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GE Shipping: In smooth waters! - Views on News from Equitymaster
 
 
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  • Nov 1, 2004

    GE Shipping: In smooth waters!

    Performance Summary
    GE Shipping, India’s largest private sector shipping company, announced robust results for the quarter and half-year ended September 2004. Apart from strong growth in the topline, aided by rising global trade and buoyant freight rates, the company has managed to expand its operating margins for both the periods. This expansion could be attributed to firm freight rates in the global waters.

    Financial performance: A snapshot
    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Sales 2,638 4,885 85.2% 5,499 9,003 63.7%
    Expenditure 1,579 2,535 60.5% 2,977 4,553 52.9%
    Operating profit (EBDIT) 1,059 2,351 122.0% 2,522 4,449 76.4%
    Operating profit margin (%) 40.1% 48.1%   45.9% 49.4%  
    Other income 197 93 -53.0% 323 163 -49.5%
    Interest 104 174 66.6% 208 395 90.0%
    Depreciation 461 712 54.6% 876 1,430 63.3%
    Profit before tax 691 1,557 125.5% 1,761 2,787 58.3%
    Extraordinary items 82 -   108 (17)  
    Tax 12 (114)   142 71 -49.8%
    Profit after tax/(loss) 760 1,671 119.8% 1,727 2,699 56.2%
    Net profit margin (%) 28.8% 34.2%   31.4% 30.0%  
    No. of shares 190.3 190.3   190.3 190.3  
    Diluted earnings per share* (Rs) 16.0 35.1   18.1 28.4  
    P/E ratio (x)         6.2  
    (* annualised)            

    About the company
    GE Shipping is the largest private sector shipping company in India (owns almost 15% of the Indian shipping capacity), with a total fleet capacity of 2.87 mdwt (million dead weight tonne). Currently, the company has a fleet of 71 vessels, including 41 ships and 30 offshore vessels. As against the world average of 14.3 years, the company’s tanker fleet is relatively young at 13.9 years. GE Shipping is predominantly focused in the crude and product transportation segment with largely 'Aframax' type tanker mix (88% of the total capacity are tankers). The company has also diversified into oil drilling rigs, marine construction and air logistics.

    What has driven performance in 2QFY05?
    There is no big alternative to crude for now: Shipping business continues to be the torchbearer for GE Shipping as can be seen by a 95% YoY growth in its revenues during 2QFY05. This segment now contributes to around 77% of the company’s total revenues (68% in 2QFY04). Buoyant oil demand was the main contributor to this segment’s growth in this quarter. As a matter of fact, global oil demand increased from 79.2 million barrels per day (mbpd) to 82.05 mbpd in 2QFY05, a YoY growth of 3.7%.

    The dry bulk segment also played an important part. Increased iron ore movement and 10% growth in global steel production led to buoyant dry bulk rates. The direct consequent of this increased demand in the wet and dry segments was the increase in revenue days for the company (increased to 3,475 days in 2QFY05, a YoY growth of 27%). We believe that a continued fleet expansion strategy combined with adhering to the changing norms of the global shipping industry are likely to stand in good stead for the company in the medium to long term.

    The offshore business (17% of revenues) also performed strongly in the quarter, as revenues grew by 27% YoY. Higher average utilisation and better realisations helped growth in this segment in 2QFY05.

    Operating leverage: Strong growth in the topline, combined with decline in staff costs and repairs and maintenance costs, has helped GE Shipping report margin expansion for both 2QFY05 and 1HFY05. Based on segments, while PBIT margins for the shipping division improved from 30% in 2QFY04 to 39% in this quarter, those for the offshore business improved from 30% to 37%. Shipping business works on high fixed cost and whenever there is a spurt in sales, the operating profit grows at a faster rate, which is what is reflected from the rise in margins.

    Cost break-up
    (Rs m) 2Q04 % of sales 2Q05 % of sales % change
    Staff 314 10.9% 436 10.6% 38.8%
    Repairs & maintenance 407 14.1% 538 13.1% 32.4%
    Direct operating 365 12.6% 833 20.2% 128.4%
    Other 448 15.5% 586 14.2% 30.9%

    Net profits: Strong growth in operating profit has helped GE Shipping report a more robust YoY growth in net profits for the second quarter. Even at these levels, this growth in net profits seems pared due to a decline in other income and high interest and depreciation costs.

    What to expect?
    At the current price of Rs 175, the stock is trading at a price to earnings multiple of 6.2 times annualised 1HFY05 earnings. The company’s board has declared an interim dividend of Rs 3.5 per share (dividend yield of 2%). Riding especially on strong demand for tanker capacity due to increased world oil demand, GE Shipping has raked in yet another quarter of superb performance. For the remaining part (second-half) of FY05, the management expects freight rates to remain volatile, however with a firm undertone. Factors like strong demand for crude oil due to lower inventories ahead of the winter season and the approaching deadline for scrapping of single hull tankers for double hulls are likely to keep the demand-supply balance for tankers tight, thus possibly leading to firm freight rates.

    However, vulnerability to any slowdown in Chinese demand for commodities in the wake of curb on bank lending to industries might hinder this growth. The fact that valuations are at the higher level of the spectrum also calls for added caution.

     

     

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