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Unlisted diversification takes its toll

Aug 7, 1999

GESCO, set up in 1948, is India's largest private sector shipping company. It operates a fleet that includes 16 bulk carriers, 4 mini - bulk carriers and 17 tankers (of which 2 Aframax tankers were added during FY99), having a total dead weight tonnage (DWT) of over 1.3 million.

  • Over the years, GESCO has diversified into commodity trading, property development and leasing, and offshore services including marine construction and oilrigs. The company's property bank currently spans over 1.7 m sq. ft. across Bombay, Bangalore, Delhi and Poona.

      Latest results
    • During FY99,GESCO recorded a total income of Rs 8.4 bn, which is 12.3% lower than that recorded in the previous year. Net profit at Rs 1.2 bn was down 24.4% on year on year basis.

    • The company's subdued performance could be attributed to the consistent fall in freight rates since the Asian meltdown in 1997. With the Asian market accounting for approximately 37% of all sea borne trade (both dry and wet), lower demand from the region eventually translated into lower freight rates.

    • During the year under review, the Baltic Handy Index tumbled 16% (in FY98 it fell 12%), reflecting the subdued conditions in the dry bulk market. Even though the net supply of fresh tonnage was stagnant, the freight rates continued to fall during the year. This affected the revenues and profit growth of this division adversely.

    • Revenues of the tanker division too were adversely affected by an oversupply of tankers. The contract under which GESCO had given its nine tankers on a time charter to oil companies expired during the year. This resulted in the loss of a steady stream of revenues that was at a premium to market rates.

    • GESCO's offshore division - the largest in the private sector, continued to perform well on account of the increase in demand for oil field services. It entered into long term contracts with some parties at premium to market rates.

    • The property division is being hived off into a separate company. This move is likely to benefit the company as the property division had been absorbing a large portion of the free cash flows generated by the other divisions. Moreover, it will help the management refocus on the primary business of the company - shipping and related services.

    • The commodity trading division, which had suffered large losses in FY95, has since been reduced to a marginal business with revenues of approximately Rs 1 bn (12% of total income). The company has adopted a policy of not keeping any open positions to avoid the risk of loss.

    • GESCO has continued to reduce its equity portfolio from a high of Rs 656 m in FY95 to Rs 55 m currently. This will go down positively with the investors who were concerned that the company might be focussing too much on its equity portfolio.

    • The management of GESCO has always stated that ship trading is an integral part of their business and that they will continue to leverage on their experience to profit from opportunities that might arise from time to time. The company continues to record gains from sale of ships while at other times vessels are being added to their fleet. The management's ability to understand and comprehend the cycle of freight rates and asset values has enabled the company to earn profits from the business.

      Concerns

    • With no clear signs of economic recovery emanating either from the Southeast Asian countries or from Japan, the prospects of a recovery in the shipping industry seem remote. This will continue to weigh down on the freight rates resulting in lower realizations.

    • With the oil prices having risen to the pre-crisis levels, the demand for oil is likely to be adversely affected. Coupled with this, the oversupply of vessels is likely to result in thinner margins as market players compete in a shrinking market.

    • There is also a fear that the management might diversify into unrelated businesses, like it has done in the past. Inspite of the management's assurances to the contrary, investors continue to be weary of the management's dedication to such a commitment. A glance at the figures reveals that over the past 8-year period, the company has grown at a compounded annual growth rate of 14.3% and 6.1% in terms of total income and profits respectively. The unwarranted diversification into commodity trading and property development is largely responsible for the subdued performance of the company.

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