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GE Shipping: Managing the shipping cycle - Views on News from Equitymaster

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GE Shipping: Managing the shipping cycle

Oct 19, 2007

Performance Summary
  • Topline for 2QFY08 grows by 15% YoY on the back of strong dry bulk rates and increased in-chartered tonnage.

  • Operating margins contract by 4.7% to 46.2% due to higher repairs and maintenance expenses.

  • Higher extraordinary income (on account of unrealised forex gains and sale of ships) leads to a 46% YoY growth in bottomline. Adjusted PAT witnesses a decline of 9% YoY.

  • NAV (net asset value) at the end of September 2007 stood at Rs 492 per share.

Financial snapshot - Standalone numbers
Particulars (Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net Sales 5,222 6,013 15.2% 9,560 12,384 29.5%
Expenditure 2,566 3,235 26.0% 4,573 6,479 41.7%
Operating Profit (EBITDA) 2,655 2,779 4.6% 4,987 5,906 18.4%
EBITDA margin (%) 50.9% 46.2%   52.2% 47.7% -
Other income 302 890 194.4% 645 2,427 276.5%
Interest 267 341 27.8% 541 655 21.1%
Depreciation 643 866 34.6% 1,352 1,701 25.8%
Gain on sale of ships 388 1,158 - 1,181 1,947 64.8%
Profit before tax 2,435 3,620 48.7% 4,919 7,924 61.1%
Tax 81 192 138.7% 154 285 85.1%
Reported net profit 2,355 3,428 45.6% 4,765 7,639 60.3%
Adjusted net profit* 1,967 1,783 -9.4% 4,765 4,051 -15.0%
Adjusted net profit margin (%) 37.7% 29.6% - 49.8% 32.7% -
No. of Shares (m)         152.7  
Earnings per share^ (Rs)         63.9  
Price to earnings ratio^ (x)         6.1  
* Adjusted for gain on sale of ships and unrealised forex gains.
^On a trailing twelve month basis

What is the company’s business?
Great Eastern Shipping (GES) is the largest private sector shipping company in India. The company has a fleet of 48 vessels, including 36 tankers (14 crude carriers, 20 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 11.3 years and tonnage of 3.24 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). Post the demerger of Great Offshore Ltd., the company entered the offshore business through its wholly owned subsidiary Great Ship (India) Ltd.

What has driven the performance in 2QFY08?
Strong dry-bulk rates drive topline: GES has reported a strong 15% YoY growth in topline for 2QFY08. This was mainly due to a 103% YoY surge in dry-bulk rates. During the quarter, bulkers recorded an average TCY (time charter yield) of US$ 31,117 per day, as against an average TCY of US$ 15,321 per day in 2QFY07. Despite a sharp decline in tankers rates in 2QFY08 (40% to 50% decline on a YoY basis), GES witnessed a mere 1% decline in average TCY for its tankers as a significant part of its fleet is on time-charter. According to the company, none of its tankers would be up for re-pricing till March 2008, and hence average TCY for tankers are expected to remain stable in 2HFY08. The topline growth was also bolstered by the increase in revenue days on in-chartered vessels, which increased from 162 days in 2QFY07 to 279 days in 2QFY08. For the quarter, revenue days (including in-chartering days) at 4,303 days were higher by around 15% YoY. Owned tonnage increased by 17% YoY to 3.24 mdwt, as against 2.77 mdwt in 2QFY07.

Cost break-up
Particulars (Rs m) 2QFY07 2QFY08 1HFY07 1HFY08
Staff cost 8.0% 9.5% 8.6% 8.9%
Repairs and maintenance 5.9% 10.8% 6.8% 7.4%
Direct operating expenses 18.4% 16.0% 18.3% 16.4%
Hire of chartered ships 9.0% 11.1% 6.5% 13.5%
Other expenses 7.8% 6.3% 7.7% 6.1%
Higher dry-docking expense impact margins: During the quarter, repairs and maintenance expenses increased to 10.8%, as compared to 5.9% in the previous year (both as a percentage of sales). Also, 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 162 days in the previous year to 279 days in 2QFY08. 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 11.1% in the quarter as compared to mere 9.0% during 2QFY07. Other overheads like direct operating expenses and other expenditure, however, witnessed a decline.

Profitability masked due to extraordinary items: Extraordinary items like gain on sale of ships and unrealised foreign exchange gains led to a 46% YoY jump in net profits for the quarter. Adjusting for the same, net profit for the quarter declined by 9% YoY. This was mainly on account of the contraction in operating margins and higher tax expenditure. Since gain on sale of ships is subject to MAT as opposed to tonnage tax, tax outgo more than doubled in 2QFY08. Adjusted net margins for the quarter stood at 29.6% as compared to 37.7% in 2QFY07.

What to expect?
At the current price of Rs 393, the stock is trading at 1.2 times our estimated FY10 book value. As of 30th September 2007, GES had a NAV (net asset value) of Rs 495 per share. The company has a committed capex of US$ 375 m for the shipping business and US$ 600 m for the offshore business (Greatship India), spread over the next 3 to 4 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.

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