Indian shipping outlook negative: Fitch

The outlook for the Indian shipping industry is negative in 2010, due to increased competition and, consequently, low freight rates, said Fitch Ratings.

Assets acquired in the past two to three years are now at low yields – at times below break-even points, it said.

In a special report, Fitch said companies with long-term contracts have been shielded to some extent from the sharp decline in charter/freight rates.

Pratibha Shipping Company derives 100 per cent of its revenue from time charter, Varun Shipping Company about 65 per cent and Essar Shipping Ports & Logistics (ESPL) about 80 per cent. However, these contracts generally have a tenor of about one year, and it is expected that charter rates will see some reduction upon renewal, said Fitch.

The industry is also plagued by excess capacity across the various sectors - tankers, bulk carriers and container ships.

Fitch expects charter rates to remain low in 2010, and this will be reflected in ship valuations. The decline in ship prices may increase loan-to-value ratios, and may require companies to increase their equity contribution or provide additional assets as collateral.

The liquidity and leverage position of some of the companies are already stretched, and any additional collateral requirement from banks may lead to downward pressure on their ratings.

Fitch noted that shipping companies are faced with a difficult choice between investing in attractively priced new vessels and postponing capex due to liquidity pressures. The average age of ships in India is old, with Varun's fleet at 15 years, Pratibha 22 years, and ESPL 14.7 years. The agency also said companies are not helped by the paucity of availability of funds and reluctance of banks to lend to this sector.

Companies with committed capex are also in a difficult spot. With high contracted prices to acquire the vessels, they are now not in a position to deploy them at attractive freight rates. Owing to cabotage, the coastal shipping is still protected to some extent, but with the development of Indian ports competition from global vessels is set to intensify over the medium term.

Fitch expects liquidity and leverage to remain stressed in 2010, with margin pressures.

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