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GE Shipping: Dry bulk led growth - Views on News from Equitymaster
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GE Shipping: Dry bulk led growth
Jan 30, 2008

Performance summary
  • Topline grows by 23% YoY in 3QFY08, 27% YoY in 9mFY08. Growth led by bigger fleet and higher dry bulk rates. Tanker rates come under pressure.
  • Operating margins expand by 2.4% during 3QFY08 due to lower repairs and maintenance and direct operating expenses.

  • Higher extraordinary income (on account of unrealised forex gains and sale of ships) leads to a 77% YoY growth in bottomline during the third quarter. Adjusted PAT grows by 47% YoY.

  • NAV (net asset value) at the end of December 2007 stood at Rs 540 per share.

  • Declares second interim dividend of Rs 3.5 per share (dividend yield of 0.9%).

Financial snapshot - Standalone numbers
Particulars (Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net Sales 4,908 6,043 23.1% 14,462 18,427 27.4%
Expenditure 2,669 3,140 17.7% 7,242 9,619 32.8%
Operating Profit (EBITDA) 2,239 2,903 29.7% 7,220 8,808 22.0%
EBITDA margin (%) 45.6% 48.0%   49.9% 47.8% -
Other income 291 910 212.6% 941 3,337 254.5%
Interest 243 386 58.9% 784 1,041 32.8%
Depreciation 594 878 47.8% 1,946 2,580 32.5%
Gain on sale of ships   490 - 1,181 2,437 106.3%
Profit before tax 1,693 3,039 79.5% 6,613 10,962 65.8%
Tax 93 103 10.6% 247 388 57.0%
Extraordinary items 59 - -100.0% 58 0  
Reported net profit 1,659 2,936 77.0% 6,424 10,574 64.6%
Adjusted net profit* 1,659 2,445 47.4% 5,243 8,137 55.2%
Adjusted net profit margin (%) 33.8% 40.5% - 36.3% 44.2% -
No. of Shares (m)         152.3  
Earnings per share^ (Rs)         68.1  
Price to earnings ratio^ (x)         6.0  
* Adjusted for gain on sale of ships and unrelaised forex gains.  ^On a trailing twelve month basis

What has driven performance in 3QFY08?
  • Strong dry-bulk rates have been the lead growth driver for GE Shipping (GES) during 3QFY08. As reported by the company, these rates increased by 155% YoY to stand at over US$ 45,000 per day in 3QFY08 (US% 17,700 per day in 3QFY07). Better tonne-mile demand for iron ore and coal has led to this spike in dry bulk rates during the quarter. However, the company recorded some softness in tanker rates, which were down by 21% YoY. Apart from lower tanker rates, the topline growth was also impacted by the decline in the number of revenue days, both from owned and in-chartered vessels (decline of 1% YoY and 34% YoY respectively). GES increased its owned tonnage to 3.14 mdwt (million dead weight tonnes), from 2.92 mdwt at the end of 3QFY07. The company is pursuing a capital expenditure of US$ 589 m to add 0.85 mdwt of shipping tonnage over the next few 2-3 years. For the offshore services subsidiary, Greatship India, the planned capex stands at US$ 667 m during the same period.

  • GES recorded a 2.4% expansion in its operating margins during the quarter. This was a result of lower repairs and maintenance expenses. These costs declined from 9.4% of sales in 3QFY07 to 7.1% of sales in 3QFY08. The decline in direct operating expenses also aided the margin expansion during the quarter.

  • GES recorded a 47% YoY growth in net profits during 3QFY08. This growth was after excluding the gains on sales of ships to the tune of Rs 490 m. Including the same, the bottomline growth stood at 77% YoY. This was also propelled by substantially higher other income, which was result of the adoption of AS11 accounting standard as issued by the Ministry of Company Affairs. Due to adoption of this standard, GES booked gains of Rs 224 m during 3QFY08, on account of changes in forex rates in respect of loan repayments and outstanding forex loans relating to ships acquired from international markets.

What to expect?
At the current price of Rs 410, the stock is trading at 6.7 times and 1.2 times our estimated FY10 earnings and book value respectively. Apart from the strong growth that is envisaged for the shipping business, is one were to consider the value of offshore services subsidiary (Greatship), we believe that the stock is attractive from a long-term investment perspective.

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