GE SHIPPING

THE Rs 3,108-crore Great Eastern Shipping is the largest private sector shipping company in the country. Its fleet comprised 41 vessels with a capacity of 2.85 million dwt. Like other domestic players in this sector, GE Shipping has deployed a majority of its fleet capacity (30 vessels) in the tanker segment (vessels used for transporting crude oil and allied products). A key advantage that GE Shipping enjoys over SCI is that the average age of its vessels is 10.6 years, which is much lower than that of SCI. This enables GE Shipping to quickly deploy its vessels in response to the changing market conditions. The company follows an operational strategy, whereby it enters into long-term contracts with its key customers, to minimise violent fluctuations in the spot freight rates. For instance, during FY08, GE Shipping derived 42% of its earnings from the spot market.


GLOBAL SHIPPING ENVIRONMENT:

Meanwhile, current spot freight rates for tanker segments like VLCC (very large crude carriers typically used for transporting crude from West Asia to refiners in Western countries) have now fallen by nearly two-thirds to $42,400 per day levels, compared to the average of $119,722 per day for July ’08. Spot freight rates in the tanker segment have weakened in tune with sluggish global oil demand in CY08. Similarly, in the dry bulk segment, the Baltic Dry Index has plummeted a whopping 92% to 711 currently, compared to the average of 8,936 in July ’08. Transportation demand has been curtailed since China’s steel industry, which is the key client in the dry bulk segment, is currently grappling with a slowdown.


FINANCIALS:

GE Shipping reported strong revenues and profit growth for the three years ended FY08. Its consolidated core operational income jumped by over 50% during the period to Rs 3,108.4 crore in FY08. But this was accompanied by a 200 bps decline in OPM to 43.9% in FY08. The company’s OPM came under pressure due to surging costs related to the hire of chartered ships to meet global cargo demand. Nevertheless, GE Shipping’s OPM remained superior to that of SCI during this period. During the September ’08 quarter, GE Shipping’s OPM grew by 1,370 bps y-o-y to 59.9%. The company’s cash flow from operations rose nearly 60% y-o-y to Rs 1,667 crore in FY08. This helped to bring down its debt-equity ratio to 0.66 in FY08, compared to 0.94 in FY05.


GROWTH PLANS:

The company has a capex of around $779 million (Rs 3,778 crore) which should enable it to add 14 shipping vessels by FY12, and also give it an additional 1.17 million dwt of capacity. Analysts do not expect a rise in GE Shipping’s debt-equity ratio in the medium term, as the company has traditionally enjoyed strong cash flows. Though shipping freight rates have declined over the past six months, the company is positioning itself for long-term growth opportunities. These include transporting imported crude to the country, coupled with opportunities in other countries.


VALUATIONS:

At Friday’s closing price of Rs 217.60, GE Shipping trades at just 2.5 times its estimated FY09 earnings. The stock is a good long-term buy. However, given the global economic uncertainties in the next 6-12 months, making forward earnings estimates remain a challenge.


Beta: 0.54
Institutional Holding: 34.77%
Dividend Yield: 6.89%
P/E: 2.23
M-Cap: Rs 3,313 cr