GE Shipping safer bet among shipping stocks: Udayan

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GE Shipping safer bet among shipping stocks: Udayan

Udayan Mukherjee, Managing Editor, CNBC says one should not draw a one-to-one correlation between Baltic Dry Index and the earnings of the shipping companies. He considers GE Shipping to be a safe bet among the shipping stocks.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS Baltic Dry Index hits new high; shipping stocks may rally ALSO READ See what other CNBC-TV18 anchors have to say GE Shipping BSE | NSE 30/05/12 Are Mutual Funds betting on GE Shipping? Other Stocks in this news Mercator | Global Offshore Services | Essar Ports | Varun Shipping Company |

The Baltic Dry Index soared to new 2009 high at 4,381 and was trading at 14-month highs. Shipping companies like Essar Shipping , Garware Offshore , GE Shipping , Mercator Lines and Varun Shipping moved up 6-10%.

Udayan Mukherjee, Managing Editor at CNBC-TV18 says, one should not draw a one-to-one correlation between Baltic Dry Index and the earnings of the shipping companies. "Most of the shipping companies have bulk of their earnings coming in from their tanker segment, which doesn't usually move in tandem with the Dry Index."

Mukherjee considers GE Shipping to be a safe bet among the shipping stocks." GE Shipping is a sleep better at night candidate."     

Here is a verbatim transcript of Udayan Mukherjee's comments on CNBC-TV18. Also see the accompanying video.

The market is excited by the fact that the Baltic Dry Index is hitting new highs everyday. That does translate to some positive potential earnings for many of the shipping companies but you should not draw a one-to-one correlation between the Baltic Dry Index and the earnings of shipping companies. For one, most of the shipping companies have lot of their ships tied to their long-term charters and they don't move as much as the spot prices move. 

Most of the shipping companies have bulk of their earnings coming in from their tanker segment, which doesn't usually move in tandem with the Dry Index. So it's not that the Baltic Dry Index doubles and therefore earnings for most shipping companies will double. There is some rub off because about 20% odd both Shipping Corporation of India (SCI) and GE Shipping's earnings or revenues do come in from the Dry Index but some of that is in the long-term charter as well.

There is probably a 10% kind of sensitivity - not 100% sensitivity to the Baltic Freight Index and where it is headed and within the key three stocks out there - GE Shipping, SCI and Mercator Lines - one will find that the one, which offers more value in terms of valuation comfort is GE Shipping followed by SCI. Mercator Lines is quite expensive, although it tends to be the most volatile trading stock among the three and therefore its got excited because of the sentiment rub off. But I would be a bit wary of Mercator Lines and there is far grater safety in GE Shipping if one is buying because of the Baltic Index.

Just one caveat that at some point if there is a dollar spike and that leads to some kind of sell-off in global markets, including commodities, you will probably find shipping stocks reacting then as well. And insurance against that kind of correction - although we don't know when it will happen but it will at some point - is that you need to be in stocks which are trading at 4 to 5 PE and not at 20 PE, so that you don't get knocked back very substantially when that correction comes. In that GE Shipping is a sleep better at night candidate.