Stock Review: Essar Shipping Ports & Logistics (ESPL)

Essar Shipping Ports & Logistics (ESPL) has attempted to offset a rather difficult operating environment for the shipping and allied businesses in the March 2011 quarter by reining in costs and long-term contracts with key customers. Apart from that, in its smaller port business, it reported an improved performance in the fourth quarter, thanks to expanded capacity and strong demand conditions.

As a result, the company's consolidated operating profit margin improved 70 basis points to 30.8% in the March quarter despite core operational income falling 7.5% to . 787.9 crore. In its key fleet operating and chartering division, the company has attempted to offset weaker spot shipping freight rates via its longterm contracts with key customers. For instance, in the tanker segment like VLCC (very large crude carriers), the average of the spot freight rates declined nearly 73% y-o-y in the fourth quarter. In addition, the Baltic Dry Index weakened nearly 55% y-o-y in the quarter under review. The company has also highlighted that it had grappled with lower realisations in its oil fields services division .
Apart from that, a rise in its interest and depreciation during the fourth quarter impacted its net profit that declined nearly 78% y-o-y to . 14 crore. In fact, ESPL would have slipped into a quarterly loss in the period under review if we were to exclude the profit on sale of asset. The stock declined 5% to . 92.6 on Tuesday. The fourth quarter was the company's weakest performance during the year ended March 2011, on a consolidated basis, with regard to sales and net profit growth.

ESPL is expected to shortly complete the process of demerging its shipping and logistics and oilfields drilling business into Essar Shipping, while the port operations would be housed in an entity called Essar Ports.

This move will help create more focused entities, making it easier to raise funds, especially from institutional investors. The outlook for the port's business appears strong in the short term, given the shift in traffic to ports in Gujarat. However, the outlook is rather difficult in the shipping industry. ESPL trades at a P/E of more than 30 times on a trailing four-quarter basis, excluding the forthcoming restructuring of its businesses.