761.3 15788.5 163648.4 5549.1 52251. -6% Source: Indian Railways, ICICIdirect.com Research Exhibit 14: Railways Commodity wise Earnings Crore FY12 FY13 FY14 FY15 FY16 YTDFY16 YTDFY17 YTD Growth (%) Commodity per se, coal continues to remain the largest contributor to total railway earnings. However, post lower import of coal, revenues from the same declined 11% for July. However, lifting of ban and increase of iron ore exports, resulted in growth in earnings from the same by 9%. Total earning for July de-grew 8% YoY to 7747 crore. Pressure across all commodities (except iron ore) experienced downward pressure Coal 28611.6 3682.4 39986.9 49273.7 49988.5 1792.9 14762. -14% RM for steel plants except iron-ore 1163.7 1387.3 156.8 1964.3 222.6 718.9 582.6-19% Pig Iron & Finished Steel 48.7 5182.1 585.3 6488.7 746.5 2283.6 221.6-3% Iron Ore 7285. 7421.3 9163.4 784.5 772.5 2293.6 2518. 1% Cement 6719.7 8229.2 8665.3 9241.6 9154. 3299.6 2799.4-15% Foodgrains 4634.2 6792.2 7894.4 8474.9 7811.3 2511. 2371.5-6% Fertilizers 427.8 4732.1 4536. 56.4 6919.9 2197.8 1872.3-15% POL 3667.3 472.3 545.7 5738.3 62.8 25.1 21.7-2% Other Goods 5115.3 5684.4 6111.4 7111.3 7776.2 2559. 2373.8-7% Domestic Container 921.2 953.8 1239.9 1263.4 1248.8 439.4 386.2-12% EXIM Container 2495.9 2879.6 398.7 3676.3 4234.4 1384.6 1345. -3% Total Container 3417.1 3833.4 4338.6 4939.7 5483.2 1824. 1731.3-5% Grand Total 68965.4 84784.7 93467.7 16637.4 19277.5 3683.4 33232.1-1% Source: Indian Railways, ICICIdirect.com Research Exhibit 15: Railways commodity wise tonnage Over FY11-16, coal tonnage increased at a CAGR of 6%. For the same period, cement and foodgrains volumes have increased 1% and 2%, respectively. Coal tonnage as a percentage of total volume has increased from 44% in FY1 to 5% in FY16, whereas iron ore tonnage has declined from 15% in FY1 to 1% in FY16 For July, total tonnage de-grew 2% YoY to 89 MT. Coal, which is the largest commodity, de-grew 3% YoY to 43 MT for July. Due to higher costs involved in rail transportation and roadways getting cheaper, volumes for cement, fertilisers and foodgrains continue to remain subdued On a YTD basis, total tonnage de-grew 1% to 36 MT. Coal, the largest commodity, de-grew 2%. However, de-growth continued from other commodities like cement, fertilisers and foodgrains were at 8%, 5% and 6%, respectively. Total container volumes on a YTD basis grew 1% YoY; Exim grew 5%. However, for the domestic route, it de-grew 15% Million Tonnes FY12 FY13 FY14 FY15 FY16 YTDFY16 YTDFY17 YTD Growth (%) Coal 455.8 496.4 58.1 547.6 551.7 18. 177.1-2% RM for steel plants except iron-ore 14.5 15.7 17.3 19. 2.3 6.8 6.6-3% Pig Iron & Finished Steel 34.5 35.3 38.6 4.2 42.7 14.2 14.7 3% Iron Ore 14.7 111.5 124.2 112.3 117. 37.6 42.2 12% Cement 17.6 15.8 19.9 19.7 16.1 37.3 34.2-8% Foodgrains 45.6 48.3 54.4 53.8 45.8 14.7 13.8-6% Fertilizers 52.7 45.9 44.4 48.1 52.3 16.9 16.1-5% POL 41.2 41.6 42. 42.7 44. 14.9 14.8-1% Domestic Container 9.3 9.3 1.9 1.3 9. 3.2 2.7-15% EXIM Container 29.1 31.9 32.6 38.3 37.1 12.3 12.9 5% Total Container 38.5 41.2 43.5 48.5 46.1 15.5 15.6 1% Other Goods 74.3 68.1 71.2 76.8 78. 25.6 25.5 % Grand Total 969.5 19.8 153.5 198.7 114. 363.4 36.5-1% Source: Indian Railways, ICICIdirect.com Research Page 6
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 342 33 HOLD 5,277.3 68.9 73.9 71.7 5.1 4.7 4.9 3.7 3.8 3.6 1.2 8.4 7.7 12.5 12.2 1.9 Reliance Defence & Eng. 65 8 BUY 4,711.7-8. -3.1 -.3 NA NA NA -77.4 39.5 22.6-4.1.5 2.6-26.9-9.4-1.1 SCI 68 63 HOLD 3,214. 8.1 7.6 6.9 8.5 9.1 1. 5.1 6. 5.5 4.8 3.4 3. 5.5 4.9 4.2 Dredging Corp Ltd. 434 5 BUY 1,12. 28.5 3.5 41.7 14.1 13.1 9.6 1.5 9. 7.9 7.4 8. 9. 5.3 5.1 6.2 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 27,783 53.7 4.4 46.6 35.2 3.4 22.2 24.9 2.8 15.2 8.8 1.6 13.5 9.7 1.3 12.8 Transport Corp (TRACOR) 36 32 BUY 2,51 1.8 12.2 15. 3.6 27.2 22. 14.3 13. 11. 17.4 18.4 2.1 11.9 12.5 13.7 BlueDart 5,13 6,5 BUY 13,23 81.2 79.8 1.2 67.5 68.6 54.7 34.4 35.5 28.7 35.9 34.1 38.2 46.6 38.3 39.9 Gati Ltd. 148 2 BUY 1,239 4.2 5.9 7.3 33.8 24.2 19.5 12.9 9.4 7.5 11.4 14.3 16.4 6.6 8.8 1.1 Gujarat Pipavav (GPPL) 171 19 BUY 8,169 4.9 4.6 5.5 34.9 37.2 31.2 19.2 16.7 13.5 13.4 14. 15.7 11.7 9.9 1.5 Source: ICICIdirect.com Research Page 7
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
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