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GE Shipping: Prudence paying off - Views on News from Equitymaster

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GE Shipping: Prudence paying off
May 2, 2008

Performance summary
  • Topline grows by 29% YoY in FY08, 36% YoY in 4QFY08.
  • Operating margins contract by 2.3% YoY during the fiscal, largely due to costs incurred on hire of chartered ships.

  • Higher gains on sale of ships aide bottomline, which grows by 54% YoY during FY08. Excluding these gains, net profit growth stands at 43% YoY.

  • Declares third interim dividend of Rs 5 per share and one time special dividend of Rs 2.5 per share. This takes the total dividend declared for FY08 to Rs 15 per share (dividend yield of 3.4%).

Financial snapshot (Standalone)
Particulars (Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net Sales 5,438 7,380 35.7% 19,975 25,807 29.2%
Expenditure 2,446 3,484 42.4% 9,688 13,103 35.3%
Operating Profit (EBITDA) 2,992 3,895 30.2% 10,287 12,704 23.5%
EBITDA margin (%) 55.0% 52.8%   51.5% 49.2%  
Other income 307 (3) -100.9% 1,173 3,334 184.2%
Interest 288 452 56.8% 1,072 1,493 39.3%
Depreciation 706 830 17.5% 2,653 3,410 28.5%
Gain on sale of ships 182 457 151.3% 1,363 2,894 112.3%
Profit before tax 2,486 3,067 23.4% 9,099 14,029 54.2%
Tax 73 74 1.5% 320 462 44.4%
Extraordinary items (4) 1   54 1  
Reported net profit 2,409 2,994 24.3% 8,833 13,568 53.6%
Adjusted net profit* 2,227 2,537 13.9% 7,470 10,674 42.9%
Adjusted net profit margin (%)* 41.0% 34.4%   37.4% 41.4%  
No. of Shares (m)       152.3 152.3  
Earnings per share (Rs)       58.0 89.1  
Price to earnings ratio (x)         4.9  
* Adjusted for gain on sale of ships

What has driven performance in FY08?
  • GE Shipping’s (GES) FY08 topline growth of 29% YoY was largely a combined result of higher revenue days and strong freight rates (especially in the dry bulk segment). Revenue days for the fiscal stood at 17,017 days, higher by 14% YoY. As far as dry bulk rates are concerned, these more than doubled during the year (from an average of US$ 17,500 per day in FY07 to US$ 38,400 per day in FY08. Better tonne-mile demand for iron ore and coal and higher proportion of tonnage utilised in the spot markets have led to this spike in dry bulk rates during the fiscal (these rates increased by 127% YoY in 4QFY08).

    As far as the tanker business is concerned, freight rates were largely flat. On the tonnage front, GES saw a reduction in owned tonnage by the end of the fiscal - 3.07 mdwt (million dead weight tonnes) at the end of March 2008, from 3.26 mdwt at the end of FY07. As indicated by the management in the conference call, GES is pursuing a capital expenditure of US$ 594 m during the period FY09 to FY12. For the offshore services subsidiary, Greatship India, the planned capex stands at US$ 731 m during the period FY09 to FY11 (See details in table below). This capex is estimated to be funded in a debt to equity ratio of 70:30. As far as Greatship is concerned, the entire equity of around US$ 200 is being funded by GES (out of which US$ 150 has already been infused), which currently has a cash balance of around US$ 340 m.

    Planned capex
      GES Greatship
      Capex (US$ m) No. of vessels Capex (US$ m) No. of vessels
    FY09 160 3 104 5
    FY10 130 3 480 10
    FY11 138 3 147 4
    FY12 166 3 - -
    Total 594 12 731 19
    Source: Company

  • The management expects FY09 to be yet another good year for GES, though average freight rates for both tankers and dry bulkers are expected to be stable near their FY08 levels. The fact that a lot of tonnage supplies are expected to come in within the dry bulk segment, freight rates here could be volatile in the short to medium term.

  • GES recorded a 2.3% contraction in its operating margins during FY08. This was a result of higher costs of in-chartered vessels. The pressure on operating margins was however pared on account of lower direct operating expenses. These costs, as percentage of sales, declined from 26.3% in FY07 to 16.9% in FY08.

  • GES recorded a 43% YoY growth in net profits during FY08. This growth was after excluding the gains on sales of ships, which were higher by 112% YoY. Including the same, the bottomline growth stood at 54% YoY for the fiscal. The bottomline growth was also propelled by a 184% YoY rise in other income. Higher other income was on account of the gain that was result of the adoption of AS11 accounting standard as issued by the Ministry of Company Affairs. Due to adoption of this standard, GES booked a gain of Rs 1.5 bn during FY08, on account of changes in forex rates in respect of loan repayments and outstanding forex loans relating to ships acquired from international markets.

What to expect?
At the current price of Rs 438, the stock is trading at 7.1 times and 1.3 times our estimated FY10 earnings per share and book value per share respectively (of the standalone entity). GES’ FY08 performance has surprised us on the positive, given the fact that the company has been able to manage strong growth in the face of freight rate volatility. Its strategy of prudently mixing the spot and forward contracts as also the asset buying and selling initiatives have helped it manage the overall risks better. That fact that the company is on an aggressive expansion mode and sees the growth momentum to be maintained over the next few years is a positive for long term investors. We had recommended the stock in September 2007 with a target that has already been breached. We shall soon update our research report on the company, factoring in the actual numbers for FY08 and also incorporating our estimates for FY11.

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