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GE Shipping: Outperforms, yet affected - Views on News from Equitymaster
 
 
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  • Apr 30, 2002

    GE Shipping: Outperforms, yet affected

    Though the Great Eastern Shipping Company (Gesco) managed to circumvent the slowdown for the first nine months of the FY02, the slowdown in the economy and the consequent pressure on freight rates has affected the company's fourth quarter performance. Nevertheless, the company's full year performance is commendable given the subdued world trade scenario.

    (Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
    Net sales 3,316 2,560 -22.8% 10,807 11,724 8.5%
    Other Income 106 57 -46.2% 383 233 -39.0%
    Expenditure 2,212 1,557 -29.6% 6,811 6,916 1.5%
    Operating Profit (EBDIT) 1,105 1,003 -9.2% 3,996 4,809 20.3%
    Operating Profit Margin (%) 33.3% 39.2%   37.0% 41.0%  
    Interest 170 95 -44.1% 717 503 -29.9%
    Depreciation 491 485 -1.3% 2,008 2,017 0.5%
    Profit before Tax 550 480 -12.6% 1,654 2,522 52.5%
    Extraordinary items 126 (33)   360 6  
    Tax 129 140 8.9% 240 453 88.7%
    Profit after Tax/(Loss) 547 308 -43.8% 1,774 2,075 16.9%
    Net profit margin (%) 16.5% 12.0%   16.4% 17.7%  
    No. of Shares (m) 217.8 202.6   217.8 202.6  
    Diluted Earnings per share 10.1 6.1   8.1 10.2  
    P/E Ratio (x)         3.3  

    The company has managed to lower the impact of slowdown through effective shift to charter-based shipping at the start of FY02. The fourth quarter results of the company clearly vindicates this argument. Revenue from its charter division contributed to 65% of sales in 4QFY02 as compared to 55% in the corresponding period last year. The weakness in freight rates is reflected in freight and demurrage income, which declined by 43% in 4QFY02. However, for the full year ended FY02, revenue from freight markets is on the higher side because Gesco had entered into charter based on March 2001 freight rates. As a result, though freight rates fell by as high as 40% from 2001 levels, the company has managed to outperform the market. The results are in line with expectations.

    Revenue break-up: Charters contribute to a chunků
    (Rs m) 4QFY01 4QFY02 % change FY01 FY02 % change
    Freight and demurrage 1,430 816 -42.9% 3,365 3,918 16.4%
    % of sales 43.1% 31.9%   31.1% 33.4%  
    Charter hire 1,818 1,665 -8.4% 6,438 6,811 5.8%
    % of sales 54.8% 65.0%   59.6% 58.1%  
    Project - - - 66 213 221.9%
    % of sales 0.0% 0.0%   0.6% 1.8%  
    Others 269 79 -70.6% 938 783 -16.6%
    % of sales 8.1% 3.1%   8.7% 6.7%  

    Operating margins for FY02 have also increased notably and this was primarily aided by exit from select identified non-core businesses like commodity trading and real estate. In FY01, expenses incurred towards its commodity trading division accounted for 7% of total expenditure. Consequently, by exiting this business Gesco has been benefited significantly. Interest costs have also declined substantially for FY02, as the company is estimated to have repaid debt close to Rs 2.5 bn. Despite additions to the fleet, depreciation charges are on the lower side as Gesco sold some of its dry bulk vessels in FY02. Extraordinary items here pertains to profit from sale of ships to the tune of Rs 6 m, which is significantly lower as compared to FY01. Tax outflow has increased due to deferred taxation. Net profit for FY02 has gone up 17% to Rs 2,075 m. However, if one were to equate the huge variation in extraordinary income, net profit stands increased by 46%.

    The stock currently trades at Rs 34 implying a P/E multiple of 3.3x FY02 earnings. The company's buy back plan, restructuring and Gesco's interest in acquiring Shipping Corporation of India (the PSU shipping major) have been aiding the stock price recently. As far as outlook for the company is concerned, freight rates have remained weak over the last quarter and there are no clear indications of a recovery in the US economy. While advanced economies like US, European Union and Japan are expected to grow from 1.7% in FY02 to 3.0% in FY03, it is the developing nations like China and India, which are expected to outpace others (as per IMF). International Energy Agency's forecast for crude demand is also on the lower side. Even international shipping majors like Teekay Shipping have given a cautious outlook for freight rates in the near term. Given this backdrop, we expect Gesco's profits to decline by 6%-8% in the coming fiscal.

     

     

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