• OCTOBER 30, 2002

GE Shipping: Mirroring the global economy

The Great Eastern Shipping Company (Gesco) has posted a sharp fall in revenues for the second quarter ended September 2002. The performance of the company mirrors the slowdown in the global economy and weak industrial output. However, the company has been able to report over 17% bottomline growth backed by operating efficiencies, lower interest and depreciation outgo.

(Rs m)2QFY022QFY03Change1HFY021HFY03Change
Sales 2,947 2,458 -16.6% 6,328 4,618 -27.0%
Other Income 71 48 -32.3% 114 104 -8.9%
Expenditure 1,824 1,442 -20.9% 3,883 2,822 -27.3%
Operating Profit (EBDIT) 1,123 1,016 -9.5% 2,445 1,796 -26.5%
Operating Profit Margin (%)38.1%41.3% 38.6%38.9% 
Interest 149 107 -28.2% 293 201 -31.4%
Depreciation 535 436 -18.4% 1,020 893 -12.4%
Profit before Tax 510 521 2.2% 1,247 806 -35.4%
Extraordinary item - 109   - 208  
Tax 119 62 -47.8% 222 149 -32.8%
Profit after Tax/(Loss) 391 568 45.4% 1,025 864 -15.7%
Net profit margin (%)13.3%23.1% 16.2%18.7% 
No. of Shares (m) 214.8 190.3   214.8 190.3  
Earnings per share (Rs)* 7.3 11.9   9.5 9.1  
P/E (x)     3.1  

Two key factors have a major bearing on the shipping sector in general. One is the global industrial activity and the other is crude oil output from the OPEC. While industrial sector has remained lacklustre in all the three major economies viz. US, Europe and Japan, the OPEC reduced crude throughput twice in the recent past following a fall in crude prices. Since GE Shipping has been focusing more on increasing its presence in crude transportation, the latter seems to have had a larger impact on the company's performance in 2QFY03 and 1HFY03.

Income break-upů
(Rs m)2QFY022QFY03Change1HFY021HFY03Change
Shipping 2,175 1,833 -15.7% 4,558 3,422 -24.9%
Offshore 547 554 1.4% 1,269 1,057 -16.7%
Others 225 71 -68.5% 501 139 -72.2%
Total 2,947 2,458 -16.6% 6,328 4,618 -27.0%

That said, with crude prices strengthening in the last one and a half months, tanker rates have also hardened. If one were to look at the growth in shipping revenues in 1QFY03 and 2QFY03, there is a marked change. Shipping income has declined only by 16% in 2QFY03 as against a 33% YoY fall in 1QFY03. Though we expect shipping revenues to fall in 3QFY03 as well, the extent of decline could be lower on two counts. Firstly, crude prices have strengthened on the back of war fears (US vs Iraq), as select countries are in the process of building reserves to lower the impact, if the war indeed breaks out. Secondly, demand for tanker transportation tends to increase in 3QFY03 due to winter inventory build-up in the US.

Operating margins have increased surprisingly in 2QFY03 but have remained stable for 1HFY03. We expect operating margins of Gesco to fall for FY03 due to slowdown in global economy (OPM was 42% in FY02). Interest costs are lower on account of retirement of some high cost debts. Average interest cost for Gesco came down from 8% in FY01 to 6% in FY02. Depreciation charges have fallen on account of sale of two ships in 2QFY03.

The stock currently trades at Rs 28 implying a P/E multiple of 3.1x annualised 1HFY03 earnings. As mentioned above, we expect revenue growth to remain lacklustre for the remaining quarters with a downward pressure on operating margins. Much depends on recovery in global economy, for which prospects are not heartening for the next two years.

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