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GE Shipping: Strong freight boosts growth - Views on News from Equitymaster

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GE Shipping: Strong freight boosts growth
Jul 22, 2008

Performance summary
  • 1QFY09 sales grow by 10% YoY, aided by higher freight rates for dry bulk and crude carriers.

  • EBIDTA margins expand by 5.5% YoY, aided by lower costs on hire of chartered ships and other expenditure (both as percentage of sales).

  • Net profits drop by 8% YoY during 1QFY09. Growth impacted by a one-time forex loss during the quarter, against a one time gain during 1QFY08. Excluding these extraordinary items from both the quarters, profits are up 72% YoY.



Performance snapshot - Standalone numbers
(Rs m) 1QFY08 1QFY09 Change
Sales 6,371 7,024 10.3%
Expenditure 3,244 3,192 -1.6%
Operating profit (EBDITA) 3,127 3,832 22.6%
Operating profit margin (%) 49.1% 54.6%  
Other income 383 361 -5.7%
Interest 314 383 22.0%
Depreciation 836 780 -6.6%
Profit before tax 2,361 3,030 28.4%
Tax 93 308 232.6%
Extraordinary income/(expense) 1,154 (1,386)  
Gain on sale of ships 789 2,539 221.9%
Profit after tax/(loss) 4,210 3,876 -7.9%
Net profit margin (%) 66.1% 55.2%  
No. of shares (m)   152.3  
Earnings per share (Rs) *   63.4  
P/E ratio (x)   6.3  
*Adjusted for extraordinary items

What has driven performance in 1QFY09?
  • Strong freight rates for dry bulk and crude carriers have helped GE Shipping (GES) to grow its topline by 10% YoY during 1QFY09, despite the fact that its revenue days have declined by 15% YoY (on account of sale of 5 ships). While the crude carrier rates have increased by 38% YoY, dry bulk rates have increased by a whopping 78% YoY. The company currently has a total tonnage capacity of 2.85 DWT (dead weight tonnage) as compared to 3.22 DWT last year.

    Average freight rates* 1QFY08 1QFY09 Change
    Crude carriers 29,488 40,737 38.1%
    Product carriers 22,182 22,146 -0.2%
    Gas carriers 16,564 17,460 5.4%
    Dry bulk 28,446 50,619 77.9%
    * All figures in US$ per day

  • At the operating level, GES reported a 5.5% YoY expansion in operating margins during 1QFY09. This was mainly due to an 11% decline (as percentage of sales) in cost of hiring chartered ships and 1% decrease in other expenses. Direct operating costs (including a large proportion as bunker costs) though increased from 16.7% of sales in 1QFY08 to 18.7% in 1QFY09.

  • GES recorded a 8% YoY fall in profits during 1QFY09. While this looks like a poor performance on the back of a 10% YoY growth in revenues, the bottomline growth was actually impacted by an extraordinary forex loss of Rs 1,386 m during the quarter (since a large part of its loans are denominated in US dollar terms, an appreciation of the greenback against the Indian rupee has led to this forex loss) against an extraordinary gain during 1QFY08. Excluding these one-off items from both the quarters, the company’s bottomline growth for 1QFY09 stands at a solid 72% YoY. Now, the bottomline is also aided by a 222% YoY rise in gains on sales of ships. If one were to exclude both extraordinary items and gains on sale of ships from the profits, the bottomline growth stands at 20% YoY for the quarter.

What to expect?
At the current price of Rs 400, the stock is trading at a multiple of 6.5 times our estimated FY10 earnings. As mentioned by the company in its press release, the key reasons for the high freight rates (for both crude and dry bulk carriers) in 1QFY09 were strong demand from the Chinese markets along with a high floating storage demand. The fact that there was a negligible growth in fleet in the last two quarters also led to an increase in demand for carriers and subsequently the freight rates. The company expects the crude carriers demand to decrease marginally, as oil prices are expected to stabilise. However, it does not expect freight rates to drop as they are restricted by conversions, demolition and the IMO regulation.

GES has planned a capex of approx US$ 780 m to be spent over the next four years. Out of this, nearly US$ 104 m will be invested during the current fiscal, while the balance will be spread through out the next three years. On the completion of this capex the company will have an additional capacity of 1.17 DWT. We shall soon update our research report on the company.

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