Bharat K. Sheth's tough decisions propelled Great Eastern Shipping into the front ranks

Like for many executives across the world, the Lehman moment in 2008 was a big wake up call for Bharat K. Sheth. “We were always conservative as a company. Lehman taught us we were not conservative enough for Black Swan events and that was a huge learning,” says the Deputy Chairman & Managing Director of The Great Eastern Shipping Co. Ltd.

It was time to get back to the basics, and that meant revisiting the risk model. From a fundamental point of view, it was about defining risk and how to prepare for the unexpected. “Shipping is a very capex-intensive business, and everything hinges on capital allocation. The question is: What is the leverage within which you are willing to play the game,” explains Sheth.

A decision to cut back on debt was taken. Interestingly, the company was in very good shape (it had a triple A rating), and this was done proactively. There was a committed capex of $1.6 billion, but banks were understandably nervous, and funding could have become a challenge.

Reflecting on the period, Sheth, winner in the Transport & Logistics category of the BT-PwC India’s Best CEOs ranking this year, says: “Shipping being amongst the most volatile industries globally, few companies have been around for over 75 years.” Great Eastern has learnt over the years that “having low leverage, high cash balances and a strict discipline on making acquisitions in low markets is the best mantra for long term survival.” Today, it has a fleet of 42 ships—crude, product, gas, and dry bulk carriers. It also owns and operates one of India’s largest and most modern fleets in the offshore oilfield exploration and production sector. It has four jack-up rigs and 19 offshore support vessels.

It conducted an exercise to identify risks afresh after Lehman. That phase turned out to be invaluable, and by 2016, the scenario had changed and Great Eastern was hungry. “Asset values had dropped considerably, and we had the capacity to invest. The phase between 2008 and 2016 was about being on the Titanic and not hitting the iceberg but changing direction,” says Sheth. If Lehman was a big lesson in the unexpected, it meant being better prepared when the pandemic hit. In financial terms, that process of strengthening the balance sheet worked very well. The investments made in 2016 paid off, yielding a dollar return of close to 30% in seven years.

The approach to cash is also interesting. To survive a Black Swan event, there is cash that will never be touched, and that is the first bucket. The second is to extend the runway, and the third is “to take advantage of blood on the streets”. To Sheth, the present moment is critical, and being debt-free is also about investing wisely and needing that big opportunity. “There are too many moving parts in our industry, and on a global scale, we are still at the mid-level. It is necessary for us to be at the table with the big boys, and with 85% of our revenue coming from outside India, we want to sail with them.”

In the business it operates in, there is the option of taking the balance sheet risk or the operational risk. “With a balance sheet in control, I can take an operational risk. While I have the cash today, a sudden spike in oil prices could change everything,” emphasises Sheth. The other business of Great Eastern is Greatship (India), a player in offshore oilfield services, which is today “almost net debt-free”.

According to Vinit Bolinjkar, Head (Research) at Ventura Securities, Great Eastern understands the shipping cycle very well. “They get it well on asset flipping and manage to buy at low prices and sell at high prices. Now, with a turnaround in the oil industry, the rig business will do well,” he says. He says the company is risk-averse when it comes to debt, and a long-term charter approach results in good cash flows. “They have a healthy mix, with the spot rates helping in the short term.”

For Sheth, risks are a part of the business. “Look at what is going on in the Red Sea, and it is not easy to mitigate it,” he says. The focus of Great Eastern has been on superior capital allocation. Be it buying bulk carriers, tankers or even buying back its own shares. “Along with the right capital allocation, keeping the balance sheet light also helps us take greater operational leverage and this has worked well for us over the last few years,” says Sheth.

Clearly, there is merit in getting the basics right.

@krishnagopalan