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GE Shipping: A focused approach - Views on News from Equitymaster
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  • May 9, 2001

    GE Shipping: A focused approach

    The Great Eastern Shipping Company (Gesco) had its analyst meet yesterday where it discussed its current year performance, the outlook for FY02 and its future strategies for growth.

    Gesco reported a 100% growth in net profits for the fourth quarter ended 31st March 2001 to Rs 646 m. Sales for the fourth quarter have also gone up by 30% to Rs 3,006 m, which is primarily on account of a 98% rise in freight and demurrage income. Net profits for FY01 has increased by 66% to Rs 1,775 m on the back of a 10% rise in sales. Operating margins for FY01 has also gone up to 42% from 32% in FY00 primarily on account of higher freight rates as well as a 3% reduction in operating expenditure.

    Following are some of the key initiatives taken by the company to propel growth. The company’s geographical mix has changed substantially in the last three years. It has been realigning its fleet to cater the international markets, which has had positive implications on Gesco. Currently, international operations contribute to more than 55% of the shipping revenues as against 5% in FY97.

    Though freight rates, in general, have come off from their highs in the second half of the current year, they are still higher than the FY00 levels. To put things in perspective, Aframax rates, which touched the US$ 40,000 per day earnings levels is currently hovering around US$ 25,000 per day. This when compared to its low of US$ 10,100 per day in the last ten years is 147% higher.

    The company expects the freight rates for the tanker segment to remain more or less at the current levels, as the International Energy Agency expects the oil demand to increase by 1.8% this year. Another reason is that the ton-mile demand has actually gone up in recent periods, which effectively means that the per-voyage miles have been on the rise. So, both the crude as well as the product carriers’ supply is reduced to that period. This will help maintain the freight rates despite the fact that almost 4% of the existing fleet is expected to be added towards the end of the year. Since demand for product tankers is expected to fall in the coming years in domestic markets (due to the rise in refining capacities in India), the repositioning of the product tankers is expected to benefit Gesco.

    However, the prospects for the dry bulk segment do not seem encouraging. Due to a substantial rise in new order for dry-bulk carriers, the Baltic Freight Index has fallen to 1,500 levels recently. The segment should grow by atleast 6% to maintain the freight rates at the current level, which is very unlikely as the industry is expected to grow only by 2% in the current year.

    On the offshore front, Gesco is one of the leading offshore service providers for companies like ONGC, Cairns, Hardy and Enron. Gesco has placed orders for 2 service vessels, the delivery of which is expected by FY02. The other encouraging fact is that the company has almost covered 35% of FY01 shipping revenues in the first quarter of the current year while it is 57% for the offshore division.

    The company has embarked on a capital expenditure of Rs 8 bn over a three-year horizon for augmenting its fleet, especially the Aframax tankers. Gesco expects to fund the proposed expansion plans through a mix of debt as well as equity (the current debt in the books of Gesco is Rs 8 bn).

    The scrip is trading at Rs 33 a P/E of 4.1x the FY01 earnings. The company has reduced its exposure towards equities and commodities in the last two years with the aim of becoming a pure shipping company (current exposure towards equities is Rs 2 m). This is a positive move for the company in the longer run. The price to book value of company is 0.6 and it is trading at 0.5 to its net asset value of Rs 67.



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