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Valuations at attractive levels
Oversupply and lower demand in the shipping industry
globally, continued to lead the decline in freight rates
during Q4FY11. This was more visible in the dry bulk
commodities which continue to remain under pressure
due to high fleet supply expected during 2011. While
the Baltic Dry Index (DBI) was down 48.2% YoY to 1,545
at the end of Q4, Baltic tanker index was down just 3.9%
YoY to close Q4 at 936. We maintain our positive view
on tanker-based Indian shipping operators with a Buy
on Great Eastern Shipping (GE Shipping) and Shipping
Corp of India (SCI).
Freight rates to remain under pressure in 2011: We
expect shipping freight rates to remain under pressure
along with supply overhang during 2011. The shipping
cycle is expected to recover post FY13, when the excess
supply is absorbed. However, dry-bulk freight rates are
likely to remain subdued with a negative bias, while
tanker freight rates are expected to remain stable at
current levels.
Japan’s earthquake and tsunami to impact shipping
industry in the short term: We expect freight rates
(especially dry bulk) to remain under pressure in the
short to medium term as Japan recuperates from the
devastating earthquake and tsunami. Japan is the
second largest consumer of dry bulk commodities after
China. Ports have been closed and movement of ships
restricted rendering refineries, power and steel plants
out of operation for the mean time.
Indian shipping companies better positioned: We
believe Indian operators are better placed vs. global
peers due to their large presence in the tanker and
offshore segments and strong under-leveraged
balance sheets which is likely to help them to take the
advantage of current downturn and increase fleet at
lower costs.
Maintain Buy on GE Shipping with a target of Rs410:
GE Shipping is our top pick in the shipping space with a
Buy rating and a target of Rs410 on the back of
attractive valuations (0.6x FY13E P/B on a consolidated
basis) and a strong offshore services presence.
Maintain Buy on SCI with a target price of Rs134: At
CMP, SCI trades 0.7x FY13E P/B and looks attractive
from a long-term perspective. We maintain our Buy
rating with a target of Rs134 (0.8x FY13 P/BV) as the
company is in a capex phase and would benefit from
the expected turnaround in the shipping cycle.
Great Eastern Shipping (Buy; Target Price: Rs410)
Consolidated revenue is likely to increase 11.1% QoQ but decline 19.4% YoY to Rs6,178mn,
primarily led by an improvement in tanker freight rates. Operating profit is expected to grow
9.9% QoQ (down 9.9% YoY) to Rs2,237mn on the back of an increase in revenues.
EBITDA margin is likely to remain stable QoQ (down just 40bp) but improve sharply YoY
(up 384bp) to 36.5% on the back of improvement in the tanker business’ profitability.
However, PAT is expected to decline 13.9% QoQ (and 35.1% YoY) to Rs1,011mn, impacted by
higher interest, depreciation and taxes.
During the quarter, the company took delivery of one Kamsarmax (80,700 dwt) and one
Supramax (57,000 dwt) dry bulk carriers. Its offshore subsidiary – Greatship India took delivery
of one Platform/ROV Support Vessel (ROVSV) and the 350 feet jack up rig ‘Greatdrill Chetna’
which it already operated under in-charter from Mercator.
Greatship has placed an order for a new 350 feet drilling rig with Lamprell Energy Ltd. The Rig is
due for delivery in Q3 FY13 and would be the third jack up rig owned by GE’s offshore
subsidiary.
Shipping Corp. of India (Buy; Target Price: Rs134)
We expect SCI’s Q4FY11 revenue to increase 4.4% YoY and 4.4% QoQ to Rs9,287mn, led by an
improvement in the liner business and higher freight rates in the tanker segment.
Operating profit is expected to be higher by 18.3% YoY and 10.3% QoQ to Rs1,778mn as
operating margin is likely to expand 255bp YoY (and 102bp QoQ) to 19.1% on the back of
improvement in Liner business’ profitability.
PAT is likely to decline 43.3% YoY and 37.5% QoQ, to Rs769mn due to the absence of profit from
the sale of ships which had inflated profitability in previous quarters. Net profit margin will in
effect contract 699bp YoY to 8.3% in Q4FY11.
During the quarter, SCI took delivery of three aframax tankers "m.t. Desh Garima" (114,790 DWT)
and "m.t. Desh Samman" (114,683 DWT), "m.t. Desh Suraksha" (114,783 DWT). The company also
scrapped a bulk carrier "m.v. Lok Rajeshwari" (26,639 DWT).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Valuations at attractive levels
Oversupply and lower demand in the shipping industry
globally, continued to lead the decline in freight rates
during Q4FY11. This was more visible in the dry bulk
commodities which continue to remain under pressure
due to high fleet supply expected during 2011. While
the Baltic Dry Index (DBI) was down 48.2% YoY to 1,545
at the end of Q4, Baltic tanker index was down just 3.9%
YoY to close Q4 at 936. We maintain our positive view
on tanker-based Indian shipping operators with a Buy
on Great Eastern Shipping (GE Shipping) and Shipping
Corp of India (SCI).
Freight rates to remain under pressure in 2011: We
expect shipping freight rates to remain under pressure
along with supply overhang during 2011. The shipping
cycle is expected to recover post FY13, when the excess
supply is absorbed. However, dry-bulk freight rates are
likely to remain subdued with a negative bias, while
tanker freight rates are expected to remain stable at
current levels.
Japan’s earthquake and tsunami to impact shipping
industry in the short term: We expect freight rates
(especially dry bulk) to remain under pressure in the
short to medium term as Japan recuperates from the
devastating earthquake and tsunami. Japan is the
second largest consumer of dry bulk commodities after
China. Ports have been closed and movement of ships
restricted rendering refineries, power and steel plants
out of operation for the mean time.
Indian shipping companies better positioned: We
believe Indian operators are better placed vs. global
peers due to their large presence in the tanker and
offshore segments and strong under-leveraged
balance sheets which is likely to help them to take the
advantage of current downturn and increase fleet at
lower costs.
Maintain Buy on GE Shipping with a target of Rs410:
GE Shipping is our top pick in the shipping space with a
Buy rating and a target of Rs410 on the back of
attractive valuations (0.6x FY13E P/B on a consolidated
basis) and a strong offshore services presence.
Maintain Buy on SCI with a target price of Rs134: At
CMP, SCI trades 0.7x FY13E P/B and looks attractive
from a long-term perspective. We maintain our Buy
rating with a target of Rs134 (0.8x FY13 P/BV) as the
company is in a capex phase and would benefit from
the expected turnaround in the shipping cycle.
Great Eastern Shipping (Buy; Target Price: Rs410)
Consolidated revenue is likely to increase 11.1% QoQ but decline 19.4% YoY to Rs6,178mn,
primarily led by an improvement in tanker freight rates. Operating profit is expected to grow
9.9% QoQ (down 9.9% YoY) to Rs2,237mn on the back of an increase in revenues.
EBITDA margin is likely to remain stable QoQ (down just 40bp) but improve sharply YoY
(up 384bp) to 36.5% on the back of improvement in the tanker business’ profitability.
However, PAT is expected to decline 13.9% QoQ (and 35.1% YoY) to Rs1,011mn, impacted by
higher interest, depreciation and taxes.
During the quarter, the company took delivery of one Kamsarmax (80,700 dwt) and one
Supramax (57,000 dwt) dry bulk carriers. Its offshore subsidiary – Greatship India took delivery
of one Platform/ROV Support Vessel (ROVSV) and the 350 feet jack up rig ‘Greatdrill Chetna’
which it already operated under in-charter from Mercator.
Greatship has placed an order for a new 350 feet drilling rig with Lamprell Energy Ltd. The Rig is
due for delivery in Q3 FY13 and would be the third jack up rig owned by GE’s offshore
subsidiary.
Shipping Corp. of India (Buy; Target Price: Rs134)
We expect SCI’s Q4FY11 revenue to increase 4.4% YoY and 4.4% QoQ to Rs9,287mn, led by an
improvement in the liner business and higher freight rates in the tanker segment.
Operating profit is expected to be higher by 18.3% YoY and 10.3% QoQ to Rs1,778mn as
operating margin is likely to expand 255bp YoY (and 102bp QoQ) to 19.1% on the back of
improvement in Liner business’ profitability.
PAT is likely to decline 43.3% YoY and 37.5% QoQ, to Rs769mn due to the absence of profit from
the sale of ships which had inflated profitability in previous quarters. Net profit margin will in
effect contract 699bp YoY to 8.3% in Q4FY11.
During the quarter, SCI took delivery of three aframax tankers "m.t. Desh Garima" (114,790 DWT)
and "m.t. Desh Samman" (114,683 DWT), "m.t. Desh Suraksha" (114,783 DWT). The company also
scrapped a bulk carrier "m.v. Lok Rajeshwari" (26,639 DWT).
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