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GE Shipping: Massacre in rough seas

Oct 31, 2009

Performance summary
  • Consolidated sales declines 43% YoY during 2QFY10 and 33% YoY during 1HFY10. This is largely due to a sharp fall in sales of the shipping business while offshore business manages to grow strongly.
  • Revenue days decline by 13% YoY during 2QFY10. Freight rates for crude tankers and dry bulk carriers fall by 65% YoY each.
  • Operating margins fall to 24.3% in 2QFY10, from 54.6% in 2QFY09. Higher staff costs and sharp rise in cost of hiring chartered ships are the culprits here.
  • On the back of lower sales, weaker operating margins, and higher interest costs, net profits crash by 81% YoY during the quarter.

Consolidated performance
Particulars (Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net Sales 11,526 6,627 -42.5% 20,499 13,836 -32.5%
Expenditure 5,236 5,020 -4.1% 11,341 10,686 -5.8%
Operating Profit (EBITDA) 6,290 1,608 -74.4% 9,158 3,149 -65.6%
EBITDA margin (%) 54.6% 24.3%   44.7% 22.8%  
Other income 789 854 8.3% 1,239 1,307 5.5%
Interest 446 707 58.7% 877 1,153 31.5%
Depreciation 868 1,078 24.3% 1,706 2,040 19.6%
Gain on sale of ships -   538   2,539 1,733 -31.8%
Profit before tax 5,765 1,214 -78.9% 10,354 2,997 -71.1%
Tax 66 129 96.2% 375 370 -1.4%
Net profit 5,699 1,085 -81.0% 9,978 2,626 -73.7%
Net profit margin (%) 49.4% 16.4%   48.7% 19.0%  
No. of shares (m)       152.3 152.3  
Earnings per share (Rs)*         44.8  
Price to earnings ratio (x)*         5.4  
* On a trailing 12-months basis

What has driven performance in 2QFY10?
  • 2QFY10 can surely be termed as one of the worst quarters in the history of GE Shipping (GES). Nothing seemed to have gone right for the company during this quarter. The biggest dampener was the crash in freight rates. On the back of a lean demand environment, the company also recorded lesser number of revenue days across all its vessel segments. The total revenue days for the quarter stood 13% lower as compared to 2QFY09. Apart from the general slowdown in business activity, lesser revenue days were also due to reduction in the company’s tonnage to 2.84 mdwt (million dead weight tonnes), from 2.85 mdwt in 2QFY09.

    As for the freight rates, the same weakened significantly for all vessel segments. Crude tanker rates, for instance, dropped by 65% YoY while those for dry bulk carriers came down by almost an equal rate. The tanker market remained depressed throughout the quarter with the company’s vessels earning just enough to cover their operating costs. The management has attributed this weakness to high crude inventory levels with refining companies globally, coupled with decline in demand for refined products from the developed world, which resulted in huge oversupply and therefore weak freight rates.

    The management expects the second half to be equally bad for crude tanker freight rates, though dry bulk rates are expected to improve marginally. The caveat is - to witness a significant improvement in the dry bulk trade, there has to be steady increase in the industrial production in developed nations. This might look somewhat likely given the huge stimulus that has been infused by most governments.

    Data Source: Company

  • For the current fiscal, the management continues to see the demand outlook to be very weak, both for the crude oil and dry bulk segments. On oil, it believes that contraction in world output is likely to depress energy consumption more so in the energy intensive OECD countries. To add to this, high fleet growth (net addition to the global fleet is expected to be around 8-14% during the current year) will continue to cast its dark shadows. Both these factors, put together are likely to keep a pressure on the rates and utilisation levels for the crude tanker segment.

  • GES’ operating margins crashed to nearly 24% in 2QFY10, from around 55% in 2QFY09. Higher staff costs and significantly higher cost for chartered ships were the factors that impacted margins during the quarter. Cost of chartered ships for instance rose to around 29% of 2QFY10 sales, from less than 14% in 2QFY09.

  • On the back of a weak topline and extremely poor operating margins performance, GES recorded a massive 81% YoY decline in its net profits during 2QFY10. If one were to exclude the gain that the company earned on the sale of ships, profits are down almost 90% YoY during the quarter. The management has also blamed it on the high base effect considering that 2QFY09 was the company’s best quarter ever in terms on profits.

What to expect?
At the current price of Rs 240, the stock is trading at a multiple of around 5.4 times its trailing 12 months earnings. Given the company’s poor performance during 1HFY10, we would have to revise our forward estimates downwards. We shall soon update our research report on the company.

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