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GE Shipping: A focussed approach - Views on News from Equitymaster
 
 
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  • Mar 30, 2002

    GE Shipping: A focussed approach

    GE Shipping is the largest private sector shipping company in the India. The company had a fleet strength of 60 ships constituting 17 dry bulk carriers, 17 crude carriers (including product tankers) and 26 offshore vessels in its offshore division. The company sold three bulk carriers in the current fiscal and consequently, its aggregate capacity stands at around 1.4 million dead weight tonnage (mdwt). One of the key positive of the company is that it is backed by a management, which is reputed for its understanding of the shipping business.

    The current year performance of the company has been lacklustre. Freight rates peaked in the second half of FY01 and since then it has remained subdued. The operating environment deteriorated on account of slowdown in three major economies viz. US, Japan and Europe. Terrorist attacks on the US and other factors like reduction in crude throughput by the Organisation of Petroleum Exporting Countries (OPEC) further aggravated the scenario. This is vindicated by the fact that per day earnings for Aframax crude carriers was trading at US$ 24,200 per day as compared with US$ 58,000 in December 2000 and US$ 26,400 in October 2001. The scenario has been similar for other segments as well.

    Quarterly trend
    Segment 1QFY02 2QFY02 3QFY02 9mFY02
    Sales growth 46.2% 24.7% 5.4% 22.3%
    Operating margins 38.4% 40.0% 46.6% 41.5%
    Net profit growth 35.5% 35.3% 70.3% 43.5%

    But Gesco took advantage of higher tanker rates in FY01 and entered into charter in 1QFY02. The company had covered almost 35% of FY01 crude tanker revenues in the first quarter of the current financial year itself. It had also covered 35% of product tanker revenues in the same period. Gesco was able to circumvent slowdown and post sales growth. A brief look at the quarterly trend in revenues vindicates this. While 1QFY02 sales grew by an impressive 46%, it was lower in 2QFY02 at 25%. In 3QFY02, the impact of slowdown in the economy was clearly visible with topline increasing by just 5%.

    Going forward, Gesco intends to focus more on crude, products and offshore segments. The company’s tonnage acquisition plan also aligns with its long-term strategy. Towards augmenting its fleet, GE Shipping has placed orders for three Aframax carriers and two product tankers. The delivery of which are expected starting January 2003. The total consideration for the tonnage acquisition is estimated at around Rs 9 bn over the next four years. It has been gradually increasing its presence in the international markets over the years, which augurs well for Gesco in the long run. International operations contributed to more than 55% of the shipping revenues in FY01 as against 5% in FY97.

    One of the most promising segments in the shipping sector is the offshore segment. The company has been gradually strengthening its presence and caters to demand for most of the public sector oil companies as well as international oil exploration majors like Cairns and Hardy. Of the two new platform vessels it had placed orders, one vessel was delivered in March 2002. It has deployed the vessel in the North Sea, which is in line with its effort to increase presence in the international market. Apart from North Sea, its offshore division already has penetrated the Middle East. Given the government thrust in oil exploration, contribution from this division is expected to increase in the coming years.

    Subdued domestic environment has forced India Inc to become competitive and Gesco is no exception. It has pruned its working capital requirement through an online tracking mechanism, which would enable the company to take care of requirements of its fleet (like fuel and spare parts) even in the international markets through a network of dealers. This has had positive results on its financials. Inventory turnover days had more than halved to 40 days in FY01.

    Meanwhile, the company has evinced interest in Shipping Corporation of India (SCI), the public sector shipping major, in which the government hopes to divest 51% stake. Gesco might have to shell out more than Rs 10 bn if it were to acquire SCI. The company has said that it would be either through a special purpose vehicle (SPV) or in partnership with a foreign major. But this acquisition combined with its huge capacity expansion plan to the tune of around Rs 10 bn would test its leverage ratios. (Click here to read on what is the fair value of SCI?).

    Besides, it had initiated the process of exiting from non-core businesses since last year. In FY01, it de-merged its real estate business to a separate subsidiary. It has stopped trading in commodities with effect from March 31, 2001. Expenses towards the commodity and property development divisions accounted for as much as 10% of sales in FY01. The company hopes to cut its exposure to capital markets. The FY01 cash flow statement of the company reveals that the company had lent around Rs 900 m towards ‘vyaj badla’. This would go a long way in not only improving profitability but enhance transparency in its operations, which has been the key cause of concern of investors till now.

     

     

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