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GE Shipping: Facing rough waters - Views on News from Equitymaster
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GE Shipping: Facing rough waters
Jan 29, 2010

Performance summary
  • Consolidated sales decline by 27% YoY during 3QFY10 and 31% YoY during 9mFY10.
  • Operating margins fall to 23% in 3QFY10, from 38.6% in 3QFY09. Higher staff costs and sharp rise in cost of hiring chartered ships are the culprits here.
  • On the back of lower sales, weaker operating margins, and higher depreciation, net profits decline by 68% YoY during the quarter. Profits down 72% YoY during the nine-month period.


Consolidated performance
Particulars (Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net Sales 9,668 7,063 -27.0% 30,168 20,898 -30.7%
Expenditure 5,934 5,436 -8.4% 17,275 16,123 -6.7%
Operating Profit (EBITDA) 3,735 1,626 -56.5% 12,893 4,776 -63.0%
EBITDA margin (%) 38.6% 23.0%   42.7% 22.9%  
Other income 495 897 81.4% 1,734 2,205 27.2%
Interest 517 505 -2.3% 1,394 1,659 18.9%
Depreciation 909 1,093 20.3% 2,614 3,133 19.8%
Gain on sale of ships 271 -   2,810 1,733 -38.3%
Profit before tax 3,074 925 -69.9% 13,427 3,922 -70.8%
Tax (20) (19) -3.0% 356 351 -1.3%
Extraordinary income/(expense) (149) -   (149) -  
Net profit 2,945 944 -67.9% 12,923 3,570 -72.4%
Net profit margin (%) 30.5% 13.4%   42.8% 17.1%  
No. of shares (m)       152.3 152.3  
Earnings per share (Rs)*         31.7  
Price to earnings ratio (x)*         8.8  
* On a trailing 12-months basis

What has driven performance in 3QFY10?
  • In carrying on with a weak performance from the previous quarter, GE Shipping (GES) recorded a 27% YoY decline in consolidated net sales during 3QFY10. Nothing seem to be going right for the company given that both the freight rates and demand have been on a lower side. The shipping business (75% of total consolidated sales) recorded a 38% YoY decline in sales during the quarter. This was brought about by a 6% YoY decline in volumes (operating days). Apart from the general slowdown in business activity, lesser revenue days were also due to reduction in the company's tonnage to 2.84 mdwt (million dead weight tonnes), from 2.93 mdwt in 3QFY09. As for the freight rates, these also fell sharply during the quarter. Though dry bulk rates have improved by around 23% over the previous quarter (2QFY10), these are still down almost 32% YoY and 60% from their peak levels of 1QFY09.

    GE Shipping's freight rates
    Data Source: Company

  • For the current fiscal, the management continues to see the demand outlook to be weak, especially for the dry bulk segment. For the tanker market, it expects the next twelve months to be better than the last twelve.

  • GES' operating margins dropped to 23% in 3QFY10, from around 39% in 3QFY09. Higher staff costs and significantly higher cost for chartered ships were the factors that affected margins during the quarter. Cost of chartered ships for instance rose to around 18.4% of 3QFY10 sales, from less than 13% in 3QFY09.

  • On the back of a weak topline and poor operating margins performance, GES recorded a massive 68% YoY decline in its consolidated net profits during 3QFY10.

What to expect?
At the current price of Rs 280, the stock is trading at a multiple of around 0.7 times our estimated FY12 book value per share. As per the management, 3QFY10 saw some uptick in freight rates owing to severe winter in China, Europe and the US, thereby causing congestion at ports while keeping demand for commodities like heating oil higher. It sees the impact of these improved rates visible in the coming quarters. The management is also expecting a fillip on freight rates owing to higher consumption of crude during the current year. This comes on the back of the upward revision in forecast for oil demand by the International Energy Agency. However, any major spike in rates would be kept in check by large US oil inventory, flat growth in consumption from developed economies, and supply of new tanker capacity in the market. We have a 'Hold' view on the stock.

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