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Encouraging performance…
Great Eastern Shipping (GE) reported an encouraging performance
despite a sharp drop in dry bulk freight rates. The company was able to
control its costs better, which resulted in a healthy operating margin of
41.1% in the current quarter. Due to the challenging business
environment, the operating performance of the company would
continue to be volatile and subdued in the medium-term especially
since tanker freight rates have corrected quite significantly since the
end of Q2FY11. However, the company would be able to ride the
volatility with ease on account of its under leveraged balance sheet. The
IPO of its subsidiary Greatship Ltd is expected in late Q3FY11 or early
Q4FY11, which would be an added trigger.
GE reports better than expected performance in Q2FY10
GE reported a 2% QoQ drop in topline in Q2FY11 at Rs 631.0 crore as
against Rs 644.3 crore in Q1FY11. The main factor contributing to the
drop in topline was the correction in dry bulk freight rates as the TCE for
bulk carriers dropped from $24484 per day to $19833 per day QoQ. The
company reported an average TCY of $20156 for crude carriers, $16953
for product carriers and $19833 for dry bulk carriers. Revenue days
dropped from 3,315 days in Q1FY11 to 3,069 days in Q2FY11. The
company reported an EBITDA of Rs 259.2 crore in Q2FY11 as against Rs
261.4 crore in Q1FY11. The company posted a net profit of Rs 168.7
crore, which declined by 1.8% QoQ.
Valuation
The company is ramping up its fleet (especially in the offshore segment),
which will be scaled up to 27 vessels while the total fleet size would rise
to 74 vessels in FY12. This would result in a higher topline despite
weakness in freight rates. At the CMP of Rs 360, the stock is trading at
8.3x FY12E EPS of Rs 43.5 and 0.82x FY12E book value of Rs 440. We
have valued GE on a P/BV and P/E multiple basis to arrive at a price target
of Rs 373. We recommend an ADD rating to the stock.
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