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GE Shipping: Tides are favourable - Views on News from Equitymaster
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GE Shipping: Tides are favourable
Jul 30, 2007

Performance Summary
  • Topline grows by 47% YoY on the back of strong dry bulk rates and increase in operating days on in-chartered vessels.

  • Operating margins contract by 470 basis points to 49.1% due to increased contribution of in-chartered vessels to the topline.

  • Extraordinary income (on account of forex gains and sale of ships) leads to a 75% YoY growth in bottomline. Adjusted PAT growth witnessed at 40% YoY.

  • NAV (net asset value) at the end of June 2007 stood at Rs 405 per share.

Performance Snapshot - Standalone Numbers
(Rs m) 1QFY07 1QFY08 Change
Net Sales 4,338 6,371 46.9%
Expenditure 2,007 3,244 61.6%
Operating Profit (EBDITA) 2,331 3,127 34.1%
EBITDA margin (%) 53.7% 49.1%  
Other income 342 383 12.1%
Interest 274 314 14.6%
Depreciation 709 836 17.8%
Extraordinary items 793 1,942 144.9%
Profit before tax 2,483 4,303 73.3%
Tax 73 93 26.2%
Net profit 2,410 4,210 74.7%
Net profit margin (%) 55.6% 66.1%  
No. of Shares (m) 152.3 152.3  
Book value per share (Rs)*   205.3  
Price to book value (x)*   1.6  
*Book value as on 31st March 2007

What is the company’s business?
Great Eastern Shipping (GES) is the largest private sector shipping company in India. Currently, the company has a fleet of 46 vessels, including 34 tankers (13 crude carriers, 19 product carriers and 2 LPG carriers) and 12 dry bulk carriers (1 capesize, 2 panamax, 6 handymax and 3 handysize), with an average age of 12.2 years and tonnage of 3.22 mdwt. The company is predominantly focused in the crude and product transportation segment, which together account for almost 90% of the total tonnage of the company (with the rest in the dry bulk segment). The offshore business of GES has been de-merged into a separate company called Great Offshore with effect from October 16, 2006.

What has driven the performance in 1QFY08?
Strong dry-bulk rates and in-chartering drives topline: GES has reported a strong 47% YoY growth in topline for 1QFY08. This was mainly due to 84% YoY surge in dry-bulk rates. During the quarter, bulkers recorded an average TCY (time charter yield) of US$ 28,446 per day, as against an average TCY of US$ 15,487 per day in 4QFY07. TCY for crude and product tankers too witnessed an increase of 11% YoY. The topline growth was also bolstered by the increase in revenue days on in-chartered vessels, which increased from 88 days in the previous year to 349 days in 1QFY08. For the quarter, revenue days (including in-chartering days) at 4,327 days were higher by around 14% YoY. Owned tonnage increased by 12% YoY to 3.22 mdwt as against 2.87 mdwt in 1QFY07.

Cost break-up
% of sales 1QFY07 1QFY08
Staff cost 9.2% 8.4%
Repairs and maintenance 7.9% 4.2%
Direct operating exp. 18.1% 16.7%
Hire of chartered ships 3.5% 15.7%
Other expenses 7.6% 5.9%
In-chartering expenses impact margins: Margins are typically lower in the in-chartering business which primarily involves hiring of vessels from a third-party on time-charter basis. As mentioned earlier, revenue days for in-chartered vessels increased from 88 days in the previous year to 349 days in 1QFY08. Hence, increased contribution from this business to the overall topline led to a fall in operating margins. As a percentage of sales, expenses on hire of chartered ship increased to 15.7% in the quarter as compared to mere 3.5% during the previous year. Other overheads like staff cost, repairs & maintenance, and direct operating expenses, however, witnessed a decline.

Profitability masked due to forex gains: Extraordinary items like gain on sale of sales and foreign exchange gains led to a 75% YoY jump in net profits in 1QFY08. Adjusting for the same, net profit grew by 40% YoY during the quarter as compared to a 47% YoY growth in topline. This was mainly on account of the contraction in operating margins. Adjusted net margins for the quarter stood at 35.6% as compared to 37.3% in 1QFY07.

What to expect?
At the current price of Rs 334, the stock is trading at 1.6 times its FY07 book value. As of 30th June 2007, GES had a NAV (net asset value) of Rs 450 per share. The company has outlined a capex of US$ 450 m for the shipping business and US$ 380 m for the offshore business (Greatship India), spread over the next 2.5 years. The management believes that the tanker rates have bottomed out and one could see higher rates in coming quarters. As far as the bulk segment is concerned, the strength is expected to continue on the back of strong iron ore and coal demand from Asia. We had not included the revenues from the offshore business in our past projections. Considering the fact that the offshore subsidiary will contribute meaningfully to the overall profitability, we need to revise our numbers.

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