Essar Shipping is planning to cut its $1.1 billion debt (around Rs5,740 crore). The company plans to drive up its valuations by deleveraging, even as it has a debt to equity ratio of 1:1, standard for shipping companies.
"We would like to go further lower. Deleveraging is a big focus now. We have to see how we are going to drive the valuation of the company really high," said AR Ramakrishnan, managing director. Fine-tuning of finance costs, he said, would help improve margins. In the quarter ended December, interest and finance expenses increased 39 per cent as compared to the year before.
Though the company is yet to set targets on the amount of debt to reduce this financial year, it has strategies in place. For one, it will use its cash flows to reduce a part of the debt. "Fortunately, we have the ability to start with good cash flows. Therefore, there is a certain amount of internal accruals that will happen, which will be used to bring down our debt levels," said Ramakrishnan.
In recent weeks, shipping rates have shown an up turn after an extended spell of low rates. In the tanker segment, the rates in recent months went as high as $30,000 per day for very large crude carriers, which the company sees as a good sign for this financial year.
Essar Shipping, into offshore drilling services and logistics, in addition to leasing ships, is also looking to refinance the rupee part of its debt. It took rupee debt between 2008 and 2011, when international financing was tough to come by. "The obvious one (for reduction) will be the rupee debt, which can be refinanced with dollar denominated debt anywhere outside India," said Ramakrishnan.
Traditionally, shipping finance is provided majorly by European banks, now under a cloud due to the continent's financial crisis.
International financing is common for shipping companies, which have a natural hedge as their payouts, as well as revenue come in the form of dollars. Interest rates have been on an upturn since early 2010 in India, and remained high for most of last year, even as they stabilised last October and are falling. This has increased the financing costs of many companies.
"We will see from where we: can knock off a few percentage points from the interest rates. On the existing dollar;debts, we will look to elongate the repayment period, so that the cash flow eases a bit," said Ramakrishnan.