GE Shipping's offshore performance dampens investor sentiment

Rising tanker freight, strong balance sheet keep analysts bullish

The market is not enthused by the strong performance of Great Eastern Shipping, India’s largest private sector shipping company, in the March quarter.

Shares of the company have slipped nearly four per cent since Friday although the consolidated bottom line doubled in the quarter and earnings before interest, tax, depreciation and amortisation (Ebitda) grew 13 per cent, year-on-year.

Great Eastern Shipping, through its subsidiaries, is engaged in shipping and the offshore businesses in India as well as internationally. The performance of the company’s offshore business is the reason for the share price fall.

Though the company’s total profit before tax and interest has risen marginally, y-o-y, in 2014-15, the contribution of the offshore segment has shrunk. This was not the case in preceding years.

“Falling crude oil prices impacted the performance of its offshore business in the March quarter,” said Vikram Suryavanshi, senior analyst with Phillip Capital.

Since 2011-12, Great Eastern Shipping’s profits before interest and taxes (PBIT) from the offshore segment have risen continuously, providing relief to the company as shipping earnings declined. Great Eastern Shipping’s offshore business usually accounts for 45 per cent of the company’s revenue and 60 per cent of profits.

At a post earnings conference call last week, the management voiced concerns over utilisation of offshore assets amid declining oil prices and also lowered offshore asset prices by 20 per cent due to the weak business climate.

“With concerns rising for the offshore business, investor sentiment has dampened,” said an analyst with a local brokerage.

In the year ended March, the contribution of the Great Eastern Shipping’s offshore business was Rs 667 crore, down from Rs 681 crore in the previous year. The shipping segment contributed Rs 432 crore, up 24 per cent from the previous year. The trend was similar in the final quarter of 2014-15.

With crude oil prices and tanker freight trending upwards, analysts see strength in the Great Eastern Shipping stock.

“Great Eastern Shipping is it is sitting on huge cash and has the capacity to acquire assets for growth. The company can withstand this long downcycle,” said Suryavanshi of Phillip Capital. On March 31, the company had cash and bank balances worth Rs 2,380 crore. It has a debt-equity ratio of less than one.

“For offshore, it makes sense for the company to remain in the two to three year contracts. With some contracts expiring in December, the company has started marketing now and can also look to offer domestically to ONGC, which would be a safe bet, given the offshore business in the domestic market is not as adversely affected as globally,” said the analyst with the local brokerage.

Though the outlook for the dry bulk business continues to remain weak, the tanker business is seen making up for the loss from the former.

“In the tanker segment, we believe the average one-year time charter rates will grow by about 10-12 per cent in 2015 and further by three to five per cent in 2016. Expanding routes and a mild recovery in trade are expected to aid the rise in freight rates,” said Binaifer Jehani, director, CRISIL Research.

Low crude prices and limited net additions drove up demand for tanker transportation in 2014. The increased crude trade and elevated demand from refinery expansions in Asia would support tanker demand, she added.

G Shivakumar, the group’s chief financial officer, had said at the post earnings conference call, “We have seen new trade patterns like Mexico to Japan/Korea, which were not there for the last 15 years.”

In the dry bulk segment, however, time charter rates are expected to decline by 20-30 per cent in 2015. In 2016, freight rates were expected to recover, albeit slowly at 5-15 per cent, due to the subdued growth in demand and continued net additions, said CRISIL Research.

Great Eastern Shipping has a fleet of 29 vessels, of which 21 are tankers and the balance dry bulk carriers. “We recommend a ‘buy’ in this scrip for medium- to long-term investment as the company is expected to keep its growth story in the coming quarters,” said Firstcall Research in a report.