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GE Shipping: But for the forex gains... - Views on News from Equitymaster

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GE Shipping: But for the forex gains...

Jul 30, 2010

GE Shipping has announced its 1QFY11 results. The company has reported 11% YoY decline in net sales. Net profits have however risen by 11% YoY. Here is our analysis of the results.

Performance summary
  • Consolidated net sales decline by 11% YoY during 1QFY11. This is largely due to a decline in the number of revenue days for the shipping business.
  • Operating margins surge to 46.9% in 1QFY11, from 21.4% in 1QFY10. This is mainly owing to a forex gain this quarter as compared to a huge forex loss in 1QFY10. Excluding the impact of these forex adjustments, operating margins stand at 40.6% for the quarter, as compared to 35.6% in the corresponding previous quarter.
  • Led by the improvement in operating margins, net profits grow by 11% YoY during the quarter. However, if one were to exclude the impact of forex adjustments (as mentioned above) as also the gains on sale of ships from the profits, the same are down 37% YoY for 1QFY11.


Consolidated performance
Particulars (Rs m) 1QFY10 1QFY11 Change
Net Sales 7,208 6,443 -10.6%
Expenditure 5,666 3,424 -39.6%
Operating Profit (EBITDA) 1,542 3,019 95.8%
EBITDA margin (%) 21.4% 46.9%  
Other income 453 392 -13.4%
Interest 446 931 108.7%
Depreciation 961 1,047 9.0%
Gain on sale of ships 1,195 441 -63.1%
Profit before tax 1,783 1,874 5.1%
Tax 241 144 -40.1%
Minority interest - 12  
Net profit 1,542 1,718 11.4%
Net profit margin (%) 21.4% 26.7%  
No. of shares (m) 152.3 152.3  
Earnings per share (Rs)*   34.8  
Price to earnings ratio (x)*   8.2  
* On a trailing 12-months basis

What has driven performance in 1QFY11?
  • The bad times continued for GE Shipping (GES), as the company recorded another quarter of decline in sales. This time again, the pressure was led by the shipping business where sales (including gain on sale of ships and the segment’s share of other income) were down 32% YoY during the quarter. On the back of continued lean demand environment, the company recorded 5% lesser number of revenue days during the quarter. And apart from the general weakness in business activity, lesser revenue days were also due to reduction in the company’s tonnage to 2.66 mdwt (million dead weight tonne), from 2.88 mdwt in 1QFY10.

    As for the freight rates, the same weakened for both the crude and product carriers. While rates for the former were down 14% YoY, these fell by around 9% YoY for the latter. The company however saw some pickup in the rates for its dry bulk carriers, which were up around 25% YoY. This was driven by strong imports from China of commodities like metals and food grains. Less supply of new dry bulk ships and port congestions also aided the small recovery in dry bulk rates during the quarter. However, a large part of the improvement in these rates came about in the first two months of the quarter (April and May) as June saw a substantial drop in rate on the back of lower Chinese demand for iron ore.

    Data Source: Company

  • For the current fiscal, the management sees the demand outlook to remain weak. But it expects some recovery in the crude tanker market driven by early signs of growth in the US oil demand and rising crude imports. It believes Asia will remain the growth driver for the product tanker segment. This is given that import of petroleum products in Asia is expected to grow by 6% YoY during the year. As far as the dry bulk segment is concerned, China will continue to be the key driver. As per the management, a prolonged slowdown in Chinese commodity imports is likely to keep the pressure on dry bulk freight rates.

  • GES’ operating margins surged to 46.9% in 1QFY11, from 21.4% in 1QFY10. This was mainly owing to a forex gain this quarter as compared to a huge forex loss in 1QFY10. Excluding the impact of these forex adjustments, operating margins stand at 40.6% for the quarter, as compared to 35.6% in the corresponding previous quarter.

  • Led by the improvement in operating margins, GES’ net profits grew by 11% YoY during the quarter. However, if one were to exclude the impact of forex adjustments (as mentioned above) as also the gains on sale of ships from the profits, the same are down 37% YoY for 1QFY11.

What to expect?
At the current price of Rs 287, the stock is trading at a multiple of around 0.7 times our FY13 estimated book value for the company. We maintain a ‘Hold’ view on the stock.

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