GE Shipping - Research Meet

Background

GE Shipping (GES) is the largest private sector shipping company in India (owns almost 69% of the Indian shipping tonnage). Currently, the company has a fleet of 70 vessels, including 40 ships (tonnage of 2.76 mdwt (million dead weight tonnes)) and 30 offshore vessels. The company is predominantly focused in the crude and product transportation segment with largely 'Aframax' type tanker mix. The company has also diversified into oil drilling rigs, marine construction and air logistics. The shipping and offshore businesses contribute to 81% and 15% respectively to the company’s revenues.

Key impressions from the research meeting

1. Tonnage expansion: Citing IEA projections of a 2.5% growth in oil demand, the management expects demand for global tonnage to grow by 5% in 2005. The company has planned a capital expenditure of US$ 353 m over the next 2.5 years to expand its tonnage from the current levels of 2.7 mdwt. The current new-building order book comprises of 7 tankers (aggregating 0.5 mdwt) and 8 offshore support vessels). While 20%-25% of the committed capex is likely to come through internal accruals (GES has a cash war-chest of Rs 10 bn), the rest would be financed through debt (largely foreign debt). The fact that most of the new vessels are coming at low break-evens as they were contracted when new building prices were low shall also benefit the company going forward.

2. Continued buoyancy in freight rates: The management expects freight rates to be buoyant in the calender year 2005 as well, though lacking the strength that was witnessed in 2004. It has also clarified that the spike that was seen in freight rates towards the middle of 3QFY05 was due to Hurricane Ivan that knocked off around 500,000 bpd of US production. This, coupled with low US oil inventory and speculative positions being built up with regard to future deliveries, led to surge in exports from long haul Mid-East countries that consequently led to the spike in tanker freight rates. The management has indicated that it has renewed contracts on a few ships, and that have been done at higher freight rates as compared to what they had earned earlier. For instance, on Suezmax tankers, while the current spot rate is around US$ 26,000 per day, GES is expecting to get around US$ 65,000 for around 50% of the vessels’ spot revenue days in 4QFY05.

3. Increased initiatives on the offshore front: In the conference call for 3QFY05, the management had indicated that the government of India has plans to conclude NELP-V in 4 months instead of 6 as was in case of NELP IV and this gives a clear indication about the seriousness of ensuring oil security for the country. Under NELP V, 6 blocks in deepwater, 2 shallow water and 12 on land blocks, involving an investment of US$ 1 bn have been offered and this is positive for the offshore division of GES.

Other key points

1.The revenue visibility for FY06 for the shipping division is Rs 4 bn (25% of expected FY05 shipping revenues). Crude tankers and product carriers are covered to the extent of 35% and 47% of operating days respectively. In case of the dry bulk segment, the fleet is covered to the extent of around 16% of operating days.

2. For the offshore divison, the revenue visibility for FY06 is around Rs 2.8 bn as of now (78% of expected FY05 offshore revenues). The offshore support vessels (OSVs), construction barge and harbour tugs are covered to the extent of 39%, 20% and 68% of their respective operating days.

3. The company’s NAV is around Rs 256 per share (Rs 139 in March 2004 and Rs 84 in March 2003). The increase in NAV could be attributed to the younger fleet mix of GE Shipping, firmness in demand for tonnage in the global waters leading to an increase in market value of assets and a favorable shipping cycle. Like commodity prices, the NAV of the company also fluctuates.

Conclusion

Based on our inferences from the research meeting, we have revised upwards our revenue and earnings projections for the company. For FY06, our topline and bottomline projections stand revised upwards by 26% and 42% respectively. While FY05-till date has been a strong year for the company, we expect growth in FY06 and FY07 to be relatively slow on account of a huge influx of tonnage. As per the management, the current order book size of global shipping tonnage is around 28% of the current capacity of 334 mdwt. As such, around 90 mdwt is likely to be added over the next 2.5 years of which around 31 mdwt will come in 2005.

While we are positive about the overall growth prospects of GES in light of the fact that the company is building up capacity to cater to the strong and growing demand for crude oil and commodities, we expect freight rates to be volatile going forward. Also, as indicated by the management, any ‘shock’ in form of the US economy slowdown might have a negative impact on the shipping industry’s and GES’ performance in the future. Having said that, there is likely to be stability on the offshore side of the business, which would act as a cushion in case the shipping cycle weakens significantly in the future.