Higher operating profitability, healthy balance sheets to keep credit profiles stable
The Indian ship recycling industry will see revenue grow ~15% this fiscal after two years of decline - 22% in fiscal 2024 and 8.5% in fiscal 2023.
The growth will be supported by two factors. First, the increased availability of ageing vessels for recycling due to addition of new vessel capacity globally. Second, the higher competitiveness of Indian ship recyclers compared with the key rival nations, Bangladesh and Pakistan.
The increased availability of ageing vessels will bring down input cost for ship recyclers, This, along with higher capacity utilization leading to better efficiency, will improve operating profitability by 75 basis points (bps) to 6.5% this fiscal.
Higher cash generation and absence of capital expenditure (capex), along with healthy balance sheets, will keep credit profiles stable for Indian ship recyclers. A CRISIL Ratings analysis of 22 ship recyclers, accounting for close to half of the industry revenues of Rs 4,400 crore, indicates as much.
Says Nitin Kansal, Director, CRISIL Ratings, "The addition of ship freight capacity for container and dry-bulk fleet globally will bring down the freight rate over the medium term. In fact, container fleet capacity alone is expected to increase 10% this fiscal. The lower freight rate will make ageing vessels operating beyond their age limit uneconomical due to high repair and insurance cost which in-turn will lead to increase in vessels available for dismantling globally."
Indian ship recyclers are expected to grab a lion's share of the increased volume of condemned vessels, given their higher competitiveness leading to likely volume growth of around ~20-23%. Key competitors Bangladesh and Pakistan are facing a severe crisis of foreign currency availability and ship recyclers in these countries are hence taking longer to complete vessel purchases and thus owners of condemned vessels likely to avoiding these markets. For the record, these three countries account for 85% of the global ship recycling volume.
Operating margins are seen improving this fiscal for two reasons. First, increased availability of condemned vessels is likely to bring the purchase cost down by ~6%, while output (scrap steel) prices are expected to remain firm.
Second, the increase in volume of ship recycling will lead to better cost efficiency as capacity utilization is seen improving to around 50%.
Says Nilesh Agarwal, Associate Director, CRISIL Ratings, "With higher revenue and improved profitability, the cash flow of ship recyclers rated by CRISIL Ratings is expected to increase 20% this fiscal. Moreover, absence of capex as yard capacity utilisation will remain around 50%, along with healthy balance sheets, will keep credit profiles stable."
The interest coverage and gearing are expected to improve to 4 times and 1.1 times, respectively, this fiscal from 3.6 times and 1.2 times, respectively, in the past three fiscals.
All said, geopolitical disruptions and their impact on freight rates, as well as steel demand will remain monitorable. |
