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GE Shipping: Wobbling in rough waters - Views on News from Equitymaster
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GE Shipping: Wobbling in rough waters
Jul 31, 2009

Performance summary
  • Consolidated sales (reported for the first time) fall by 20% YoY during 1QFY10. This is largely due to a sharp fall in sales of the shipping business while offshore business manages to grow strongly.
  • Revenue days decline by 5% YoY to 3,481 days during 1QFY10. Freight rates for crude tankers and dry bulk carriers fall by 42% YoY and 61% YoY respectively.
  • Operating margins fall to 35.6% during the quarter, from 49.5% in 1QFY09. Higher operating expenses and sharp rise in cost of hiring chartered ships is the culprit here.
  • On the back of lower sales, weaker operating margins, and a sharp fall in gains on sale of ships, net profits crash by 64% YoY during the quarter.

Consolidated performance
Particulars (Rs m) 1QFY09 1QFY10 Change
Net Sales 8,974 7,208 -19.7%
Expenditure 4,532 4,641 2.4%
Operating Profit (EBITDA) 4,442 2,567 -42.2%
EBITDA margin (%) 49.5% 35.6%  
Other income 451 453 0.5%
Interest 432 446 3.3%
Depreciation 838 961 14.7%
Gain on sale of ships 2,539 1,195 -52.9%
Profit before tax 6,162 2,808 -54.4%
Extraordinary gain/(loss) (1,574) (1,025) -34.8%
Tax 310 241 -22.1%
Net profit 4,279 1,542 -64.0%
Net profit margin (%) 47.7% 21.4%  
No. of shares (m) 152.3 152.3  
Earnings per share (Rs)*   75.1  
Price to earnings ratio (x)*   3.4  
* On a trailing 12-months basis

What has driven performance in 1QFY10?
  • Led by tremendous pressure on freight rates and business volumes, GE Shipping (GES) recorded a 20% YoY decline in its profits during 1QFY10. Not only did the freight rates crash during the quarter, the company even recorded lesser number of revenue days across all its vessel segments. The total revenue days for the quarter stood 5% lower as compared to 1QFY09. Apart from the general slowdown in business activity, lesser revenue days were also due to reduction in the company’s tonnage to 2.88 mdwt (million dead weight tonnes) in 1QFY10. As for the freight rates, the same came off significantly by for all vessel segments. Crude tanker rates, for instance, dropped by 42% YoY while those for dry bulk carriers came down by a massive 61% YoY.

    GE Shipping's freight rates
    Data Source: Company

  • For the current fiscal, the management sees the demand outlook to be very weak, both for the crude oil and dry bulk segments. On oil, it believes that contraction in world output is likely to depress energy consumption more so in the energy intensive OECD countries. To add to this, high fleet growth will continue to cast its dark shadows. Both these factors, put together are likely to keep a pressure on the rates and utilisation levels for the crude tanker segment.

  • As for the dry bulk segment, pressure on freight rate is expected to continue if China were to slow down on its purchase of commodities. Further, the fact that excessive fleet addition has been the highest in the dry bulk segment which has the largest order-book of 72% of existing world fleet, the freight situation is expected to remain tight.

What to expect?
At the current price of Rs 257, the stock is trading at a multiple of just around 0.5 times our estimated FY12 book value per share (of the standalone entity). GES’ 1QFY10 performance has been in line of our estimates given the gloom in world foreign trade. We maintain a positive view on the stocks from a 2 to 3 years perspective.

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