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Management focus holds the key... - Views on News from Equitymaster
 
 
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  • Jul 8, 2000

    Management focus holds the key...

    One of India’s shipping ‘greats’, The Great Eastern Shipping Corporation (GESCO) owns around 15 percent of the country's fleet. The average age of the fleet is around 14 years. It is the largest private operator of Offshore Support Vessels (OSVs) in India, which are mainly chartered to Oil and Natural Gas Corporation. Most of these OSVs are on time charter basis (this refers to the contracts for hire of ships for certain period of time and the shipowner receives the agreed sum in advance and at regular intervals).

    Bulk carriers contribute around 35 percent to 45 percent to the company’s revenue. The fleet includes 14 bulk carriers and 4 mini-bulk carriers. Since the Handy Index is going up, currently at 1,621, thanks to the revitalized sentiment in the world trade scenario, there should be a notable improvement in their performance for the current year.

      GESCO SCI*
    Dry Bulk carriers    
    Number of ships 20 25
    DWT 0.59 1.08
    Oil/Product tankers    
    Number of ships 17 49
    DWT 0.71 3.33
    Other Ships    
    Number of ships 22 42
    DWT 0.02 0.59
    Total fleet 59 116
    Average age 13.2 14.6

    * Shipping Corporation of India

    Tankers are mainly employed by GESCO on annual time charter basis with Indian oil companies, especially ONGC. The company has 13 product tankers, 3 crude tankers, one liquefied petroleum gas carrier (LPG) and 3 anchor-handling vessels. As the freight rates are ascertained by the government on an annual basis they are less sensitive to international freight rates. On the offshore vessels front there is an upward shift in demand due to the increase in demand for oil field services thus benefiting GESCO’s offshore division.

    GESCO's tonnage portfolio
    (dwt mt) FY98 FY99 FY00
    Bulk Carriers 593,992 534,950 523,590
    Tankers 712,542 883,040 873,363
    Offshore vessels 25,900 25,900 28,775
    Total 1,332,434 1,443,890 1,425,728

    In the financial year 2000, the company’s reported a 2 percent decline in turnover from Rs 9,290 million to Rs 9,146 million. The operating margins were also under strain as they dropped from 35 percent to 32 percent. This was largely due to the surge in operating costs (up 4 percent). However, the company managed to save its face due to profit from sale of vessels, which prevented the bottomline to drop sharply. During the year the company GESCO added a harbor tug, a bulk carrier and a tanker to its fleet.

    Down but not out...
    (Rs m) FY99 FY00 Change
    Sales 9,290 9,146 -2%
    Other Income 514 319 -38%
    Expenditure 6,039 6,260 4%
    Operating Profit (EBDIT) 3,251 2,886 -11%
    Operating Profit Margin (%) 35% 32%
    Interest 578 608 5%
    Depreciation 1,647 1,812 10%
    Profit before Tax 1,539 785 -49%
    Other Adjustments* 5 480 8781%
    Tax 280 160 -43%
    Profit after Tax/(Loss) 1,264 1,105 -13%
    Net profit margin (%) 14% 12%
    Earnings per share 4.4 4.3

    In order to improve the company’s flagging profitability, G E Shipping has been restructuring its business over the last three years, divesting its non-core businesses and increasing its focus on shipping. This is apparent from the fact that the proportion of offshore vessel income to the total revenues is increasing. In the current year, the company has hived off its property division into a separate company called Gesco Corporation Limited. The business being demerged includes project management and business centres development. However the apprehension is that the company has not demerged it totally but has retained some of its property development division. The company is also planning for buy back of shares (GESCO is cash rich company with more than Rs 3 billion in cash), which is likely to unlock value.

    With firm charter rates for both the crude carriers and product tankers looking up and depreciating rupee, the company should be able to record improved earnings in the next year. With improving trade scenario both in Asian region, which accounts for 37 percent of the global sea borne trade, the tonnage demand should go up.

    Since the world order book is showing a downward trend even as the demand for tonnage goes up, the freight rates should move upwards. This should benefit the company in terms of better realisations. The company is also venturing into LPG transportation, which has good growth potential. With recovery in South Asia and the world trade both the freight rates and the assets value (ships) are expected to up. This effect is already visible from the first quarter results of the company. Its net profit has shot up from Rs 158 million to Rs 458 million quarter on quarter. The operating margins have also improved dramatically from 32 percent last year to 42 percent for the current year.

    But not everything is in the company’s favour. It seems that the management has not learnt from the past mistakes it committed by venturing into non-core businesses. This is apparent from its recent acquisition of Boston Computers, which is engaged in computer education and training. Unless the management focuses on its strengths, it might be back to square one for the company.

     

     

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