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GE Shipping: Gain on ship sales aids profits - Views on News from Equitymaster
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GE Shipping: Gain on ship sales aids profits
Feb 14, 2011

GE Shipping has declared its 3QFY11 results. The company has reported 21% YoY decline in sales while net profit has grown by 25% YoY. Here is our analysis of the results.

Performance summary
  • Consolidated net sales decline by 21% YoY during 3QFY11. This is largely due to a 13% YoY fall in the number of revenue days for the shipping business.
  • Operating margins rise to 36.6% during the quarter, from 23% in 3QFY10. This has been led by decline in most cost heads.
  • Led by the improvement in operating margins, and also helped by lower interest and depreciation charges, net profits grow by around 25% YoY during the quarter. Profit growth for the nine-month period (9mFY11) stands at 28% YoY.
  • Withdraws the proposed IPO of the offshore subsidiary Greatship India Ltd.

Consolidated performance
Particulars (Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Net Sales 7,063 5,560 -21.3% 20,898 18,313 -12.4%
Expenditure 5,436 3,525 -35.2% 16,123 10,985 -31.9%
Operating Profit (EBITDA) 1,626 2,035 25.2% 4,776 7,328 53.4%
EBITDA margin (%) 23.0% 36.6%   22.9% 40.0%  
Other income 897 332 -63.0% 2,205 1,316 -40.3%
Interest 505 486 -3.9% 1,659 1,747 5.3%
Depreciation 1,093 1,060 -3.0% 3,133 3,106 -0.9%
Gain on sale of ships - 551   1,733 1,251 -27.8%
Profit before tax 925 1,372 48.4% 3,922 5,042 28.6%
Tax (19) 188   351 428 21.7%
Minority interest - 10   - 35  
Net profit 944 1,175 24.5% 3,570 4,579 28.3%
Net profit margin (%) 13.4% 21.1%   17.1% 25.0%  
No. of shares (m)       152.3 152.3  
Earnings per share (Rs)*         40.3  
Price to earnings ratio (x)*         7.0  
* On a trailing 12-months basis

What has driven performance in 3QFY11?
  • GE Shipping (GES) recorded another quarter of decline in sales. The same fell by around 21% YoY during 3QFY11. This was led by a decline in revenue days for the shipping business. GES' total revenue days during 3QFY11 stood at 2,974, down 13% as compared to 3,402 days in 3QFY10. This has been led by a decline the company's total tonnage. The same stood at 2.49 mdwt at the end of December 2010, as compared to 2.84 mdwt at the end of December 2009. Overall, this led to a 34% decline in the company's shipping business revenues. The sales from this business were also impacted by lower shipping freight rates, especially those for the product tankers and dry bulk carriers. While rates for the former were down 19% YoY during the quarter, those for the latter were down 4% YoY. Freight rates for crude carriers however witnessed a slight improvement of 1% YoY.

  • As per the management, the decline in freight rates for the product tankers was largely due to weak demand for heating oil in the US. Also, the return of ships from floating storages (used by oil companies to store oil) added to the supply, thereby adding to the pressure on rates. As for the dry bulk rates, the management has indicated that the fall was largely seen during the second half of 3QFY11. Slowdown in Brazilian iron ore exports to Asia was one of the main factors behind softer dry bulk demand. To add to this, towards the end of the quarter, floods in Australia resulted in shutting down of coal mines and disrupting transport chain, which impacted the coal exports putting pressure on the dry bulk rates.

  • GES' operating margins improved to 36.6% during 3QFY11, from around 23% in 3QFY10. This was led by a decline across all major cost heads. The company's direct operating costs for instance fell from 22.5% of sales in 3QFY10 to 18% in 3QFY11. Also, GES earned a small forex gain during the quarter as against the large forex loss it had incurred in 3QFY10. This also helped the improvement in margins

  • Led by better operating margins, GES' net profits grew by around 25% YoY during 3QFY11. The company also benefited from a one-time gain on sales of ships. Excluding this, net profits fell 34% YoY during the quarter.

  • GES' offshore subsidiary Greatship India Ltd. (GIL) has withdrawn its IPO. The management has indicated that this has been done ‘in light of the prevailing market conditions'!

What to expect?
At the current price of Rs 282, the stock is trading at a multiple of around 0.7 times our estimated FY13 book value per share. GES' 9mFY11 has almost been in line with meeting our full year estimates. We thus maintain our view on the stock from a 2-3 years perspective.

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