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GE Shipping: Top down, bottom up - Views on News from Equitymaster

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GE Shipping: Top down, bottom up
Nov 1, 2010

GE Shipping has declared its 2QFY11 results. The company has reported 5% YoY decline in sales while net profit has grown by 56% YoY. Here is our analysis of the results.

Performance summary
  • Consolidated net sales decline by 5% YoY during 2QFY11. This is largely due to a 6% fall in the number of revenue days for the shipping business.
  • Operating margins rise to 36% during the quarter, from 24% in 2QFY10. This is mainly owing to decline in cost on hire of chartered ships.
  • Led by the improvement in operating margins, and aided by lower interest and depreciation charges, net profits grow by around 56% YoY during the quarter. Profit growth for the first half 1HFY11 stands at 30% YoY.
  • Declares an interim dividend of Rs 3.5 per share (dividend yield of 1.1%).

Consolidated performance
Particulars (Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Net Sales 6,627            6,310 -4.8%     13,836        12,753 -7.8%
Expenditure        5,020           4,040 -19.5%    10,686          7,460 -30.2%
Operating Profit (EBITDA)         1,608           2,270 41.2%       3,149           5,293 68.0%
EBITDA margin (%) 24.3% 36.0%   22.8% 41.5%  
Other income             854                595 -30.3%       1,307               984 -24.8%
Interest            707                331 -53.2%        1,153            1,261 9.4%
Depreciation        1,078                998 -7.4%      2,040           2,046 0.3%
Gain on sale of ships             538                259 -51.8%       1,733              700 -59.6%
Profit before tax         1,214            1,795 47.9%       2,997           3,669 22.4%
Tax             129                  96 -26.0%          370               240 -35.2%
Minority interest                 -                     13                 -                    25  
Net profit         1,085            1,687 55.5%       2,626           3,405 29.6%
Net profit margin (%) 16.4% 26.7%   19.0% 26.7%  
No. of shares (m)       152.3 152.3  
Earnings per share (Rs)*                      38.8  
Price to earnings ratio (x)*                        8.5  

What has driven performance in 2QFY11?
  • GE Shipping (GES) recorded another quarter of decline in sales, as the same fell by around 5% YoY during 2QFY11. However there seemed some semblance of sanity this quarter as freight rates appeared stable to positive. Overall, the pressure on the company's consolidated topline was led by the shipping business where sales (including gain on sale of ships and the segment's share of other income) were down 24% YoY during the quarter. On the back of an overall lean demand environment, the company recorded 6% lesser number of revenue days during the quarter. And apart from the general weakness in business activity, lesser revenue days were also due to reduction in the company's tonnage to 2.61 mdwt (million dead weight tonne), from 2.84 mdwt in 2QFY10. GES did not operate in-chartered tonnage for a single day in 2QFY11 as against the operating days of 122 in 2QFY10. This also impacted the sales performance.

  • As for the freight rates, the same showed some signs of stability with a positive bias. While average rates for GES' crude carriers were up 7% YoY during the quarter, these improved by around 16% YoY for the dry bulk carriers. The company however saw some pressure in the rates for its product tankers, which were down around 10% YoY.

    As per the management, the improvement in rate for crude carriers was led by a strong Chinese demand for oil, a substantial amount of tonnage locked in oil futures contracts, and due to Iran increasing its floating storage. The improvement would have been better but for a steady addition to the global tanker fleet that raised supply and put some pressure on freight rates.

    As for the dry bulk rates, increase in Chinese steel production led to strengthening of freight rates. This was also supported by delays in deliveries of new dry bulk carriers and heavy port congestions in some of the ports worldwide.

  • GES' operating margins surged to 36% in 2QFY11, from around 24% in 2QFY10. This was led by a sharp decline in the cost of chartered ships. These costs fell from 29% of sales in 2QFY10 to just 13% in 2QFY11. Led by this sharp improvement in operating margins, as also decline in interest and depreciation charges, GES' net profits rose by 56% YoY during 2QFY11. The company also benefited from a fall in its tax expenses. Its effective tax rate stood at 5% during the quarter, as against 11% during 2QFY10.

What to expect?
At the current price of Rs 328, the stock is trading at a multiple of around 0.8 times our estimated FY13 book value per share. Given GES' decent performance during 1HFY11, we would have to revise upwards our forward estimates for the company. We maintain our view on the stock from a 2-3 years perspective.

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