| Shreyas Shipping and Logistics Limited | ||||
| Rating continues on 'Watch Developing' | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings rating on the long-term bank facilities of Shreyas Shipping and Logistics Ltd (Shreyas Shipping) continues to be on 'Rating Watch with Developing Implications'.
CRISIL had placed the rating on watch following the announcement on August 19, 2020, that the company’s board has approved transfer of its containerized domestic coastal and export-import (Exim) feeder shipping business to Unifeeder ISC FZCO (Unifeeder; subsidiary of DP World). The transaction also entails sale of the entire stake of 29.22% in Avana Logistek Ltd (Avana; ‘CRISIL BBB+/Watch Developing’) to Unifeeder. As a part of the transaction, the company will enter into a long-term framework chartering agreement (FCA) with the relevant Unifeeder entity for chartering of the vessels of Shreyas Shipping. Subsequently, the company is expected to receive gross consideration of USD 27.766 million (subject to adjustment for debt, cash and working capital on completion of transaction), out of which USD 8.766 million is for the stake sale in Avana and remaining for the sale of feeder business. It will use the funds to deleverage its balance sheet and fund capital expenditure (capex).
Post this transaction, the company will house the break bulk and vessel chartering business. The long-term FCA with Unifeeder for chartering of vessels will result in steady cash flow. The transaction is likely to be completed in few months, subject to necessary statutory and regulatory approvals. The company has received approvals from shareholders and lenders, while approval from Competition Commission of India is awaited. CRISIL is in discussion with the Shreyas Shipping management to better understand the company’s financial risk profile and business strategy after the transaction. CRISIL will remove the ratings from watch and announce its final action once key regulatory approvals are obtained.
The rating factors in recovery in business volume in the last three quarters of fiscal 2021 following the impact of Covid-19 pandemic and the nationwide lockdown in the first quarter. Volume improved to 5.3 lakh twenty foot equivalent unit (TEU) in fiscal 2021 from 4.47 lakh TEU in the previous fiscal. Operating revenue was Rs 392 crore over the nine months through fiscal 2021, 14% lower compared with the corresponding period of the previous fiscal. Furthermore, the operating margin improved to over 9% in fiscal 2021 compared with 7.6% in fiscal 2020, supported by strong volume growth and higher freight rates, which more than offset the rising fuel cost.
Operating performance is expected to remain moderate in fiscal 2021; however sustained operating profitability is expected to result in adequate net cash accruals. The financial risk profile expected to remain moderate, with total debt of Rs 206 crore outstanding as of March 31, 2021. Internal accruals and liquid surplus is expected to be adequate to meet debt repayment obligations and working capital requirements. Furthermore, expected funds from the transaction and continued financial support from the Transworld group, in case of any exigency, provides liquidity support.
The ratings continue to reflect the established market position of Shreyas Shipping in the coastal shipping and container feeder business, increased revenue diversification, and expected financial support from the Transworld group. These strengths are partially offset by a moderate financial risk profile, susceptibility to volatility in feeder rates and bunker costs, and exposure to intensifying competition, particularly on traditional routes. |
Analytical Approach For arriving at its rating, CRISIL Ratings has combined the business and financial risk profiles of Shreyas Shipping and one joint venture (Shreyas – Suzue Logistics (India) Pvt. Ltd) and one associate company (Avana Logistek Ltd) because of their considerable operational and financial linkages. CRISIL has also applied its parent notch-up framework to factor in support from Transworld Holdings Ltd (Transworld).
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths Established market position The company is a pioneer in the coastal shipping and container feeder business in India, with a track record of over a decade. It is the leading player on India's coast (with market share of 50-55%), and enjoys a competitive advantage as it offers multi-modal container cargo transportation by sea, rail and road. The associate company, Avana, provides last-mile connectivity for customers in the coastal container segment. Services are being offered on the east coast since fiscal 2016. Container cargo and feeder services have been expanded from the eastern coast to Jebel Ali Port, Dubai.
The company has increased its fleet over the years to improve service frequency and reduce fleet age. As on March 31, 2021, the total fleet capacity was 22,794 TEU with an average age of 19.9 years, as against 16,117 TEU with an average age of 19 years in fiscal 2017.
Increasing revenue diversification In coastal shipping, the company has traditionally operated on the west coast through its scheduled services. In these services, coastal cargo is shipped from Mundra in Gujarat to Kochi in Kerala, with calls on the Pipavav and Hazira ports in Gujarat along the route. The four vessels are deployed on these routes to offer weekly services. The company has a dominant position on Indian coast, with market share of 50-55%. Services commenced from west to east coast from fiscal 2016. Under East Coast Container (coastal) service, the cargo is shipped from Krishnapatnam/Chennai to Kolkata. During fiscal 2020, the company started providing services to the Chittagong port in Bangladesh from the eastern ports of India.
Expected financial support from the Transworld group Founded by Mr R Sivaswamy in 1977, the Transworld group has presence in India, the Middle East, Sri Lanka, the US, and Europe. The group offers a spectrum of shipping logistics services, including feeder (vessel-owning companies), non-vessel owning common carrier (NVOCC) operations, coastal container shipping (through Shreyas Shipping and Avana), and logistics solutions. Furthermore, Transworld is likely to provide strong and timely support to its subsidiaries during any exigency as witnessed in fiscal 2020, when the group purchased a vessel from Shreyas Shipping and leased it back to cushion the latter’s liquidity.
Weakness Moderate financial risk profile The adjusted gearing was about 0.7 time as on September 30, 2020, and is likely to remain moderate over the medium term, despite capex plan of around Rs 80 crore in fiscal 2022 for replacing older vessels with higher-capacity new vessels. The operating performance is expected to remain moderate in fiscal 2021, considering the slowdown in global trade amid the Covid-19 pandemic. Net cash accrual is expected to be adequate as compared to remaining debt repayment obligations of Rs. 5 crores in in fiscal 2021, after factoring in moratorium for six months. Furthermore, expected funds from this transaction and continued financial support from the Transworld group would provide liquidity support in the near term.
Susceptibility to volatility in spot charter rates and intense competition The company has chartered 1 of its 12 vessels. The charter rate varies based on demand and supply. Of the three chartered vessels, two are on long-term contract with fixed charter rate and the third is on a time charter to a main line operator with a one-year contract, with an option to renew at a fixed charter rate for a year. In fiscal 2020, with additional tonnage deployment by TCI Seaways, the freight rates became more competitive, thereby impacting realisations. Shreyas Shipping remains vulnerable to downturns in the shipping cycle, pricing volatility and competition.
Intense competition may continue to restrict scalability and pricing power with suppliers and customers, thereby constraining profitability. Low-sulphur oil cost accounts for 32-35% of revenue, and a slight variation in its price could adversely impact the company’s operating performance. Moreover, on account of high feeder and bunker cost, the operating margin was volatile at 12-22% in the four fiscals through 2019 (21% in fiscal 2018). The company is also susceptible to fluctuations in foreign exchange (forex) rates, as about half its revenue is forex denominated. This risk is mitigated by a natural hedge as the borrowings are in foreign currency.
Exposure to risks associated with container traffic growth in India The business is directly linked to growth in container traffic. Of the total volume handled, Indian coastal cargo accounts for 50-55% and global Exim the rest. Susceptibility to risks related to any steep fall in Exim trade, leading to sub-optimal utilisation of the fleet, persists. |
Liquidity: Stretched Net cash accrual is expected to remain moderate over the medium term. The unencumbered cash balance estimated to be around Rs 5 crore as on March 31, 2021. The company plans moderate capex of around Rs 80 crore in fiscal 2022, which will be funded mainly through debt. The working capital facilities are primarily converted to foreign currency demand loans, which are fully drawn down. Support from the Transworld group will provide some support to the credit risk profile. Unutilized bank lines of around Rs 4 crore and funds from the proposed transaction is also expected to provide liquidity support in the near term. |
Rating Sensitivity factors Upward factors • Sustained revenue growth with improvement in the operating margin, leading to net cash accrual of above Rs 60 crore per fiscal • Improvement in the debt to earnings before interest, tax, depreciation and amortisation ratio to below 2.5 times • Improvement in the credit risk profile of the Transworld group
Downward factors • Regulatory issues in sale transaction or weaker-than-anticipated operating performance, leading to net cash accrual below Rs 40 crore per fiscal • Deterioration in debt to EBITDA above 4.5 times • Deterioration in the capital structure due to large, debt-funded capex or a stretch in the working capital cycle • Weakening of the credit risk profile of the Transworld group or change in support stance |
About the Company Shreyas Shipping was set up in 1994 by the late Mr R Sivaswamy to own and operate vessels for container feeder operations between Indian and international container trans-shipment ports. The company has diversified into logistics, transportation, warehousing, and distribution services. It was the first to provide coastal trans-shipment services at several domestic ports, including Jawaharlal Nehru Port Trust in Nhava Sheva, Maharashtra. Operations are managed by Mr Ramesh S Ramakrishnan (chairman) and Capt Vivek Kumar Singh (managing director). The associate company, Avana, provides last-mile connectivity to customers in the coastal container segment.
The company reported operating income and profit after tax (PAT) of Rs 392 crore and Rs 13 crore respectively for the first nine months of fiscal 2021, as against Rs 454 crore and Rs 10 crore for corresponding period of last fiscal. |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||
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Criteria Details
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