GE Shipping

GE Shipping, like other players in the sector, is expected to benefit from signs of a turnaround in the global shipping industry

THE shipping industry has witnessed a strong improvement in its operating environment over the past few weeks, as in the key tanker segment, which consists of transporting crude and allied petroleum products, there are signs of a pick up in global demand. There has also been a corresponding improvement in spot shipping freight rates.

For instance, players such as GE Shipping, the second largest Indian player in this sector, is expected to benefit, thanks to a recent report of the IEA that said that global oil demand is forecast to improve by 1.7% year on year in calendar year 2010. Strong demand conditions for oil and allied products have resulted in tanker spot segment freight rates, such as VLCC at $48, 800 per day levels currently, a sharp jump from the third quarter of FY10. Indian players utilise a majority of their fleet capacity in the tanker segment.

Since then the stock is up nearly 7.8%. And given the turnaround in the industry, we believe there is still potential upside in this stock.

FLEET SIZE:

At the end of January 2010, GE Shipping fleet capacity consisted of 38 vessels with a total capacity of nearly 2.84 million DWT (dead weight tonnes) and it had utilised a large majority for tanker segment. However, there was a reduction of nearly 12.9% in its total shipping capacity in DWT terms as compared to its year ended March 2007.Asset prices of ships had globally peaked in mid-2008 and have fallen since then, and GE Shipping utilised this opportunity to improve its cash flows. In addition, there was an extremely challenging environment for global shipping industry during April and December 2009.

In the company’s offshore division, its owned fleet at the end of the third quarter of FY10, included a jack-up rig, five platform supply vessels (PSV), one multi-purpose supply vessel, coupled with eight anchor handling tug supply vessels. This was substantially higher than just two offshore platform support vessels at the end of FY 07. The company had invested on a consolidated basis Rs 5,059.7 crore between March 2007 and March 2009, while its operating cash flow during this period stood at Rs 4,877.7 crore. Its leverage ratio was just 0.6 at the end of the previous financial year and lower than two years earlier.

CAPEX PLANS:

GE Shipping plans to incur a capex of $437 million (nearly Rs 2,020 crore) in its shipping business over the next 18 months. In its offshore division, the company has a capex of $ 406 million (nearly Rs 1,880 crore) for the purchase of 10 more assets, and these would be delivered over the next 15 months. However, analysts fear that such an aggressive capex plan over the next 24 months could lead to a rise in the company’s leverage ratio, going forward.

FINANCIAL PERFORMANCE:

GE Shipping’s standalone operating profit margin fell 630 basis points yoy to 35% in third quarter of FY 10, at a time when its net sales also declined 33.5% yoy to Rs 466.9 crore. The operating environment was extremely difficult, with average spot freight rates in VLCC that fell 62.3 % yoy. On a consolidated basis too, which includes its offshore division, GE Shipping’s operating profit margin fell 1,070 basis points yoy to 28.2% in third quarter. During the first nine months of FY 10, its offshore business contributed 21.6% of total segment sales and shipping the rest.

VALUATIONS:

GE Shipping at Rs 261.5 per share, trades at 7.3 times on a trailing four-quarter basis. Rival, Shipping Corp trades at 14 times and Mercator Lines at 6.2 times. Investors could consider buying into GE Shipping.