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Fitch Ratings has given a negative outlook for the Indian shipping sector in 2012.
There is unfavourable demand-supply dynamics in the global shipping industry. Further, the low global-trading levels and fleet additions across segments in 2012 will be a significant drag on the revival of charter rates during the year.
A revision in the outlook to ‘stable' is unlikely in the next two years, given the overcapacity that is expected to persist in the medium term. The projected overcapacity from the new ships to the global fleet will obviate any significant improvement in charter rates because of the global economic revival, if any.
Fitch Ratings maintains coverage of around 6,000 financial institutions, including over 3,500 banks and 1,400 insurance companies.
The agency believes that the negative outlook is more likely to be affected by individual corporate actions such as equity issuances (highly unlikely given the existing equity market conditions) and deferral of capex plans, or company-specific situations such as being in a less competitive niche.
Indian shipping companies are likely to report reduced cash flows in 2012 from a fall in revenues and profitability, which will weaken their credit metrics. Those that embarked on large debt-funded capex programmes during 2008-2009 (when asset valuations had peaked), are likely to face challenges in debt servicing, considering the typically short tenure of rupee terms loans availed for ship acquisitions.
Fitch believes that those companies that derive a large proportion of revenue from specialised segments, such as offshore where charter rates have not declined significantly, or who operate on unconventional revenue models (such as on a cost-plus basis), are more likely to sustain their credit profiles in 2012.
Loans
Even companies that availed of dollar loans are likely to face liquidity pressures in 2012, considering the rupee depreciation, which has translated into higher cash outflows for debt servicing. Moreover, the current trend of risk aversion and deleveraging by European banks reduces the likelihood of existing dollar loans being refinanced.
Charter rates
Charter rate in 2012 is likely to be constrained across segments — dry bulk, tankers and container vessels. The agency believes that the dry bulk segment could be particularly impacted in the Indian scenario, as over 50 per cent of capacity additions to the Indian fleet in FY12-FY14 (financial year ending 31 March) are likely to be in this segment.
In the container segment, although global demand for vessels is also expected to be lower in 2012 than in 2011, given the probable drop in trade of manufactured goods, the decline in charter rates is not expected to be drastic as this segment often exhibits traits of an oligopolistic market.
The tanker segment could see a slight revival in rates during first half due to reduced inventory levels of crude oil in the largest importing countries towards 2011-end. This is likely to translate into higher purchases of crude and a slight recovery in rates during the first half. However, the increase in rates may not be sustained over the entire year, in the absence of a meaningful revival in the global industrial activity.
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