Shipping Sector Analysis Report 

Don't Miss: Key Information for Long-term Investors

• India is the sixteenth largest maritime country in the world, with a coastline of about 7,517 km. The shipping industry in India plays a vital role in sustaining growth in the country's trade and commerce. Most cargo ships that sail between East Asia, America, Europe and Africa pass through Indian territorial waters.
• India has 13 major ports (7 on the eastern coast and 6 on the western coast) and 200 non major ports. Major ports are under the jurisdiction of the Government of India whereas non major ports come under the jurisdiction of the respective state's Government Maritime Board (GMB).
• Out of the 200 non major ports, 44 are functional and strategically located on the world's shipping routes. Non-major ports are steadily gaining share and a major chunk of traffic has shifted from major ports to non-major ports.
• Ports in India handle almost 95% of trade volumes in India. Solid cargo contributes the largest share to all traffic handled at major ports in India followed by liquid cargo and containers. Increasing trade activities and private participation in port infrastructure have supported port infrastructure activity in India.
• Shipping is a global business whose performance is closely linked to the state of the global economy. Therefore, any impact on the global economy has an effect on the state of the shipping industry. The shipping industry is also regulated by the rules and regulations of International Maritime Organization (IMO), classification society, and the requirements of the flag state. Apart from these, there are also the rules and regulations of various countries where the vessel operates.
• The Government of India has announced several initiatives over the years to support the shipping and ports industry. In 2015, it announced the Sagarmala Program, an initiative to reduce logistics cost for international and domestic trade with minimal infrastructure investment.
• The Government also initiated the National Maritime Development Program, an initiative to develop the maritime sector with a planned outlay of US$ 11.8 billion. Moreover, it announced the Major Ports Authorities Bill in 2020 to provide regulation, operation and planning for the major ports in India and to provide greater autonomy to existing ports.
• The Government of India has allowed Foreign Direct Investment (FDI) of up to 100% under the automatic route for projects related to the construction and maintenance of ports and harbors and a 10 year tax holiday to enterprises engaged in ports. The ports sector in India has received a cumulative FDI of US$ 1.6 billion between April 2000 and June 2020.

• Supply
• Supply is determined by the addition to shipping capacity. The Maritime Agenda has a target of increasing total port capacity to 3,130 MT. Current port capacity stands at 1515 MT (FY19).
• Demand
• Demand in the shipping industry is closely linked to the economy – global and domestic, and trade.
• Barriers to entry
• High, as it requires high capital investment, adequate cash flows, and technical expertise and know-how.
• Bargaining power of suppliers
• Low, as there are only a few shipping companies that dominate the market.
• Bargaining power of customers
• High, as customers are from all over the world. Switching costs are also low as customers can switch to another company from any part of the world.
• Competition
• High, as shipping companies not only face competition from domestic players but from international players as well.
• Threat of Substitutes
• Moderate to High for solid cargo. Customers can switch to substitutes such as airlines, trucks or goods trains if there is a change in quality of service, increase in freight rates and transit time.

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Financial Year '23

• Overall seaborne crude trade grew by 10% YoY during FY23, recovering to pre-Covid levels. Crude tanker earnings were around operating expense (opex) levels for about one and a half years prior to the start of FY23 as Covid-19 took a toll on oil demand.
• Earnings surged in FY23 to levels not seen since FY09, mainly due to trade disruptions caused by the Russia-Ukraine war. Following the start of the Russia-Ukraine conflict, many participants in the oil and tanker markets began to self-sanction even before EU's official ban on Russian crude imports took full effect in December 2022, reshaping both Russia's exports and EU's imports during FY23.
• Apart from the trade flow disruption caused by the conflict, many factors were also influential in creating a strong tanker market during the year. Recovering oil products demand, historically low product inventories and elevated product cracks enabled steady crude intake into refineries during FY23. However, refinery runs were still below pre-pandemic levels.
• However, crude tanker supply was constrained as the global fleet grew by 3% during the year. Consequently, crude tankers witnessed record high freight rates for most of FY23.
• Some major were initiatives taken by the government to promote the ports sector in India. In July 2022, the Government of India announced the Sagarmala program, the flagship program of the Ministry of Ports, Shipping and Waterways to promote port-led development in the country.
• In August 2022, Minister of Road Transport and Highways Mr. Nitin Gadkari, Minister of Ports, Shipping & Waterways and Ayush, Mr. Sarbananda Sonowal, and Minister of State for Road Transport & Highways, Gen (Retd) VK Singh signed a tripartite agreement for swift development of modern Multi Modal Logistics Parks (MMLP) under Bharatmala Pariyojna across the country.
• In Union Budget 2023-24, it also allocated US$ 1,813.16 million (Rs. 2,218.74 crore) to the Ministry of Shipping.

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Prospects

• The expansion of India as a manufacturing hub linked with global supply chains is expected to increase demand for port industry on the front of cargo commodities like iron ore and fertilizers. Iron ore and finished fertilizers shipments have seen an increasing trend enabling major ports to tide over falling volumes in coal and other miscellaneous cargo.
• Long term import of thermal coal might witness a decreasing trend, due to government focus on enhancing domestic production and availability of thermal coal blocks. Owing to lackluster volume growth in most of the commodities, major ports could manage to log meagre growth in overall cargo throughput.
• At the domestic level, new business opportunities are being generated especially in natural gas sector and handling of container traffic. With increased vessel sizes, shipping liners prefer ports with deep draft, longer quays, high mechanization and ports infrastructure.
• Improved rural connectivity, port modernization, reduction of logistics costs and reduction of turnaround time is expected to increase revenue for the shipping sector.
• With rising demand for port infrastructure due to growing import (crude/coal) and containerization, public ports will fall short of meeting demand. This provides private ports an opportunity to serve the spill off demand from major ports and increase their capacity in line with new demand.
• Dry docks can provide additional opportunities to the shipping sector as they are necessary to provide ship repair facilities. Out of all major ports, Kolkata has five dry docks whereas Mumbai and Vishakhapatnam have two. The rest have one or none at all. Given the positive outlook for cargo traffic and the resulting increase in number of vessels visiting ports, demand for ship repair services is expected to go up.
• Operation and maintenance services such as pilotage, dredging, harbouring and provision of marine assessments such as barges and dredgers are expected to increase in the coming years. Increasing investment and cargo traffic point to a healthy outlook for port support services.
• Special Economic Zones are being developed near several ports thereby providing strategic advantage to industries within these zones. Plants being set up include coal based power plants to take advantage of the imported coal, steel plans and edible oil refineries. Development of SEZs in Mundra, Krishnapatnam, Rewas and few others are underway.
• Greenfield ports are being developed at shores with natural deep drafts and existing ports have invested in improving their draft depth. Higher draft depth is required to accommodate large sized vessels. Due to the cost and time associated with large sized vehicles, much of the traffic is shifting to large vessels from smaller ones, especially in coal transportation.
• The Government of India is targeting to make the country the first in the world to operate all twelve major domestic Government ports on renewable energy. The government plans to install almost 200 Megawatt (MW) wind and solar power generation capacity which could be ramped up to 500 MW in the coming years.

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FAQs on the Shipping Sector

When is a good time to invest in the shipping sector?

As the demand for the shipping sector is closely linked to the economy - global and domestic, shipping stocks are usually riskier - their fortunes are prone to economic booms and busts. For this reason, they are often called cyclical stocks. Generally considered an offensive tactic in investing, cyclical stocks can be used to generate high returns when the economy is doing well.

Therefore, the best time to buy such stocks (shipping stocks) is at the start of an economic expansion and the best time to sell them is just before the economy begins to slow down.

Where can I find a list of shipping stocks?

The details of listed shipping companies can be found on the NSE and BSE website. However, the overload of financial information on these websites can be overwhelming.

For a more direct and concise view of this information, you can check out our list of shipping stocks.

Which shipping stocks were the top performers over the last 5 years?

Seamec and Shipping Corporation of India were the top performers over the last 5 years in terms of sales and profit growth.

Seamec has done well on the back of its established market position in providing multi support vessels (MSVs) on charter-hire basis under long-term contracts to offshore exploration and production (E&P) players in India

Shipping Corporation of India has also performed well on the back of its role in supplying vessels to the Indian Government for their key operations, such as Mars Orbitter Mission of ISRO (Indian Space and Research Organisation) and other defence missions via agreement with DRDO (Defence Research and Development Organisation).

To know which other companies performed well over the last 5 years, use Equitymaster's stock screener.

What kind of dividend yields do shipping stocks offer?

There is no consistent trend of dividends across the industry, with different companies having different dividend policies.

For more details, check out our list of top shipping stocks offering high dividend yields.

Which are the shipping stocks with the highest return on capital employed (RoCE)?

Return on capital employed (ROCE) is a financial ratio that can be used in assessing a company's profitability and capital efficiency by determining how well the management is able to allocate capital for future growth. An RoCE of above 15% is considered decent for companies that are in an expansionary phase.

G.E Shipping is the top shipping stock right now on the Return on Capital Employed (RoCE) parameter.

To know which other shipping stocks offer great return on capital employed, you can check out the top shipping stocks offering the best RoCE here.

Which are the best shipping stocks to invest in currently?

Investing in stocks requires careful analysis of financial data to find out a company's true worth. However, an easier way to find out about a company's performance is to look at its financial ratios.

Being an asset heavy and cyclical business, the commonly used financial ratio used in the valuation of shipping stocks is -

• Price to Book Value Ratio (P/BV) - It compares a firm's market capitalization to its book value. A high P/BV indicates markets believe the company's assets to be undervalued and vice versa.

  To find stocks with favorable P/BV Ratios, check out our list of shipping stocks according to their P/BV Ratios