Great Eastern Shipping Co. Ltd.

Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 August 8, 2011 COMPANY RESULTS REPORT REVIEW Great Eastern Shipping Co. Ltd. Decent quarter; clouded by macro turbulence HOLD Nifty: 5,119; Sensex: 16,990 CMP Target Price Analyst Chetan Kapoor +91-22-4322 1232 chetan.kapoor@idbicapital.com Rs255 Rs272 Potential Upside/Downside +7% Key Stock Data Sector Shipping Bloomberg / Reuters GESCO IN /GESC.BO Shares o/s (mn) 152.3 Market cap. 38,803 Market cap. (US$ mn) 863 3-m daily average vol. 22,836 Price Performance 52-week high/low Rs393/240-1m -3m -12m Absolute (%) (7) (6) (18) Rel to Sensex (%) 3 2 (11) Shareholding Pattern (%) Promoters 29.94 FIIs/NRIs/OCBs/GDR 17.65 MFs/Banks/FIs 18.50 Govt. 0.01 Non Promoter Corporate 8.28 Public & Others 25.64 Summary GE Shipping (GESCO) recorded better than expected results mainly due to higher operating days in the shipping division. The revenue for the quarter grew by ~6% YoY to Rs6.8 bn mainly due to the increase in the operating days in the shipping division and higher charter rates in product tanker segment which constitutes~50% of total fleet in terms of numbers. EBIDTA margins remained relatively stable at 39.9%, holding a fall of 70bps. The PBT remained flat at Rs1.9 bn, whereas adjusted PAT fell by 7% YoY to Rs1.3 bn. The NAV contracted from Rs345 in Q4FY11 to Rs340 in Q1FY12. The consolidated NAV including the offshore fleet stands at ~Rs445 as compared to Rs420 in Q4FY11. We expect the pressure on the NAV to remain in the medium term with the asset prices expected to further correct in the case of Crude tanker and Dry-bulk space. Product tanker segment though has started to show signs of reaching the trough with the fleet addition scenario relatively brighter (~3% addition YoY over CY11-12). We believe that GESCO with its relatively lower leverage is in a better position to weather the turbulent macro-economic scenario. The stock currently trades at 7.3x FY12E which is at a fair multiple compared to the global shipping companies. We maintain our rating at HOLD with a target price of Rs272 following a simple NAV based target multiple (0.8x). Key Highlights Revenue increased by ~6% YoY to Rs6.8 bn mainly due to increase in operating days of the shipping division and higher charter rates in product tanker segment which constitutes ~50% of total fleet in terms of numbers. This growth was recorded despite a 32% YoY fall in the Dry-bulk TCYs booked by the company. Operating days in the shipping division increased by 1.7% YoY and 20% QoQ. EBIDTA margins remained relatively stable at 39.9% (ex-income from sale of ship) as compared to 40.6% in Q1FY11. This despite the 750bps reduction in offshore EBIT margins to 38.9%. Offshore EBIT margin fall has been ascribed to the lower utilization of couple of PSV and AHTV assets which are in between contracts. The earnings adjusted for gain from sale of ship stood at Rs1.3 bn. The consolidated NAV increased to Rs445 from Rs420 mainly on the back of the increase in the offshore asset prices. The shipping fleet saw a decline in valuation at Rs340 from Rs345 in Q4FY11. During the quarter GESCO added one Kamsarmax and delivered one Suezmax carrier taking the total fleet to 35 vessels (26 tankers, 9 dry-bulk carriers). Further to this, another Kamsarmax dry-bulk carrier is expected to be added in Q2FY12. The spot to charter mix in case of Tankers and dry-bulk stood at 55:45. Relative to Sensex 130 120 110 100 Table: Financial snapshot 90 80 70 Source: Capitaline GESCO Sensex Year Revenue EBITDA EBITDA (%) Adj. PAT EPS (Rs) P/E (x) EV/EBITDA (x) RoE (%) RoCE (%) FY10 28,904 7,598 26.3 5,096 33.5 7.6 9.9 9.3 3.3 FY11 24,470 9,693 39.6 4,739 31.1 8.2 8.8 8.0 4.0 FY12E 27,502 11,605 42.2 6,047 39.7 6.4 7.3 9.6 5.0 FY13E 28,313 11,650 41.1 6,286 41.3 6.2 7.3 9.3 4.4

Outlook Crude carrier The Crude carrier segment is likely to suffer from excessive supply with weakening demand of crude by developed countries. With current orderbook at 21.7% of existing fleet, the base case net-addition scenario is expected to be in range of 7% p.a. This distills into a difficult charter rate scenario with trade growth in the range of 4%. We expect the rates to remain depressed for the next two years in the tanker segment. Product segment The Product carrier segment is likely to show first signs of recovery with a relatively benign orderbook at 14% of existing fleet and fleet addition likely to be in the range of 3-4% p.a. Hence, we expect players like GE Shipping to gain out of the recovery in this segment with about 50% of its fleet in terms of numbers belonging to this segment. Dry-bulk segment We maintain a pessimistic outlook for the Dry-bulk segment with ~37% of fleet on order excluding the ore carriers. The trade growth estimates remain highly nebulous with the uncovering macro-economic scenario. There is a wide understanding in the industry of significant cancellations with a likely bankruptcy of a number of players. The iron-ore imports by China are currently stagnating, as are its inventory levels. Offshore We expect a relatively attractive scenario to continue for Offshore till the crude oil remains above US$80/barrel territory. The increase in the asset prices over the quarter is one of the key indicator for a better earning profile. Valuations The stock currently trades at 7.3x FY12E and 7.3x FY13E EV/EBIDTA. We find credence in the lower leverage (netdebt:equity at 0.8x, FY11) but with a higher risk profile due to lower coverage 55% in crude, 42% in dry-bulk, 37% in AHTSVs and 38% for MPSSVs, induces our HOLD rating on the stock with a target price of Rs 272. Concall Highlights Relatively lower dry-docking cost during the quarter. Total 10 dry-docks expected in FY12, 4 in Q2FY12 hence repair and maintenance costs to go up in the coming quarters. The product tanker segment is likely to recover first with a relatively lower net-addition scenario of 3% YoY in the next two years. Product charter rates have relatively recorded better rates in H1CY11. The rates are likely to remain stable. Lower utilization of offshore assets stationed in Brazil and couple of AHTVs reduced margins for the quarter in the offshore segment. The utilization is expected to improve with another contract to be signed in the next week for the AHTSVs. Asset prices are expected to correct further from the current levels. According to estimates assets acquired in the last 8-9 years with more than 50% leverage are not breaking even at the current spot rates hence cancellations/scrapping is likely to pick-up further pace. 2

Table: Financials (Consolidated) Year-end: March Q1FY11 Q1FY12 YoY (%) FY10 FY11 YoY (%) FY12E YoY (%) FY13E YoY (%) Revenue 6,443 6,818 5.8 28,565 24,329 (14.8) 27,502 13.0 28,313 2.9 EBITDA 2,614 2,722 4.1 7,257 9,669 33.2 11,605 20.0 11,650 20.5 EBITDA Margins (%) 40.6 39.9 25.4 39.7 42.2 6.2 41.1 3.5 Sale of Ship 441 461 4.7 1,849 1,251 (32.4) Other Income 798 658 (17.5) 2,808 1,830 (34.8) 3,068 67.7 3,524 92.6 Depreciation 1,047 1,233 17.7 4,246 5,061 19.2 5,263 4.0 5,450 7.7 Interest 931 735 (21.0) 2,123 2,397 12.9 3,225 34.5 3,278 36.8 PBT 1,874 1,874 (0.0) 5,546 5,292 (4.6) 6,185 16.9 6,447 21.8 Tax 148 236 412 463 12.3 138 (70.1) 161 (65.3) PAT 1,726 1,638 (5.1) 5,134 4,829 (5.9) 6,047 25.2 6,286 30.2 PAT excluding sale of ships and foreign exchange gains 1,431 1,328 (7.1) 3,895 4,848 24.5 6,047 24.7 6,286 29.7 EPS (as per above) (Rs) 9.4 8.7 (7.2) 25.6 31.8 24.5 39.7 24.7 41.3 29.7 Table: Segmental results Year-end: March Q1FY12 Q1FY11 YoY (%) Shipping 5,381 4,967 8.3 % Share 68.6 68.2 Offshore 2,467 2,313 6.7 % Share 31.4 31.8 Others Total 7,848 7,280 7.8 Less Inter Segment (1) (4) (86.5) Total 7,848 7,276 7.9 EBIT Shipping 1,649 1,731 (4.7) PBIT (%) 30.6 34.8 (12.1) Offshore 960 1,074 (10.7) PBIT (%) 38.9 46.4 (16.2) Others Total 2,609 2,805 (7.0) Less Interest 735 931 (21.0) PBT 1,874 1,874 (0.0) Table: Average charter rates TCYs (US$/Day) Q1FY11 Q1FY12 YoY (%) Q4FY11 QoQ (%) Crude 20,444 20,097 (1.7) 23,072 (12.9) Product 15,485 16,326 5.4 15,556 4.9 Dry 24,484 16,569 (32.3) 18,153 (8.7) 3

Table: Revenue days (Days) Q1FY11 Q1FY12 YoY (%) Q4FY11 QoQ (%) Owned tonnage 3,315 3,178 (4.1) 2,827 12.4 In-chartered tonnage 19 213 1,021.1 Total revenue days 3,334 3,391 1.7 2,827 20.0 Total owned tonnage (mn dwt) 2.7 2.6 (4.1) 2.6 (1.9) Table: World fleet status Current In Service DWT ('000) Orderbook as DWT (%) Tankers Crude Oil 2,206 345,130 21.7 Oil Product 1,524 53,338 13.6 LNG 346 27,535 17.3 LPG 539 13,571 9.8 Chemical 233 4,085 22.8 Carriers Bulk 7,612 509,830 37.1 Ore 151 36,924 83.3 Vehicle 685 11,746 11.2 Gen Cargo 4,537 57,325 20.7 Ro-Ro 423 4,575 11.1 Containers Containerships 4,763 191,375 27.5 Combination Chemical/Oil 2,998 75,424 12.0 Passenger Passenger/Cruise 165 1,449 11.2 Source: Bloomberg 4

Table: Peer Valuations Company Tanker CMP (US$) Mkt Cap (US$ mn) CY10/ FY11 ROE (%) P/E (x) P/B (x) EV/EBITDA (x) CY11E/ FY12E CY12E/ FY13E CY10/ CY11E/ CY12E/ FY11 FY12E FY13E CY10/ CY11E/ CY12E/ FY11 FY12E FY13E CY10/ CY11E/ CY12E/ FY11 FY12E FY13E Frontline Ltd/Bermuda 8.4 653 21.7 (5.7) (2.8) 4.1 0.9 1 1 6.8 11 9.4 General Maritime Corp 0.7 87 (62.2) (34.5) (43.6) 0.2 0.3 0.5 14.2 18.7 13.6 Knightsbridge Tankers Ltd 17.7 432 12.5 10.6 10.6 8.8 10.7 10.9 1.2 1.2 1.2 8.4 7.8 7.9 Aegean Marine Petroleum Network Inc 4.6 218 4.7 5 10.2 11.5 9.7 4.6 0.5 10.5 9.5 6.7 Torm A/S 3.5 251 (11.5) #N/AN/A #N/AN/A 115 20 21.9 10.2 Teekay Corp 24.4 1,752 (12.7) (3.1) 5.4 115 1 0.9 0.9 8.5 8.5 7.1 Tsakos Energy Navigation Ltd 7 323 2.1 (1.1) 2.3 14 15 0.3 0.3 0.3 10 12.2 8.8 Median 10.15 10.2 15 0.7 0.9 0.9 10 11 8.8 Dry Bulk Star Bulk Carriers Corp 1.4 112 (1) (2.9) #N/AN/A 0.2 0.2 3.6 6.8 6 DryShips Inc 2.9 1,124 5.7 7.1 7.7 4.5 3.8 3.4 0.3 0.3 0.3 6.2 5.1 4.1 Diana Shipping Inc 8.5 703 12.1 9.4 5.5 5.3 6.4 10.4 0.6 0.6 0.5 4 4.4 5.7 Excel Maritime Carriers Ltd 2 174 15.9 2.7 (3.2) 0.6 0.1 0.1 0.1 2.8 8.8 16 Genco Shipping & Trading Ltd 4.6 167 13.7 3.4 (1.8) 1.1 7.8 0.1 0.1 0.2 4.8 6.9 9.1 Eagle Bulk Shipping Inc 1.8 111 4.2 (2.2) (0.7) 4.1 0.2 0.2 0.2 8.4 10.4 9.3 Median 4.1 6.4 6.9 0.2 0.2 0.2 4.4 6.85 7.55 5

Financial Summary Profit & Loss Account Cash Flow Statement Net sales 28,904 24,470 27,502 28,313 Growth (%) (24.0) (15.3) 12.4 2.9 Operating expenses (21,307) (14,777) (15,897) (16,663) EBITDA 7,598 9,693 11,605 11,650 Growth (%) (51.0) 27.6 19.7 0.4 Depreciation (4,246) (5,061) (5,263) (5,450) EBIT 3,352 4,632 6,342 6,200 Interest paid (2,123) (2,397) (3,225) (3,278) Other income 4,316 3,057 3,068 3,524 Pre-tax profit 5,578 5,239 6,185 6,447 Tax (450) (552) (138) (161) Effective tax rate (%) 8.1 10.5 2.2 2.5 Net profit 5,128 4,687 6,047 6,286 Adjusted net profit 5,096 4,739 6,047 6,286 Growth (%) (63.8) (7.0) 27.6 4.0 Shares o/s (mn nos) 152 152 152 152 Pre-tax profit 5,578 5,239 6,185 6,447 Depreciation 2,886 (21) 23,349 26,730 Tax paid (457) (554) (129) (161) Chg in working capital (2,627) (1,688) (1,692) 12 Other operating activities - - - - Cash flow from operations (a) 5,379 2,977 27,713 33,028 Capital expenditure (2,121) (15,787) (1,545) (10,166) Chg in investments (18,765) 3,799 (5,037) (1) Other investing activities 1,185 77 - - Cash flow from investing (b) (19,701) (11,911) (6,583) (10,167) Equity raised/(repaid) (37) (61) (23) 1 Debt raised/(repaid) 11,042 5,873 10,404 4,233 Dividend (incl. tax) (1,421) (1,434) (1,203) (1,324) Chg in minorities - 376 - - Other financing activities - - (367) - Cash flow from financing (c) 9,584 4,754 8,811 2,910 Net chg in cash (a+b+c) (4,737) (4,179) 29,942 25,771 Balance Sheet Financial Ratios Net fixed assets 75,035 90,842 69,038 52,474 Investments 21,789 17,990 23,027 23,028 Current assets 21,848 17,688 48,728 74,625 Inventories 861 1,034 1,026 1,050 Sundry Debtors 2,257 2,277 3,173 3,274 Cash and Bank 17,439 13,260 43,202 68,974 Loans and advances 1,146 1,035 1,253 1,254 Total assets 118,671 126,520 140,793 150,127 Shareholders' funds 57,098 60,683 65,129 70,092 Share capital 1,605 1,547 1,524 1,525 Reserves & surplus 55,493 58,760 63,228 68,191 Total Debt 53,702 59,574 69,978 74,211 Secured loans 44,202 47,074 59,478 65,711 Unsecured loans 9,500 12,500 10,500 8,500 Other liabilities 53,695 59,566 69,978 74,211 Curr Liab & prov 9,619 7,302 5,776 5,936 Current liabilities 7,879 6,273 5,687 5,825 Provisions 1,740 1,029 89 111 Total liabilities 61,573 65,838 75,666 80,036 Total equity & liabilities 118,671 126,521 140,794 150,128 Book Value (Rs) 375 398 428 460 Adj. EPS (Rs) 33.5 31.1 39.7 41.3 Adj. EPS growth (%) (63.8) (7.0) 27.6 4.0 EBITDA margin (%) 26.3 39.6 42.2 41.1 Pre-tax margin (%) 19.3 21.4 22.5 22.8 ROE (%) 9.3 8.0 9.6 9.3 ROCE (%) 3.3 4.0 5.0 4.4 Turnover & Leverage ratios (x) Asset turnover (x) 0.3 0.2 0.2 0.2 Leverage factor (x) 2.1 2.1 2.1 2.2 Net margin (%) 17.6 19.4 22.0 22.2 Net Debt / Equity (x) 0.6 0.8 0.4 0.1 Working Capital & Liquidity ratio Inventory days 11 15 14 14 Receivable days 28 34 42 42 Payable days 105 130 129 125 Valuation P/E (x) 7.6 8.2 6.4 6.2 Price / Book value (x) 0.7 0.6 0.6 0.6 PCE (x) 4.2 4.0 3.4 3.3 EV / Net sales (x) 2.6 3.5 2.4 1.6 EV / EBITDA (x) 9.9 8.8 7.3 7.3 Dividend Yield (%) 3.1 3.2 2.6 2.9 6

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