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GE Shipping: Tougher times ahead

Aug 5, 2002

The downturn in the global economy and its consequent effect on world trade is clearly reflected in The Great Eastern Shipping Company's first quarter results for FY03. While revenues have declined by as much as 36%, there has been a marked fall in net profit as well in the same period. In contrast with last two fiscal years, FY03 is going to be a challenging year for shipping majors.

(Rs m)1QFY021QFY03Change
Net sales3,3812,160-36.1%
Other Income445628.0%
Expenditure2,0161,380-31.6%
Operating Profit (EBDIT)1,365781-42.8%
Operating Profit Margin (%)40.4%36.1% 
Interest 14494-34.7%
Depreciation485458-5.7%
Profit before Tax779285-63.4%
Extraordinary items-4297 
Tax10387-15.4%
Profit after Tax/(Loss)634295-53.4%
Net profit margin (%)18.8%13.7% 
No. of Shares (m)215.9190.3 
Diluted Earnings per share*13.36.2 
P/E Ratio (x) 4.5 
(*annualised)   

As mentioned earlier, one of the key reasons for the decline in revenues during 1QFY03 is primarily on account of slowdown in world economy and reduction in crude output by the Organisation of Petroleum Exporting Countries (OPEC). International oil demand has been lacklustre over the last year or so in line with weakness exhibited by the industrial sector worldwide. While it is known that the US economy has a bigger impact on freight rates, there has not been enough support from Europe and Japan to even partially compensate for the lull in US GDP growth in recent quarters. Consequently, the company's freight and demurrage income are lower by 56% in 1QFY03. But on the other hand, the company's charter income (primarily contracts entered into for transportation of dry bulk, crude and petroleum products over a certain time frame) was lower only marginally. However, as we go forward, we also expect charter income to come under pressure, thus dragging down revenues further.

On first glance, it may look that revenues are lower by 36%. However, since the shipping industry is cyclical in nature, the results have to be viewed with the slowdown in mind. First quarter of FY02 was a bumper year for shipping companies like GE as is evident from the table below. While the US economy started to show signs of weakness in 1QFY02 itself, GE Shipping shifted its focus from spot to charter markets to capitalise on high freight rates and lower its exposure in spot trades. As a result, the company posted a 46% rise in revenues in the corresponding quarter previous year. So the recent quarter performance requires a comparison with historical first quarter average revenues to gauge a trend. Since 1QFY00 was the time when freight rates were close to its 52-week low levels, comparatively, GE Shipping has performed well in the current fiscal. Besides, in 1QFY02, revenues from projects amounted to Rs 213 m, which is nil in 1QFY03. Excluding this adjustment, income has actually declined by 31%.

In comparison...
(Rs m)1QFY001QFY011QFY021QFY03
Revenues 2,027 2,313 3,381 2,160
% YoY change 14.1%46.2%-36.1%

The spurt in other income is primarily on account of higher interest income from free cash flow generated in FY02 to the tune of Rs 1.5 bn (other income here excludes gain on sale of ships). Interest expenses are lower on account of repayment of debts to the tune of Rs 1.7 bn in FY02. Operating margins have come under significant pressure due to lower capacity utilisation and higher expenses incurred for repairs and maintanence, especially towards new ships acquired. Extraordinary items include gain on sale of ships and assets (the company sold one bulk carrier and a tanker in 1QFY03).

GE Shipping bought back 12 m shares during the quarter as a result of which paid-up capital stands reduced to Rs 1,903 m. On the reduced paid-up capital, the stock currently trades at Rs 28 implying a P/E multiple of 4.5x annualised 1QFY03 earnings. While the company expects tanker and dry bulk rates to stabilise towards the later half of the fiscal, the continuing flow of fresh tonnage in the market could keep freight rates subdued and consequently revenues.

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