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. We recommended the GE Shipping stock in Investor’s Guide issue
dated May 18, 2009. At that time, the stock was trading at Rs 242.6 per
share. 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.

Source: The Economic India Times

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• Spot freight pick-up is in safe waters, GE Shipping

    Investors are once again taking a fancy to shipping stocks, given the nascent signs of a pick-up in spot shipping freight rates in the key tanker segment over the past weeks, from the extremely low levels that prevailed in the September ’09 quarter. Given this renewed interest, the GE Shipping

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    The impact of the difficult operating environment for the global shipping industry was visible in the December 2009 quarterly results of the government-controlled Shipping Corporation of India, the largest player in the sector, and its nearest rival GE Shipping.

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    With activities picking up after a huge lull, shipping companies have started to garner attention amongst gain. Great Eastern Shipping (GE) reported 6.6% growth in revenues in the December 2009 quarter to touch Rs 706.3 crore. Higher operating days and firming of freight rates in the December 2009 quarter, especially

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• Varun Shipping is the fleet acquisition plan on hold

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