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GE Shipping: Dry bulk prop - Views on News from Equitymaster
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GE Shipping: Dry bulk prop
Jan 25, 2007

Performance Summary
GE Shipping (GES) has announced its results for the third quarter and nine month ended December 2006. For 3QFY07, the company has reported a marginal 1% YoY growth in revenues. This was on the back of lower operating days and softness in product tanker spot rates. Operating margins have, however, expanded by 140 basis points (1.4%), primarily on the back of lower repairs and maintenance cost. Excluding the extra-ordinary items, the bottomline has grown by an impressive 31% YoY during 3QFY07.

Performance Snapshot - Standalone Numbers
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net Sales 4,860 4,908 1.0% 14,064 14,537 3.4%
Expenditure 2,713 2,669 -1.6% 7,412 7,242 -2.3%
Operating Profit (EBDITA) 2,148 2,239 4.2% 6,652 7,295 9.7%
EBITDA margin (%) 44.2% 45.6%   47.3% 50.2%  
Other income 119 291 144.9% 544 866 59.1%
Interest 275 243 -11.7% 737 784 6.4%
Depreciation 668 594 -11.0% 2,058 1,946 -5.4%
Extraordinary items 365 - - 2,438 1,181 -51.5%
Profit before tax 1,688 1,693 0.2% 6,840 6,613 -3.3%
Tax 60 93 56.5% 287 247 -14.0%
Profit after Tax 1,629 1,600 -1.8% 6,553 6,366 -2.9%
Prior period items - 59 - - 58 -
Net profit 1,629 1,659 1.8% 6,553 6,424 -2.0%
Net profit margin (%) 33.5% 33.8%   46.6% 44.2%  
No. of Shares (m) 3.5% 5.5%   190.3 190.3  
Diluted earnings per share (Rs)*       47.3 47.3  
Price to earnings ratio (x)*         4.5  
*Trailing twelve months

Company background
GES is the largest private sector shipping company in India. Currently, the company has a fleet of 41 vessels, including 32 tankers (14 crude carriers, 16 product carriers and 2 LPG carriers) and 9 dry bulk carriers, with an average age of 13.1 years and tonnage of 2.96 mdwt. The company is predominantly focused in the crude and product transportation segment with largely 'Aframax' type tanker mix. Crude and product tanker constitute almost 90% of the total tonnage of the company, with the rest in the dry bulk segment. The offshore business of GES has been de-merged into a separate company called Great Offshore with effect from October 16, 2006.

What has driven performance in 3QFY07?
Dry bulk aids topline: Decline in operating days coupled with soft crude and product tanker rates have led to GES reporting a lacklustre topline growth during 3QFY07. In fact, the 1% YoY growth has mainly been on account of firm dry bulk rates, which registered an increase of 21% YoY. While the tanker freight market was soft on account of huge build up of inventories in anticipation of a hurricane season and an unusual warmer winter in the US, dry bulk rates were boosted by a continued strong demand for steel and iron-ore and long-haul movement of the US grain exports to Asia. For the quarter, revenue days (including in-chartering days) at 3,683 days were lower by around 4.4% YoY. The owned tonnage for the quarter was higher by around 4% YoY at 2.92 mdwt.

Lower R&M expenses aid margins: Led by lower repairs and maintenance costs, GES reported a 140 basis points (1.4%) expansion in operating margins during 3QFY07. However, increase in direct operating costs restricted the margin expansion to a large extent. As can bee seen in the table below, R&M expenses, as a percentage of sales, decreased from 15.3% in 3QFY06 to 9.4% in 3QFY07, whereas the same for direct operating expenses stood at 29.5%, compared to 25.9% in the previous year.

Cost break-up
% of sales 3QFY06 3QFY07 9mFY06 9mFY07
Staff cost 8.0% 9.2% 8.4% 8.7%
Repairs and maintenance 15.3% 9.4% 11.8% 7.6%
Direct operating exp. 25.9% 29.5% 23.2% 26.2%
Other expenses 6.6% 6.3% 8.7% 7.2%
Decrease in stock trade 0.0% 0.0% 0.6% 0.0%

Impressive bottomline performance: Excluding extraordinary items (net of ‘gain on sale of ships’ and ‘loss on impairment of assets’), GES’ bottomline has grown by an impressive 31% YoY during 3QFY07. The strong performance at the profitability front was largely on account of higher other income and lower interest and depreciation charges. The growth in other income was on account of higher treasury yields. Effective tax rate (tax as a percentage of PBT) for the quarter was, however, higher at 5.5% (3.5% in 3QFY06) on account of higher proportion of income generated by non-tax tonnage assets.

What to expect?
At the current price of Rs 214, the stock is trading at 0.7 times our estimated FY09 book value. GES has outlined a capex of US$ 450 m for the shipping business and US$ 380 m for the offshore business (Greatship India), spread over the next 2.5 years. The cash and debt position of the company as of 3QFY07 is Rs 12 bn and Rs 18 bn respectively. Though we are optimistic about the dry-bulk rates going forward, the tanker rates are expected to soften further on account of huge inventory built-up in the US (higher than 5 year average) and next round of cuts in the crude production by OPEC. Overall, we maintain our positive view on the stock from a long-term perspective.

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