Varun Shipping Company Ltd Management Discussions

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SELECTED FINANCIAL INFORMATION

The following selected financial data has been prepared in accordance with Indian Accounting Standards, in conjunction with our financial statements and related notes and “Managements Discussion and Analysis of Financial Condition and Results of Operations”. The audited financial statements have been prepared in Indian rupees and have been prepared in accordance with Indian Accounting Standards for the fiscal years ended 2000, 2001, 2002, 2003, 2004 and three months ended 30^th June, 2004. For detailed financial statements, prepared in accordance with Indian Accounting Standards, as required by Guidelines, please refer “Auditors Report” of this Letter of Offer.

Statement of Profit and Loss for the year ended March 31, 2000, 2001, 2002, 2003, 2004 and for three months ended 30^th June, 2004

Rs in Lakhs (except per share data)

			For the year ended
	3 months ended 30-June-04	31-Mar-04	31-Mar-03	31-Mar-02	31-Mar-01	31-Mar-00
INCOME
Income from Operations	7,984.57	29,287.28	23,025.70	21,275.03	21,139.25	18,388.36
Profit on sale of Ships and Other Fixed Assets		45.62	497.13	0.13	_	_
Other Income	68.29	103.04	151.39	90.26	40.83	87.57
	8,052.86	29,435.94	23,674.22	21,365.42	21,180.08	18,475.93
EXPENDITURE
Operating Cost	4,308.54	14,215.16	11,386.31	8,873.19	8,146.28	7,030.88
Staff Cost	768.22	2,875.22	2,911.31	2,871.45	2,731.58	2,505.74
Administration Cost	344.37	1,420.86	1,002.41	1,314.78	1,318.64	1,017.22
Interest and Finance Cost	349.26	1,746.17	1,948.80	2,382.04	3,098.13	3,021.03
Depreciation	1,497.83	5,367.51	5,189.12	4,407.31	4,115.17	3,893.86
	7,268.22	25,624.92	22,437.95	19,848.77	19,409.80	17,468.73
Profit/(Loss) before Taxation	784.64	3,811.02	1,236.27	1,516.65	1,770.28	1,007.20
Less: Provision for Taxation	55.54	230.42	98.00	123.23	149.00	113.42
Less: Deferred Tax	-	-	-	9.00	-	-
Profit/( Loss) after Taxation	729.10	3,580.60	1,138.27	1,384.42	1,621.28	893.78
Ratio Analysis
Earning Per Share (Rs.)	0.97#	4.71	1.35*	3.33	3.85	1.83
Return on Networth	3.13%#	15.72%	4.95%*	7.51%	9.01%	4.49%
Book Value per Share (Rs.)	31.00#	30.00	27.27*	44.43	42.80	40.60

* EPS, return on networth and book value per share are lower for the year ended 31^st March 2003 on account of conversion of 3,62,61,591 FCDs into Equity Shares.

# Ratios for the quarter ended 30^th June, 2004 are not annualized.

The following discussion of our financial condition and results of operations should be read together with the audited financial statements for each of the fiscals ended 31^st March 2000, 2001, 2002, 2003, 2004 and three months ended 30^th June, 2004, including the notes thereto and the reports thereon, which appear elsewhere in this Letter of Offer. The audited financial statements are prepared in accordance with Indian Accounting Standards.

The fiscal ends on 31^st March of each year, so all references to a particular fiscal are to the twelve-month period ended 31^st March of that year.

2001 Vs 2000

Income from operations improved by 14.96 per cent to Rs.21,139.25 lakhs in 2000-01 from Rs. 18,388.36 lakhs in 1999-00. This was mainly on account of improved freight rates.

Operating cost increased by 15.86 per cent from Rs.7,030.88 lakhs in 1999-00 to Rs.8,146.28 lakhs in 2000-01.

Profit before depreciation, interest and tax increased by 13.40 per cent to Rs.8,983.58 lakhs in 2000-01 from Rs.7,922.09 lakhs in 1999-00.

Depreciation increased from Rs.3,893.86 lakhs in 1999-00 to Rs.4,115.17 lakhs in 2000-01. This was on account of acquisition of vessel MT. Vijaydoot in December, 1999 which was being operated on bareboat charter basis prior to acquisition.

The profit after tax increased substantially by 81.40 per cent to Rs. 1,621.28 lakhs in 2000-01 from Rs.893.78 lakhs in 1999-00.

2002 Vs 2001

Income from operations increased to Rs.21,275.03 lakhs in 2001-02 from Rs.21,139.25 lakhs in 2000-01.

Operating cost increased by 8.92 per cent from Rs.8,146.28 lakhs in 2000-01 to Rs.8,873.19 lakhs in 2001-02 mainly due to costs incurred on fleet maintenance to achieve desired standard of operations. The Company also incurred additional costs on fleet insurance as the arrangement for protection and indemnity Insurance for some of the ships were shifted to an alternative insurer. This resulted in certain prepayment charges being incurred to exit from the previous arrangement.

Consequently the profit before depreciation, interest and taxes declined from Rs.8,983.58 lakhs in 2000-01 to Rs.8,306 lakhs in 2001-02.

Interest and finance cost reduced substantially by 23.11 per cent to Rs.2,382.04 lakhs in 2001-02 from Rs.3,098.13 lakhs in 2000-01 due to net reduction in borrowings and lower interest rates. Depreciation increased from Rs.4,115.17 lakhs in 2000-01 to Rs.4,407.31 lakhs in 2001-02 due to capitalization of ship acquired on BBCD basis.

2003 Vs 2002

Although the freight rates continued to remain depressed in the first half of 2002-03, income from operations increased by 8.22 per cent to Rs.23,025.70 lakhs in 2002-03 as compared to Rs.21,275.03 lakhs in 2001-02.

Operating cost increased from Rs.8,873.19 lakhs in 2001-02 to Rs.11,386.31 lakhs in 2002-03 by 28.32 per cent. Increase was due to higher costs incurred on upgrading its fleet to meet global standards of operation and also due to increase in bunker costs and port charges.

The profit before depreciation, interest and taxes improved marginally to Rs.8,374.19 lakhs in 2002-03 from Rs.8,306 lakhs in 2001-02.

There was a significant reduction of 18.18 per cent in interest and finance cost to Rs. 1,948.80 lakhs in 2002-03 from Rs.2,382.04 lakhs in 2001-02. This was on account of efficiency in interest cost despite addition of an LPG Carrier Maharshi Dattatreya to the fleet during the year 2002-03.

Depreciation increased from Rs.4,407.31 lakhs in 2001-02 to Rs.5,189.12 lakhs in 2002-03 due to addition of a ship as mentioned above.

There was a decline in profit after tax from Rs.1,384.42 lakhs in 2001-02 to Rs.1,138.27 lakhs in 2002-03.

2004 Vs 2003

Income from operations improved by 27.19 per cent in 2003-04 to Rs.29,287.28 lakhs from Rs.23,025.70 lakhs in 2002-03 due to improved freight rates and better turn around of ships. Operating cost increased by 24.84 per cent from Rs.11,386.31 lakhs in 2002-03 to Rs.14,215.16 lakhs in 2003-04 mainly due to increase in repairs and maintenance cost of fleet.

Profit before depreciation, interest and tax improved by 30.40 per cent to Rs.10,924.70 lakhs in 2003-04 as compared to Rs. 8,374.19 lakhs in 2002-03. Interest and finance cost reduced by 10.39 per cent to Rs.1,746.17 lakhs in 2003-04 from Rs.1,948.80 lakhs in 2002-03 due to substitution of high cost of debt with debt carrying lower interest rate as well as general reduction in interest rates.

The profit after tax increased substantially by 214.56 per cent to Rs. 3,580.60 lakhs in 2003-04 from Rs.1,138.27 lakhs in 2002-03.

Post audit period viz. 30^th June, 2004

The company continues to enjoy the benefits of improved freight rates. The income from operations amounted to Rs.5,807.81 lakhs for the 2 month period ended 31^st August, 2004. The profit before tax for the said period is Rs.1,423.24 lakhs. In addition company has acquired another LPG Carrier viz. Maharshi Shubhatreya on 25^th August, 2004 and also entered into an Memorandum of Agreement for acquisition of a LPG carrier. Further, the company is negotiating the sale of two ships namely, MT Vishwa Doot and MT Shakti Doot and is in the process of entering into Memorandum of Agreement for sale which is expected to be completed shortly.

Performance Analysis

The profit after tax declined from Rs.1,621.28 lakhs in 2000-01 to Rs.1,384.42 lakhs in 2001-02. This was due to depressed freight rates in 2002. The operating expenditure also increased by 8.92 per cent due to higher cost of fleet maintenance and additional costs incurred on fleet insurance due to change in insurance arrangements for some of the ships. Similarly the profit after tax declined from Rs.1,384.42 lakhs in 2001-02 to Rs.1,138.27 lakhs in 2002-03. This was mainly due to lower freight rates during a part of the year and additional costs incurred on upgrading the fleet to meet global standards of operation. The profit after tax for 2003-2004 was Rs.3,580.60 lakhs. The increase in profit was mainly due to improvement in freight rates and better turnaround of companys ships.

Unusual or infrequent events and transaction

There were no unusual or infrequent events or transactions during the last 5 years.

Significant economic changes that materially affected or are likely to affect income from continued operations

Freight rates have remained buoyant in the last one year due to overall recovery in world economies and particularly in the South East Asian region with China and India contributing to a significant growth in the GDP This trend is likely to continue in the near future and will have a positive effect on the Companys operations.

Known trend or uncertainties.

Commissioning of new refineries in India will result in an increased domestic production of petroleum products thereby reducing the import of these products. This would translate to a drop in demand for product tankers employed on the import trade. However increased domestic production will also give rise to a greater movement of refined products on the Indian coast from regions where they are surplus to regions which are in deficit, thus partially offsetting the fall in demand caused by reduced imports. India has chartering guidelines that ensure a “right of first refusal” to existing Indian flag tonnage on any charter to an Indian company. Surplus arising in refined products due to expansion of refining capacities will be largely exported. This will create further employment potential for Indian ships.

Safety considerations and stricter tonnage regulations are resulting in phasing out of single hull tankers. The new regulation prohibits the transport of heavy oil grades in single hull oil tankers to ensure transportation of most polluting products in the safest ships. The new regulation also imposes a broader and earlier compliance with reinforced inspection rules for single hull tankers, which have not yet reached their age limit. The European Union (EU) and The Marine Environment Protection Committee (MEPC) of the IMO have committed themselves to the phasing out of single hull tankers. The accelerated scrapping of older tonnage will offset the additions to existing capacity.

As the Companys fleet consists of well maintained ocean going ships the Company is able to divert its ships to international cross trading.

Future relationship between cost and revenue.

The relationship between revenue/costs on the existing fleet is likely to improve in the future on account of demand for quality tonnage in view of stricter regulations. Well maintained ships will be supported by premium charter rates. Interest costs are expected to decline due to an overall reduction in interest rates and also due to repayment of existing term loans. The proposed expansion will also enable the Company to spread fixed overhead expenses on a larger revenue base.

Status of any publicly announced new products or business segment.

The Company has not announced any new product or business segment.

Extent of seasonality in the business.

Though the ships are in operation continuously throughout the year, the freight rates are generally better during the winter months compared to the summer months due to the northern hemisphere requiring heating fuels during the winter season. The shipping industry is also subject to global demand and supply balances arising due to factors such as shifts in trade patterns, regional economic climates, crop production and world fleet size. The Company hedges itself against downturns in a given sector by owning a well diversified shipping fleet catering to dry, liquid and gas cargoes.

Any significant dependence on any one customer or supplier

There is a significant dependence on the Indian public sector oil companies, as most of the product tankers and LPG carriers are employed for carriage of petroleum products and LPG on their behalf. However, the Companys fleet is well maintained and capable of international cross trading and therefore can be employed with foreign chaterers or other private sector Indian charterers. The Company is operating some of its ships in international pool arrangements.

The Company operates 2 offshore supply vessels which are presently deployed with ONGC and charter arrangements for the same are expected to continue in the near future.

Competitive Conditions

Shipping Industry is international in character and hence is subject to global competition. However, the Company has during the last 31 years, acquired adequate technical and commercial competence to compete globally. The Companys ships are capable of being deployed on the Indian coast as well as in overseas trade and are suitable to carry a variety of cargoes. The Companys technical and operating efficiency has been appreciated by its charterers. The Company has also measured upto international operating norms by ensuring compliance of ISO 9001:2000 and the International Safety Management (ISM) code for all its required ships. The ship acquisition cost as well as operating and maintenance standard of the ships owned by the Company are bench marked to international standards and hence the Company is capable of withstanding international competition.