Shreyas Shipping & Logistics is a multi modal logistics and shipping company founded by Late Sivaswamy. This company is a part of Transworld group of companies with over 25 years of expertise in shipping industry. It operates container between various Indian ports and is the first to get ISP 9002 for container ship and feeder services.

As a young man from a small town in Kerala, R.Sivaswamy developed a fascination with the sea. It is this dream that made him go after acquiring ships and be a pioneer in a container feeder service. Transworld Group was formed in 1977 soon establishing it as a reputed shipping company in India and the Gulf. His son, S. Ramakrishnan took over the company, in 1989, and started completing the dreams of his father. He was able to expand the Transworld Group further developing it into providing transport solution to various segments of clients. The group believes developing unique solutions to address the larger needs of the clients. The mission of the company clearly states that while providing quality service to the clients, they will be committed to excellence with unmatched zeal to explore and discover new businesses placing contribution to the society as its prime objective.

Industry

Container Shipping

Indian shipping industry contributes approximately 0.3% to the country’s GDP. Shipping is a global industry and its prospects are associated with the level of global economic activity. Greater industrial activity leads to greater movement of raw material and finished goods. However, the shipping market is known to be cyclical in nature with volatile freight rates. More than 90% of world merchandise trade is carried by sea and over 50% of that volume is containerized. Shipping has always provided the most cost-effective means of transportation over long distances and containerization has played a crucial role in world maritime transport.

Containerization began in India in 1973 and has grown since then. The increase in containerization has was more in the decade 1995-2005 when India added about 1.76 million TEUs. In the Indian context, growing trade is driving container traffic at major ports in the country. In the last six years, India’s container traffic has increased at a CAGR of 13.56 per cent from 2.468 million Teus in 2000-01 to 4.610 million Teus in 2005-06. Remarkably, India’s container traffic has been growing faster than the global container traffic growth of about 9 per cent during the last six to seven years. The country’s growing external trade particularly in textile, automotive, auto ancillary, engineering and capital goods has boosted container trade growth. Further, the demands placed by India’s growing domestic market characterized by growing population, rising life expectancy, rising disposable incomes, rising standards of living, changes in traditional patterns of consumption and savings are also fuelling container trade growth and has become one of the major drivers for future growth of the domestic container sector.

Globally, the average level of containerization is above 70 per cent, while in India, it is around 40-45 per cent, which is expected to improve rapidly. With the booming Indian economy and the wave of liberalization measures ushered in by successive governments, Indian container traffic is poised for a substantial growth in the next four to five years. Indian container traffic is estimated to grow at a CAGR of 16 per cent in the next five years to reach around 11.98 million Teus by 2011-12 and 52.86 million Teus by 2021-22 from 4.24 million Teus in 2004-05. Indian GDP grew by an average of 6.5 per cent and industry grew by 7 per cent in the past six years while containerization logged a growth of about 14 per cent. In short, during the last six years, for every one per cent growth in industrial output, containerization has grown by 2.25 per cent. Containerization at major ports of India contributed about 11% of total cargo handled at those ports in 2000-01; it increased to 16% in 2005-06 and is estimated to further increase to 22.7% by 2010-11.

According to CII, India has the potential to handle 20 mn TEUs by 2015 as against 4.5 mn TEUs in FY06. The 12 major ports of India have handled 378.89 MT of traffic during April 2006-January 2007 as against 348.05 MT during the same period of the previous financial year. Cargo throughput at the 12 Major Ports recorded a growth of 6.13 per cent during the first half of the financial year over the same period of 2005-06. The Major ports handled 214.64 million tons of cargo during April-September 2006, as against 02.25 million tons in April-September 2005. In view of the current globalization scenario, container traffic in India is all set for a big stride. Logistics

The concept of integrated logistics service (co-ordination of all the logistical activities taking place in a value chain to provide optimum benefit to the user) is new to the context of Indian industry. In India, traditional transport companies, Custom House agents, courier companies and freight forwarders have emerged as integrated logistics service provider by leveraging on their existing infrastructure and experience. They not only provide the prime functions like transportation, warehousing, packaging, clearing and forwarding but also handle other activities like order processing, sales tax and excise duty documentation, invoicing, collection of bills, inventory management, and some others even supply skilled labor. In India, the market for logistics service providers is highly fragmented. The cost of surface logistics is estimated to be anywhere between 9 to 23 per cent of the GDP of any part of the globe. It is an important part of the business economic system and a major global economic activity. The logistics market in India alone is estimated to be US$60 billion. Manufacturing and marketing companies spend about 6 to 36 per cent of sales on logistics. The major cost component is transportation and it is higher than handling, warehousing, and inventory carrying cost. Transportation, an indispensable component of economic progress, is an essential and major sub-function of logistics, creating time and place utility in goods. It serves as the backbone of supply chain management. Globally, transportation sector accounts for around 3 to 5 percent of GDP. The demand for transportation industry is directly proportional to the growth of the economy, mobility of population and other related factors. As per the World Bank’s estimate, a unit increase in GNP in India generates an increase of 1.5 times in freight transport demand. The rapid economic growth on the onset of the liberalization in the last decade has substantially increased the potentiality of transportation in India.

To cope with the expected rise in demand, huge investments have been made in the last few years. There has been an ongoing boom in logistics segment due to a booming economy fueling demand for goods, an ever-increasing mass of consumers demanding higher value goods; the retail boom which is reforming supply chains into being time sensitive from being just volume-sensitive and of course, far more relaxed regulatory and taxation climate than ever before. Logistics in the new millennium is going to be what information technology was in the 1990s. The long term prospects for outsourcing logistics remains valid. Inter-modal and ocean transportation volumes continue to increase, but customers are more and more looking for total solutions. Transportation itself is a ‘commodity’ type service, which whilst important is not enough in itself. The growth of the 3PL industry is expected to accelerate over the next 5 years reflecting increased appetite for outsourcing combined with a stronger economic growth.

Financials

The key financials are listed below

The quarter Dec 07 has witnessed a decline in profitability ratios although there was revenue growth. The FY 07 has been an excellent year of growth for the company. During FY 07 the logistics revenue has contributed to 55% of the total revenue (excluding income from charter hire) during the year as compared to 44% during the last year. Shreyas has also forayed into warehousing business, rendering such services for various customers across the industry verticals. During FY 07, Shreyas has added three vessels to its fleet, i.e., OEL Trust, OEL Shreyas and OEL Express. Finance for these acquisitions has been organized from State Bank of India on attractive terms. The fleet capacity as at the end of the year stands at 5,927 Teus as compared to 4,170 Teus as on 31st March, 2006. This amounts to an effective addition of nearly 42% of the capacity over the year. Moreover, all the recent acquisitions have been of younger vessels thereby reducing the average fleet age from about 23 years as on 31st March, 2006 to about 20.5 years as on 31st March, 2007.

The growth of the logistic services offered by Shreyas is in keeping with the growing evolution in the transportation business and changing outlook. The freight income has steadily increased from Rs.7, 968.34 lacs for 05-06 to Rs.10, 166.56 lacs for 06-07. Apart from the existing services, Shreyas has, during the year, launched a container shuttle service between India and Karachi. The USP of Shreyas on this leg would be that the solution offered is a door-to-door solution where the client is assured of safety, reliability, speed and economy.

Outlook on opportunities

Container shipping

Liberalization of international trade and globalization has contributed significantly towards the robust world trade, which in turn increased the container traffic. Globally, containerization is growing at over 9.2% per annum and is expected to grow over 10% per annum in the next five years based on the promising world economic growth. Global trade has bolstered container traffic world-wide and widespread acceptance of containerization is evident from the current growth trend. The ongoing trade agreements between countries will enhance container trade, particularly in the Asian Pacific countries. China will make inroads in the East-bound transpacific trade lane with roaring manufacturing sector. The main routes that are likely to attain the highest expansion are Intra-Asian transport and routes from North America and Europe to Asia. According to forecasts by Drewry, ports in Baltic and Black Sea, South America, Africa, China and India will register the highest growth rates in container handling. In view of the current globalization scenario, container traffic in India is all set for a big stride. Acceptance of container trade in India, although very low, is picking up exponentially. The huge potential of containerization in India has to be harnessed through various measures by the Government of India. Riding high with booming economy, India is becoming the most preferred destination for manufacturing outsourcing in the world, offering greater potential for containerization. India’s retail industry is estimated to be over USD 200 billion, which is expected to grow at a CAGR 30% over the next five years. The growing industrialization in India will boost containerization in the country, which offers immense private and public investment opportunities in port infrastructure development. The shipping industry has proposed to the Shipping Ministry that if a slice of forex reserves were to be used to develop infrastructure projects in the country, shipping should also get a proportionate share in the scheme, as it was part of the infrastructure. This proposal, if accepted, would further brighten the prospects of the industry.

Indian Railways has allowed private participation in inland container transport which will result in a decline in rail freight rates which is encouraging for container shipping companies.

India and Pakistan have signed a revised shipping protocol, which replaces the protocol on resumption of shipping services signed by India and Pakistan in 1975, which restricted lifting of cargo destined to the other country by the vessels belonging to India or Pakistan only. Also, the vessels of India or Pakistan could not lift the cargo destined to or from other countries from each other’s ports. The revised protocol removes restrictions on lifting of third country cargo by Indian and Pakistani vessels from each other’s ports. It also lifted the restriction that the cargo destined for the other country could be carried only by an Indian or Pakistani vessel. Signing of this protocol which was long awaited throws open prospects for Shreyas which has been the first operator to commence services from India into Karachi.

It is projected that port capacity will be 1.1billion metric tons by 2012 and almost 2 billion by 2017. There is much action happening in the port sector. In the next two years about 28 projects are expected to be awarded to the private sector. This would involve cargo traffic of 200 million metric tons per annum with an aggregate investment of $2.25 billion. Consequently, there are several green field port projects that are coming up under the various state governments which will lead to additional capacity. Under the National Maritime Development Programme (NMDP), government is trying to invest in the private-public partnership to the tune of Rs 1, 00,000 crore ($22 billion) of which approx Rs 55,800 crore ($12 billion) is earmarked to be spent on the port sector and the remaining Rs 44,500 crore ($10 billion) is going to be spent on shipping and inland water development. The Government of India has set the target of achieving India’s export share of 1.5% to world merchandise trade by 2009 and this will create huge opportunities for containerization in the country. Looking at the overall aspect of the industry, it can be concluded that future of container shipping business would be bright enough.

Logistics

With the strategies taken up by traditional industrial firms to reduce operational costs and enhance value addition throughout the value chain, importance of integrated logistics has got a new dimension. Outsourcing of logistics service to specialized service provider having considerable expertise over the industry becomes the trend. Overall the role of integrated logistics services is expected to increase in the new economy leading to betterment of value chain.

Estimated increase in the output of the basic industries is likely to create substantial demand for bulk transportation. With the expected annual growth of Indian economy likely to cross 6 percent mark in near future, transportation demand is also likely to rise substantially and estimated to become double in next ten years. A recent study of 3PL markets reports encouraging developments for logistics players in the country. Increasing preferences of companies to outsource their logistics functions to 3PL service providers is fueling demand for Third Party Logistics (3PL) services in India. Preference of new foreign entrants to India to outsource their logistics operations in the country from a Third Party Logistics (3PL) service provider is expected to boost 3PL activities in a big way.

Outlook on Threats, Risks and Concerns

Shipping

Declining share of Indian shipping in the country’s overseas seaborne trade has been alarming. It is especially so when India’s international trade is booming. From 40% in the late 80s, today Indian ships carry only 13.7% of the country’s international trade. As on December 31, 2006, the tonnage was 774 ships of 8.4 million GT. With an average age of the Indian fleet of 18 years, over 40% of that will be due for scrapping in the next five years. According to estimates, India’s exim trade is expected to maintain a year-on-year growth of 20%. Therefore, it is expected to reach around 1 billion tones by 2009-10 from 400 million tones in 2004-05. Even to maintain the same level of 13.7% in the ever-growing Indian trade, the Indian shipping tonnage needs to expand rapidly.

Inadequate port infrastructure in India is a major bottleneck for containerization in the country. India’s contribution to global containerization is insignificant (just over 1%). Port capacity has to be enhanced to handle the projected container traffic in India. During 2005-06, cargo handled by major ports was 423.41m tons; while total capacity was 440.2m tons, which indicates about 96% of port utilization. India still lacks deep water in many ports and currently, only Mundra Port has a draft in excess of 14 meters. However, most ports have embarked on major dredging exercises this year. Inadequate road infrastructure is one of the important challenges for the growing containerization in India. Another important bottleneck for container terminals in India is timely evacuation of containers

Age profile of Indian fleet is another concern for maritime transport. In India, as of January 2005, 39% of ships are above 20 years as compared to 27.3% global ship age distribution; 17% of ships are under five years against over 23% in the average global fleet. These old ships are becoming a major concern for maritime transport.

In India there has been an improvement in productivity in terms of ship turnaround time which was 3.53 days at major ports and average pre-berthing waiting time was 6.03 hrs in 2004-05. But the performance is very low as compared to international standards.

Lack of adequate infrastructure in form of container handling equipment, Container Freight station (CFS) network and rail network in other ports have led to concentration of container traffic at Mumbai and JNPT.

The challenges before the domestic container logistics sector are to acquire, assimilate and integrate technologies, solutions, etc into their systems so as to provide Indian shippers with a true integrated, multimodal transport and logistics value chains and the benefits of visibility, control and seamless flow of goods.

Roads are the lifeline of any nation providing the widest connectivity like any infrastructure sector and the only mode that can provide door-to-door service. Having the second largest road network in the world with 3.3 million km, 75% of freight traffic and 85% of the passenger traffic goes by road in India. The national highway, which constitutes 2% of the overall network, carries 40% of the traffic. Trucking, being unorganized and de-regulated, is also highly fragmented. The small operators contribute 86% to the road sector. As a result, technology has not made much headway into the road transport.

Summary

The company has identified its synergies and has been in the forefront of logistics by providing warehousing and integrated door to door delivery of goods. The shipping volume decline or the uncompetitive rates will be largely made up by the logistics services the company is offering. I believe that this is a low priced and high growth oriented company with right valuation for the investor to lock investments for a long term especiallly if the stock reaches its support levels of Rs. 60.