Buy GE Shipping; target of Rs 372: BP Equities

“The Great Eastern Shipping Company (GESCO) is India’s largest private sector shipping company incorporated in the year 1948. The company has two main businesses: shipping (60% of total revenues) and offshore (40% of total revenues). The shipping business is involved in transportation of crude oil, petroleum products, gas and dry bulk commodities. The offshore business services to the oil companies such as ONGC & Reliance Industries Ltd in carrying out offshore exploration and production (E&P) activities through its wholly owned subsidiary Greatship India Limited (GIL).”

“GIL’s revenue is expected to grow at a CAGR of ~ 46% over FY10-FY13E on back of the increasing spend on E&P activities by oil and gas companies due to increasing oil prices. GIL expects to add seven new vessels and an operating rig by FY13E to its existing fleet of 19 vessels which will contribute significantly to company’s topline. We believe the offshore segment to contribute over 50% to total revenues by FY13E from the level of ~25% in FY10. GESCO has planned a capex of USD 480 million (~ Rs 21.6 billion) for its shipping business, which will be used to add six new vessels by FY12E to its existing shipping fleet of 34 vessels thus enhancing its capacity from 2.6 million dead weight tonne (dwt) to 3.8 million dwt. GESCO is adding vessels both in the dry bulk and tanker segments, freight rates for which, we believe, are set to improve from current levels on account of improved demand of iron ore, coal and oil from fast growing economies like India and China.”

“The company has ordered new built vessels both in the shipping and offshore segments which will help to improve its average age of fleet and return on investments. In offshore business, younger vessels attract better day rates, generally preferred by oil & gas companies, because they provide better operational efficiencies and are technologically more advanced. The average age of GESCO’s shipping fleet is ~ 9.8 years which is considerably lower than its Indian peers and the company’s offshore fleet has an average age of only 2.5 years.”

“In view of the company’s fast growing offshore business and strong capex plans, we expect GESCO’s revenues to grow at a CAGR of over 27% over FY11E-FY13E. The stock currently trades at a P/E, P/BV and EV/EBITDA of 7.14 x , 0.78 x and 6.98 x respectively for FY12E representing a significant discount to its global peers. We have arrived at a SOTP target price of Rs 372/ share for GESCO which represents a 43% upside from CMP. We hereby initiate coverage on GESCO with a “Buy” recommendation with a target price of Rs 372/share,” says BP Equities research report.

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