The Great Eastern Shipping Company (Gesco) has posted a sharp fall in revenues for the second quarter ended September 2002. The performance of the company mirrors the slowdown in the global economy and weak industrial output. However, the company has been able to report over 17% bottomline growth backed by operating efficiencies, lower interest and depreciation outgo.
Operating Profit (EBDIT)
Operating Profit Margin (%)
Profit before Tax
Profit after Tax/(Loss)
Net profit margin (%)
No. of Shares (m)
Earnings per share (Rs)*
Two key factors have a major bearing on the shipping sector in general. One is the global industrial activity and the other is crude oil output from the OPEC. While industrial sector has remained lacklustre in all the three major economies viz. US, Europe and Japan, the OPEC reduced crude throughput twice in the recent past following a fall in crude prices. Since GE Shipping has been focusing more on increasing its presence in crude transportation, the latter seems to have had a larger impact on the company's performance in 2QFY03 and 1HFY03.
That said, with crude prices strengthening in the last one and a half months, tanker rates have also hardened. If one were to look at the growth in shipping revenues in 1QFY03 and 2QFY03, there is a marked change. Shipping income has declined only by 16% in 2QFY03 as against a 33% YoY fall in 1QFY03. Though we expect shipping revenues to fall in 3QFY03 as well, the extent of decline could be lower on two counts. Firstly, crude prices have strengthened on the back of war fears (US vs Iraq), as select countries are in the process of building reserves to lower the impact, if the war indeed breaks out. Secondly, demand for tanker transportation tends to increase in 3QFY03 due to winter inventory build-up in the US.
Operating margins have increased surprisingly in 2QFY03 but have remained stable for 1HFY03. We expect operating margins of Gesco to fall for FY03 due to slowdown in global economy (OPM was 42% in FY02). Interest costs are lower on account of retirement of some high cost debts. Average interest cost for Gesco came down from 8% in FY01 to 6% in FY02. Depreciation charges have fallen on account of sale of two ships in 2QFY03.
The stock currently trades at Rs 28 implying a P/E multiple of 3.1x annualised 1HFY03 earnings. As mentioned above, we expect revenue growth to remain lacklustre for the remaining quarters with a downward pressure on operating margins. Much depends on recovery in global economy, for which prospects are not heartening for the next two years.
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407