Hold Great Eastern Shipping: BP Equities

“Great Eastern Shipping Co Ltd’s (GESCO) income from operations increased 35.1% YoY and 10.7% QoQ to Rs 7,514 mn in Q3FY12 on the back of rupee depreciation and higher revenue days in the offshore segment. Offshore revenue increased 60.8% YoY and 26.6% QoQ to Rs 3,376 mn as four new vessels were added to its fleet over the year. Average Time Charter Yield ($ per day) increased 8.2% QoQ for crude carriers and 13.3 % QoQ for Dry Bulk carriers which helped boost revenues further. The company’s EBITDA margin declined by 654 bps YoY and 394 bps QoQ to 35.8% in Q3FY12 primarily due to 109.1% increase YoY and 57.5% increase QoQ in repairs and maintenance cost. There were six dry dockings during the quarter and the company has guided that there would be 4-5 dry docks in Q4FY12 due to which we expect the repairs and maintenance cost to remain high. There was also an increase in direct operating cost (7.6% up QoQ) and employee cost (7.0% up QoQ) during the quarter which dented the EBITDA margin further. Interest cost during the quarter decreased by 16.7% QoQ but increased substantially by 135.6% YoY to Rs 1,144 mn. Interest cost had an additional adjustment of Rs 308.2 mn due to exchange fluctuation. The company’s depreciation cost increased 35.3% YoY and 3.3% QoQ to Rs 1,434 mn.”

“The company reported net profits of Rs 875 mn during the quarter but the profits included extraordinary income of Rs 430.8 mn. Extraordinary income included gain on sale of assets to the tune of Rs 129 mn, reversal of impairment in the value of ship of to the extent of Rs 209.8 mn and gain on foreign currency transaction of Rs 92 mn during Q3FY12. Consolidated NAV for the quarter stood at Rs 431 as compared to Rs 448 in Q2FY12. There has been a drop in asset values during the quarter between 12% to 15% both in tankers and dry bulk carriers due to which there was a reduction in NAV sequentially. The company declared an interim dividend of Rs 3 per share. During the quarter the company sold two product carriers and subsequent to the quarter delivered two VLCCs to its buyers. The company’s shipping fleet consists of 24 tankers and 10 dry bulk carriers with a combined average age of 8.9 years and 2.62 million DWT. The company's offshore fleet consists of 21 vessels (including one Jackup Rig) as of now and during the next two years it would be taking delivery of four more vessels (including one rig) which would take its fleet to 25 vessels.”

“With the oversupply situation expected to continue in the dry bulk segment and expected slowdown in the global oil demand, freight rates across all segments are expected to remain under pressure. However offshore market continues to remain robust as crude oil prices continue to remain considerably higher than the comfort level of US$ 75-80 per barrel. GESCO is currently trading at 6.8x FY13E EPS and 6.4x FY13E EV/EBITDA. We recommend HOLD rating on the stock and arrive at a target price of Rs 258 for the company,” says BP Equities research report. 

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