Result Update Rating matrix Rating : Strong Buy Target : Rs 37 Target Period : 1 months Potential Upside : 4% Key Financials (Rs Crore) FY9 FY1E FY11E FY1E Net Sales 3. 3. 3379.9 33. EBITDA 166.1 916.4 137. 1493.6 Net Profit 1417.5 497.6 63.7 91. February, 1 GE Shipping (GESHIP) Rs 6 WHAT S CHANGED PRICE TARGET... Changed from Rs 99 to Rs 37 EPS (FY11E)... Changed from Rs 54.6 to Rs 41.9 EPS (FY1E)...Introduced at Rs 5.5 RATING...Changed from OUTPERFORMER to STRONG BUY Valuation summary FY9 FY1E FY11E FY1E PE (x).. 6. 4.5 Target PE (x) 4. 11. 9. 6.6 EV to EBITDA(x) 3.6 6.6 5. 3.1 Price to book (x)..7.6.6 RoNW (%) 7.1. 1. 1.6 RoCE (%) 1.7 4.4 6.4 7.7 Stock data Market Capitalisation Rs 399. crore Debt (Q3FY1) Rs 556. crore Cash (Q3FY1) Rs 3595. crore EV Rs 591 crore 5 week H/L (Rs) 3 / 143 Equity capital Rs 15.3 crore Face value Rs. 1 MF Holding (%) 14.3 FII Holding (%) 1.3 Price movement (Nifty vs. GE) 6 35 5 3 4 5 3 15 1 1 5 Feb-9 Jun-9 Oct-9 Feb-1 Analyst s name NIFTY Bharat Chhoda bharat.chhoda@icicisecurities.com Jehangir Master jehangir.master@icicisecurities.com Prerna Jhunjhunwala prerna.jhunjhunwala@icicisecurities.com GE Striking valuation Great Eastern Shipping (GE) reported 6.6% growth in topline, which came in at Rs 76.3 crore. It was achieved on the back of higher operating days and firm freight rates in Q3FY1 as compared to the previous quarter. GE s performance stands out as compared to other shipping companies. The company has managed to deliver an admirable performance despite a volatile freight rate environment. GE is also ramping up its fleet (especially in offshore segment), which will be scaled up to 7 vessels in FY1 from the present 17 vessels. Total fleet size will increase to 74 vessels in FY1 from the present 5 vessels. With firmness in freight rates, going ahead, the performance of GE is set to improve. Further, new deliveries are expected to join the fleet over the next two years. In FY1, GE would be operating at peak capacity and the full impact of the same would be visible in the financials. We are changing our rating on GE from OUTPERFORMER to STRONG BUY. Performance improves on the back of higher utilisation, firm rates GE s performance in Q3FY1 improved as its consolidated revenue increased by 6.6% to Rs 76.3 crore on the back of a rise in revenue days, which rose to 34 days as against 36 days in QFY1. TCE per day for dry bulk carriers as well as product carriers increased to Rs 964 and Rs 19131 as compared to Rs 1765 and Rs 165 in QFY1. Excluding extraordinary profit on sale of ship of Rs 53. crore in QFY1, PAT in Q3FY1 has been higher by 7.6% a significant improvement in performance. Valuation Factoring in FY1E earnings, GE is trading at a significant discount to its fair value and the stock is likely to get re-rated. We have valued GE on multiple valuation parameters to arrive at price target of Rs 37. We are changing our rating from OUTPERFORMER to STRONG BUY. Exhibit 1: Performance Highlights Q3FY1 Q3FY1E Q3FY9 QFY1 YoY Gr. (%) QoQ Gr.(%) Net Sales 76.3 576.9 966. 66.7-7. 6.6 EBITDA 199.3 47. 374.5 16.4-46. 1.4 EBITDA Margin (%). 4. 3.7 5.4-7.1 11.1 Depreciation 19.3 91.3 9.9 17..3 1.4 Interest 5.5 5.4 51.7 7.7 -.3 -.5 Reported PAT 94.4 149.5 94.5 1.5-67.9-13. EPS (Rs) 6. 9. 19.3 7.1-67.9-13.
Exhibit : Topline improves backed by higher utilisation level, firm rates GE reported 6.6% growth in topline backed by higher utilisation levels and firm vessel rates During Q3FY1, revenue days increased to 34 as compared to 36 days in QFY1 During Q3FY1, TCE per day for dry bulk carriers as well as product carriers increased to Rs 964 and Rs 19131 as compared to Rs 1765 and Rs 165 in QFY1 Rs. Cr. 1. 1.. 6. 4.. 64.1 966. 56. 7. 66.7 76.3. QFY9 Q3FY9 Q4FY9 Q1FY1 QFY1 Q3FY1 After dipping to 5.4% in QFY1, the operating margin has since improved to.% on account of a rise in topline combined with drop in charter hire charges With a gradual recovery in tanker rates, the operating margin for GE is set to improve over the next few quarters Exhibit 3: Operating margin improves on higher freight rates, drop in charter hire charges Rs.Cr. 6. 5. 4. 3.. 1.. 517.9 6% 374.5 39% 47% 36% 65. 56.7 5% 16.4 % 199.3 QFY9 Q3FY9 Q4FY9 Q1FY1 QFY1 Q3FY1 7% 6% 5% 4% 3% % 1% % EBITDA OPM PAT declined by 13.% in Q3FY1 to Rs 94.4 crore as against Rs 1.5 crore in QFY1. However, the decline in PAT has been arrested and PAT for Q4FY1 is likely to come in higher due to rise in realisations Another noteworthy aspect is that PAT in QFY1 also included profit on sale of ship of Rs 53. crore. Excluding that GE has reported a higher PAT in Q3FY1. This indicates that the performance has improved on a QoQ basis Exhibit 4: Excluding gains on sale of ship in QFY1, PAT from operations reports significant improvement Rs.Cr. 6. 5. 4. 3.. 1. 56. 94.5 5. 154. 1.5 94.4. QFY9 Q3FY9 Q4FY9 Q1FY1 QFY1 Q3FY1 Page
Exhibit 5: Improvement in operating parameters Revenue days Revenue days have improved from 36 days in QFY1 to 34 days in Q3FY1 on the back of higher utilisation level of its fleet 345 34 335 34 33 36 35 3 QFY1 Revunue Days Q3FY1 Exhibit 6: Improvement in operating parameters Average TCE TCE for product tankers increased while it dropped with respect to crude tankers In the case of dry bulk vessels, TCE showed significant strength 5 1779 1777 165 19131 1765 964 TCE $/day 15 1 5 Crude Product Dry Bulk QFY1 Q3FY1 Exhibit 7: Present fleet At present, GE operates a fleet of 5 vessels of which 41 vessels consist of shipping vessels (bulk+lpg+product+crude) and 17 consist of offshore vessels (AHTS+OSV) No. of vessels 1 16 14 1 1 6 4 19 13 7 1 Crude Product LPG Dry Bulk Rig AHTS OSV Page 3
Exhibit : Fleet in FY1 post capex completion The existing fleet will be scaled up to 74 vessels consisting of 47 shipping vessels and 7 offshore vessels With the rise in offshore vessels, GE will have a balanced and diversified fleet, which will be less impacted by market fluctuations Further, with an improved outlook for offshore freight rates on the back of improved crude oil prices, the revenue growth visibility also improves significantly for GE No. of vessels 1 16 14 1 1 6 4 14 19 1 Crude Product LPG Dry Bulk Jack-up Rig 13 1 AHTS 15 PSV Page 4
Detailed valuation GE is one of the best performing shipping companies in India and is aggressively expanding its fleet especially in the offshore segment. This will drive growth for the company over the next two years At the current price level, GE is trading at a significant discount to its fair value, which does not factor in the improved earnings scenario emerging over the next two years We have changed our valuation matrix to FY1E as against our earlier price recommendation based on FY11E financials. Further, new deliveries are expected to join the fleet over the next two years and in FY1, GE would be operating at peak capacity and the full impact of the same would be visible in the financials. Factoring in FY1E earnings, GE is trading at a significant discount to its fair value and there is a strong likelihood of the stock getting re-rated. We have valued GE on multiple valuation parameters i.e. EV/EBITDA, P/BV and P/E multiples to arrive at price target of Rs 37, which is at a steep discount to its global peers. We are changing our rating on GE from OUTPERFORMER to STRONG BUY. Exhibit 9: Valuation parameters Valuation based on Global average Target multiple Target price(rs) PE multiple (x).13 6. 351 EV/EBITDA.3 4. 347 Price to book value (x) 1.39 1. 464 Average target price (Rs.) 37 Current market price (Rs) 6 Upside (%) 4 Source: ICICIdirect.com Research Exhibit 1: Valuations Sales Sales Growth EPS EPS Growth PE EV/EBIDTA RoNW RoCE (Rs. cr) (%) (Rs.) (%) (x) (X) (%) (%) FY1E 3. -5.5 3.7-64.9. 6.6. 4.4 FY11E 3379.9 19.4 41.9.3 6. 5. 1. 6.4 FY1E 33. 13.4 5.5 39.5 4.5 3.1 1.6 7.7 Exhibit 11: Revised estimates Old New FY11E FY1E FY11E FY1E Sales 3653.9-3379.9 33. EBITDA 1499.9-137. 1493.6 Net Profit 3.1-63.7 91. EPS 54.6-41.9 5.5 Source: ICICIdirect.com Research Page 5
ICICIdirect.com coverage universe Domestic Peers G.E Shipping Sales (Rs. Crore) EPS (Rs.) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%) Idirect Code GESHIP CMP (Rs.) 6 FY1E 3. 3.7. 6.6. 4.4 Target (Rs.) 37 FY11E 3379.9 41.9 6. 5. 1. 6.4 MCap 39.4 % Upside 4 FY1E 33. 5.5 4.5 3.1 1.6 7.7 Mercator Lines Sales (Rs. Crore) EPS (Rs.) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%) Idirect Code MERLIN CMP (Rs.) 55 FY1E 156. 1. 9. 5.6 1.9 5.6 Target (Rs.) 74 FY11E 197..9 19. 4..9 5. MCap 19. % Upside 35 FY1E 15.6 6.5.5 3.5 6. 7.1 Varun Shipping Sales (Rs. Crore) EPS (Rs.) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%) Idirect Code VARSHI CMP (Rs.) 5 FY1E 679.5-3.3-15. 16.5-5. Target (Rs.) 4 FY11E 771. -1. -43.4 1.3-9.6 MCap 75. % Upside - FY1E 19. 1.7 3. 9.4 3.3 1.5 Aban Offshore Sales (Rs. Crore) EPS (Rs.) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%) Idirect Code ABALLO CMP (Rs.) 117 FY1E 3151.7. 14. 1. 7.6.4 Target (Rs.) 144 FY11E 543. 33.4 3.4 5.5 3. 15. MCap 46.1 % Upside FY1E 415.4.3 4. 5.7 19. 1.9 Garware Offshore Sales (Rs. Crore) EPS (Rs.) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%) Idirect Code GARSHI CMP (Rs.) 1 FY1E 39.9.4.4 9. 19. 9.4 Target (Rs.) 1 FY11E 44. 3.3.1. 16.9 1. MCap 447.4 % Upside -3 FY1E 3.4 1..9. 13.5 9. Great Offshore Sales (Rs. Crore) EPS (Rs.) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%) Idirect Code GREOFF CMP (Rs.) 47 FY1E 194. 46.3. 7. 19.4 11. Target (Rs.) 43 FY11E 166.6 49.. 5.9 17. 11.6 MCap 151. % Upside 6 FY1E 131.5 67.3 6. 4.5. 13.5 Bharati Shipyard Sales (Rs. Crore) EPS (Rs.) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%) Idirect Code BHASHI CMP (Rs.) 97 FY1E 131.4 49.3 6..5 16.5 11.3 Target (Rs.) 369 FY11E 1361.7 76.7 3.9 7.4 13.7 1.3 MCap 19.7 % Upside 4 FY1E 114.6 79. 3.7 7. 1.5 11.4 Global Peers P/BV (x) P/E (x) EV/EBITDA (x) ROE (%) Company Country CY CY9E CY1E CY CY9E CY1E CY CY9E CY1E CY CY9E CY1E Dry Bulk/Tankers Teekay Corp.* USA.7.9 1. 6.9-54. 7.6 1.4 9.6 9.9.4 3.9 Diana Shipping* USA 1.5 1.3 1. 5.5 1.5 1.6 4. 7.6 7.4 7.4 13.3 11.7 Genco Shipping* USA.9.9. 3.7 5.5 7. 5. 6.4 7.1.3 17.7 9.9 Dry Ships* USA..7.6.6 7.5 7. 4.. 6. 6.7 5.7 7. Frontline Ltd* Norway 3.4 3.6 3.4 4. 4.6 1. 5.5 11. 1.7 1.3 15.4 14.4 G.E Shipping# India.9..7.7.. 4. 3.6 6.6 33.6 7.1. Mercator Lines# India..6.6 4. 3.4 9. 4. 3.5 5.6. 16.5 1.9 *consensus # FY Source: Bloomberg, ICICIdirect.com Research Page 6
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