The shipping industry has its fortunes highly correlated to those of the global trade. As such, companies from this sector usually have growth rates that are highly volatile, very much in line with the precariousness that characterises global trade in merchandise. Now, the last year has seen shipping companies benefit largely from a pickup in global trade and, consequently, freight rates. This has helped them not only in improving their topline performance but has also aided a better utilisation of their capacities (vessels). In this regard, let us take a look at the performance of Great Eastern (GE) Shipping, the largest private sector shipping company in the country.
GE Shipping's large fleet has aided the company's growth in recent times as it has been, for instance, able to meet demand arising from rising oil demand since the beginning of the third quarter of 2004 (3QFY04). Apart from this spurt in oil demand (volumes), the company has also benefited consequently from the rise in spot freight rates (prices). Improvements in these two factors (volumes and prices) have had a positive impact on the company's performance at present. While it has been a bumper period for shipping majors in the last two years, growing concerns of an imminent slowdown in the Chinese economy could spoil the party in the future. While this could impact dry bulk rates, tanker rates are likely to decline at a slower rate due to steady demand for oil.
Note: mdwt-million dead weight tonnes
GE Shipping's proactive management has been one of the major strengths over the years, and especially during the period when the global economy was under a slowdown and trade took a backseat. In these testing times, the company's management was able to foresee trends and it altered the fleet mix accordingly to improve realisations.
At the current price of Rs 135, the stock trades at a P/E multiple of 6.7x annualised 9mFY04 earnings. These valuations are at the higher end of the spectrum considering the high levels of volatility that affect shipping companies' performance. Also, while the company believes that spot freight rates shall remain strong throughout FY05 as well, we believe that oversupply situation in the industry combined with slower growth in demand is likely to affect rates going forward. In fact, GE Shipping has some aggressive capital expenditure plans for the next three years. If topline were to grow at a slower rate, higher depreciation and interest charges could impact profitability, though the implementation of the tonnage tax is a positive. Also, due to uncertainties over growth of economies of Japan and Southeast Asia (these account a large chunk of sea trade with India), there could be shocks on the demand for tonnage. Considering these facts in mind, investors need to practice caution.
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