G E Shipping: A Bad Quarter

G E Shipping has announced the fourth quarter results of financial year 2016-2017 (4QFY17). The company reported a 13.2% YoY decline in the topline while the company reported a loss during 4QFY17. Here is our analysis of the results.

Performance summary

• The topline declined by 13.2% YoY.
• Operating profit declined during the quarter by 25.8% YoY. Operating margin declined by 7.5% and stood at 44%.
• Other income increased by 10.5 times during this quarter. Finance cost and Depreciation seen an increase of 62.1% YoY and 8.1% YoY respectively.
• Due to decline in operating profit, an increase in depreciation, finance cost and impairment cost GES registered a loss of Rs 342 million during the quarter.
  
  

  	Consolidated			Consolidated
  (Rs m)	4QFY16	4QFY17	Change	FY16	FY17	Change
  Net sales	8,599	7,465	-13.2%	38,078	31,169	-18.1%
  Expenditure	4,177	4,183	0.1%	16,594	15,077	-9.1%
  Operating profit (EBDITA)	4,422	3,282	-25.8%	21,483	16,092	-25.1%
  EBDITA margin (%)	51.4%	44.0%		56.4%	51.6%
  Other income	121	1281	955.6%	1,187	5,123	331.5%
  Finance cost	710	1151	62.1%	2,878	3,776	31.2%
  Depreciation	1644	1776	8.1%	6,079	6,779	11.5%
  Impairment	1637	1742	6.4%	1,637	1,843	12.6%
  Profit before tax	553	-106		12077	8816	-27.0%
  Tax	312	236	-24.4%	1107	1266	14.4%
  Net Profit	241	-342		10,970	7,550	-31.2%
  Net profit margin (%)	2.8%	-4.6%		28.8%	24.2%
  No. of shares (m)					150.8
  Diluted earnings per share (Rs)*					50.1
  Price to earnings ratio (x)*					8.3

  (* on trailing twelve months earnings)

What has driven performance in 4QFY17?

• Crude and Product tanker segment performed poorly during 4QFY17. Particularly, crude segment witnessed a significant pressure and crude carrier rates declined significantly compared to last year. Towards the end of 2016, OPEC decided to cut the production. The actual impact of this decision started in January and February of 2017. This has impacted the quantum of cargo. Not to mention, during the quarter, floating storage also got released and this has created the oversupply of vessels in the market. Another worrying thing is strong order book for crude carriers.
• The product tanker market was also lower, but less compared to the crude segment. This is due to low demand, no long-haul voyages, stocks being piled up in the west and the east consuming regions and some disruption in the middle-east. During the quarter 2.5 million DWT capacities were added to the overall fleet.
• The dry bulk segment saw a significant improvement during 4QFY17. This run started with a surge in coal demand from China. Steel output across the world witnessed a significant growth, which resulted in robust demand for iron ore and coking coal. To add to this run, towards the end of February a big disruption was seen in coking coal shipment (due to floods in Australia). This was replaced by shipments from US east coast and Canada. However, April-May month saw some decline in dry bulk rates. Huge chunk of new dry bulk capacities was added (18 million DWT) and 4 million DWT of scrapping took place during the quarter.
  
  

  Average (TCY $ Per day)	4QFY16	4QFY17	Change
  Crude carrier	33,838	20,897	-38.2%
  Product carrier	21,613	15,868	-26.6%
  Dry Bulk	4,418	8,345	88.9%

• The offshore segment continues to remain weak with estimated E&P (Exploration and Production) spending to be further cut by 5-10% in 2017. This is on the heels of a 25% cut in 2015 and 20% cut in 2016. On the offshore side, revenue days declined by 20.1% on YoY basis. The offshore segment is affected by reduced E&P (Exploration and Production) spending by the oil majors. Due to this, globally, tenders are lower and there is a huge pressure on day rates. Every quarter, the rate of working to the idling of vessel is increasing. 4QFY17 was an exception. However, one needs to watch whether this will sustain in the coming quarters.
  
  

  Breakup of Revenue Days (Offshore)

  Revenue Days	3QFY16	3QFY17	Change
  Offshore Logistics	1,587	1,290	-18.7%
  Drilling Services	331	278	-16.0%
  Total	1,918	1,568	-18.2%

• On the operating margin front, an increase in crude prices put pressure on Operating margins. Operating profit declined by 25.8% YoY and EBITDA Margin stood at 44% during the quarter.
• GES registered a loss during the quarter, this is due to decline in operating profit, an increase in depreciation expenses and finance cost. Impairment of assets also resulted in a decline in earnings. This was partly offset by an increase in other income.