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GE Shipping: Impressive performance - Views on News from Equitymaster

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GE Shipping: Impressive performance
Oct 24, 2008

Performance summary
  • Sales grow 44% YoY during 2QFY09, 27% YoY in 1HFY09.

  • Operating margins expand by a substantial 13.7% YoY during the quarter, largely due to decline in cost of repairs and maintenance and hire of chartered ships.

  • Absence of any gains on sale of ships unlike the corresponding quarter of previous year pares bottomline growth, which still stands at a robust 48% YoY. Excluding these gains from last quarter’s numbers, net profit growth for 2QFY09 stands at 123% YoY.

  • Net profit growth during 1HFY09 (at 17% YoY) muted on account of hedging loss recorded in the books.

  • Declares interim dividend of Rs 2.5 per share (dividend yield of 1.5%).



Performance snapshot
Particulars (Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net Sales 6,013 8,641 43.7% 12,384 15,665 26.5%
Expenditure 3,235 3,462 7.0% 6,479 6,654 2.7%
Operating Profit (EBITDA) 2,779 5,179 86.4% 5,906 9,012 52.6%
EBITDA margin (%) 46.2% 59.9%   47.7% 57.5%  
Other income 403 1,284 218.6% 786 1,645 109.3%
Interest 341 361 5.7% 655 744 13.5%
Depreciation 866 797 -7.9% 1,701 1,577 -7.3%
Gain on sale of ships 1,158 -   1,947 2,539 30.4%
Profit before tax 3,133 5,306 69.3% 6,283 10,875 73.1%
Tax 192 52 -73.0% 285 360 26.3%
Extraordinary items 487 (192)   1,641 (1,578)  
Net profit 3,428 5,062 47.7% 7,638 8,937 17.0%
Net profit margin (%) 57.0% 58.6%   61.7% 57.1%  
No. of shares (m)       152.3 152.3  
Earnings per share (Rs)*         97.6  
Price to earnings ratio (x)*         1.7  
* On a trailing 12-months basis

What has driven performance in 2QFY09?
  • Strong freight rates in both the tanker and dry bulk segments helped GE Shipping’s (GES) rake in a strong 44% YoY growth in sales during 2QFY09. While crude and product tanker rates increased by 67% YoY and 56% YoY respectively, dry bulk rates were up 57% YoY. The impact of higher freight rate over-powered the impact of lower operating days, which were down 13% YoY. Decline in operating days was a direct consequence of lower tonnage, which stood at 2.85 mdwt (m dead-weight tonnes) at the end of September 2008, as compared to 3.25 mdwt in September 2007.

    The management indicated in the conference call that freight rates (especially in the dry bulk segment) that have crashed over the past two months, are expected to impact performance during the current quarter (3QFY09). As a matter of fact, the Baltic Dry (BDI) Index (which tracks dry bulk rates) has crashed by 86% since May 2008. BDI is currently at 1,506 against an average of 10,280 in 3QFY08. Considering the GES has around 54% of its dry bulk fleet in the spot market, its performance is expected to be impacted to that extent. Even crude and product tanker rates during the current quarter are lower than the average recorded during 3QFY08, though the extent of fall is not as severe as in BDI.

    Despite the impending slowdown in demand, the management has indicated that the company will pursue a capital expenditure of US$ 1.6 bn over the next four years in its shipping division. For the offshore services subsidiary, Greatship India, the planned capex stands at around US$ 700 m during this period. This capex is estimated to be funded in a debt to equity ratio of 70:30. Considering the GES has already tied up finance for its capital requirements over the next two years (FY09 and FY10), the capex plan is expected to go as planned.

  • GES’ operating margins expanded by a substantial 13.7% YoY during the quarter. This was largely due to decline in cost of repairs and maintenance and hire of chartered ships. As a percentage of sales, these costs came down substantially from 10.8% and 11.1% respectively in 2QFY08 to 3.3% and 2.8% respectively in 2QFY09.

  • Absence of any gains on sale of ships unlike the corresponding quarter of previous year has impacted GES’ bottomline, which has still managed a growth of 48% YoY during the quarter. The company has also booked a hedging loss during the quarter, which has pared the growth in bottomline.

    What to expect?
    At the current price of Rs 165, the stock is trading at a multiple of 1.7 times its trailing 12 months earnings, which we believe is highly attractive. We shall however have to revise our forward estimates downwards to factor in the pressure on freight rates and a slowing demand. GES’ 2QFY09 performance has surprised us on the positive given the fact that the company has been able to manage strong growth in the face of freight rate volatility. Its strategy of prudently mixing the spot and forward contracts as also the asset buying and selling initiatives have helped it manage the overall risks better. That fact that the company is on an aggressive expansion mode and sees the growth momentum to be maintained over the next few years is a positive for long term investors. We maintain our positive view on the stock from a 2 to 3 years perspective.

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