Despite a slowdown in the economy and a fall in freight rates, GE Shipping reported a sharp growth in shipping income and profits in 2QFY02. However, if recent trends are any indication, revenue growth is expected to grow at a slower rate in the second half of the current fiscal and in FY03.
Revenue from shipping operations grew by 30.8% in 2QFY02 to Rs 2,175 m and offshore division also posted a 7.6% growth. For the first half of the current fiscal, shipping income and net profit grew by 32% and 30% respectively. However, if one were to exclude the income from sale of ships in 1HFY01, profit for 1HFY02 has actually gone up by 70%. The cost cutting initiatives taken by the company in the last one and half year seem to have yielded positive results. But all is not rosy for the company.
With the freight rates touching historically high levels last year, shipping companies, globally, went on an ordering spree. Cumulative orders for clean and dirty fuel tankers are close to 11% of existing fleet. In terms of dead weight tonnage (dwt) it is almost 18% of existing tonnage available in the market. And if were to take a closer look, FY01 and FY02 accounts for 53% of new tanker deliveries. Given the slowdown in the economy and subdued industrial activity in all the major economies, rising world order book for tankers is a cause for concern. The scenario is the same for other segments like dry bulk and product tankers as well. Now with oil prices hovering around US$ 19.6 per barrel, OPEC has already cut crude output by 1.5 m barrels per day. Other countries like Norway have also cut crude output in light of a weaker demand scenario. Consequently, tanker rates are trading around 964 levels as compared with around 1,500 levels a year before. Though the International Monetary Fund expects world trade to grow at a higher rate in 2002, it is far lower than FY01 levels of 4.2%. If the slowdown persists in 2002 also, freight rates could fall even further and thus could affect sales growth of GE Shipping.
Rising tanker deliveries…
% of existing fleet
Apart from shipping, Gesco is also one of the leading offshore service providers for companies like Oil and Natural Gas Corporation (ONGC), Cairns, Hardy and Enron. The government has encouraged exploration activity on the Indian coastal line in an effort to increase indigenous crude production. So offshore service providers like Gesco are set to benefit in the long run on account of increased spending by exploration companies like ONGC. Given the potential of the offshore division, Gesco has plans to increase fleet size in the coming years.
The company had embarked on a capital expenditure of Rs 8 bn over a three-year horizon for augmenting its fleet, especially the Aframax tankers. Towards this, it acquired one bulk carrier and a harbor tug vessel in the 2QFY02 at an aggregate cost of US$ 15.7 m (Rs 754 m). It had placed orders for three Aframax carriers with a MTDWT of 105,000 each and the delivery is expected by FY03. It has also placed orders for two platform supply vessels (delivery date around March 2002).
We expect the company to report around 7% growth in sales to Rs 10,775 m and a 6% growth in profits for FY02E. For FY03E, shipping income is expected to grow by 3%-4%. The scrip is currently trading at Rs 24 implying a P/E multiple of 2.7x FY02E earnings.
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