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G E Shipping: Margin pressure persists - Views on News from Equitymaster
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G E Shipping: Margin pressure persists
Feb 13, 2012

G E Shipping has announced its December quarter results. The company has reported a 17.5% growth in standalone topline and a 64% drop in bottomline. Here is our analysis of the results.

Performance summary
  • Topline grows by 17.5% YoY during the quarter
  • Operating margins contract by 15.4% on the back of higher outgo towards hiring of chartered ships and rigs
  • Near tripling of interest expenses leads to a huge 64% fall in net profits for the quarter
  • Nine month based bottomline falls 55% YoY on the back of an 13% growth in topline

(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Net sales 3,626 4,259 17.5% 11,489 13,013 13.3%
Expenditure 1,981 2,985 50.7% 6,165 8,779 42.4%
Operating profit (EBDITA) 1,645 1,274 -22.5% 5,324 4,235 -20.5%
EBDITA margin (%) 45.4% 29.9%   46.3% 32.5%  
Other income 289 522 80.5% 1,196 1,988 66.3%
Interest (net) 267 739 176.5% 1,039 2,097 101.9%
Depreciation 752 980 30.3% 2,272 2,785 22.5%
Profit before tax 915 77 -91.6% 3,209 1,342 -58.2%
Extraordinary items - 210   - 210  
Tax 120 -   225 220 -2.1%
Profit after tax/(loss) 795 287 -63.9% 2,984 1,332 -55.4%
Net profit margin (%) 21.9% 6.7%   26.0% 10.2%  
No. of shares (m) 152.3 152.3   152.3 152.3  
Diluted earnings per share (Rs)*         14.2  
Price to earnings ratio (x)*            
(* on trailing twelve months earnings)

What has driven performance in 3QFY12?
  • The company's topline grew by a modest 17.5% YoY during the quarter. The growth was driven mostly by freight and charter hire division as the company earned very little from sale of ships. As per the company, reasonable improvement in tanker deployment and earning were witnessed in the Q3FY12 as compared to immediately preceding quarter. However, these positives were overshadowed by a steady supply of new ships, which kept a lid on freight rates. As far as the outlook is concerned, limited improvement in demand and a steady addition to supply will keep freight rates under pressure in the near term.
    Cost break-up...
    (Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
    Employees cost 549 548 -0.3% 1,691 1,653 -2.3%
    % sales 15.1% 12.9%   14.7% 12.7%  
    Repairs and Maintenance 385 617 60.2% 1,168 1,458 24.8%
    % sales 10.6% 14.5%   10.2% 11.2%  
    Direct operating expenses 801 1,196 49.2% 2,744 3,540 29.0%
    % sales 22.1% 28.1%   23.9% 27.2%  
    Other operating expenses 72 79 10.3% 270 245 -9.3%
    % sales 2.0% 1.9%   2.3% 1.9%  
    Hire of chartered ships & rigs 98 556 465.1% 138 1,895 1276.4%
    % sales 2.7% 13.0%   1.2% 14.6%  
    Other expenses 75 (11)   155 (12)  
    % sales 2.1% -0.3%   1.3% -0.1%  

  • On the costs front, margins have taken a hit to the tune of 15.4%. The biggest impact has come on account of costs incurred for hire of chartered ships and rigs. From just 2.7% of sales in 3QFY11, this cost component increased to become 13% of topline for the quarter ended December 2011. The margins were salvaged a bit on account of fall in other expenses.

  • While operating profits fell by 22.5% YoY, a near 3-fold jump in interest expenses resulted in the PBT falling by 92% YoY and the PAT taking a hit to the tune of 64% YoY during the quarter. The interest costs jumped sharply on account of an adjustment related to borrowings in foreign currency.

  • The company's offshore business continued to do well, increasing its revenues by about 61% YoY and segmental profits by more than 50% YoY. Another Rs 983 m were pumped into the offshore business related subsidiary, taking the total investment till now to Rs 17 bn.

What to expect?
At the current price of Rs 250, the stock trades at a multiple of around 0.6 times its expected FY14 standalone book value per share. While short term pressures persist, in the long run shipping companies are likely to benefit from strong consumption demand from China and India as they build up infrastructure to support economic growth. In view of this, we remain positive on the stock.

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