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Home GE Shipping – Stock of the Month (July 2017)

GE Shipping – Stock of the Month (July 2017)

Date – 30 June 2017

Price – Rs. 402.65

The Great Eastern Shipping Company Limited (“GE Shipping” or the “Company”) is India’s largest private sector shipping service provider. The Company has two main businesses: Shipping and Offshore.

  • Shipping business is involved in transportation of crude oil, petroleum products, gas and dry bulk commodities.
  • Offshore business services to the oil companies in carrying out offshore exploration and production activities, through its subsidiary Greatship (India) Limited.

GE ShippingINVESTMENT RATIONALE

Strong Financial Position

GE Shipping has shown consistent growth over the last five years (i.e. 2012-13 to 2016-17). Its net profit over this period grew at an impressive CAGR of 19 %.

For Financial Report – click here.

The Company has a good dividend track record and has consistently declared dividends for the last 5 years. In FY 2017, the Company announced dividend of 101% which at the current price of Rs. 401.65 gives a yield of about 2.51%.

Aggressive Asset Creation Approach

In FY 2017, GE Shipping raised ~ Rs. 900 Cr. via issuance of unsecured nonconvertible debentures (NCDs). In addition, the Company prefers to hold ~Rs. 2000 Cr. of cash. This additional liquidity will give the Company financial comfort to buy and sell assets on a timely basis.

In FY 2017, the Company aggressively purchased ships and second hand vessels at 20-30 year low prices. GE Shipping spent around Rs. 2,250 Cr. to buy 14 vessels in the shipping segment. The Company’s current fleet stands at 45 vessels, comprising 29 tankers (12 crude carriers, 15 product tankers, 2 LPG carriers) and 16 dry bulk carriers.

Increase Demand of Crude Oil Tankers

As of 31st March 2017, the tanker fleet of the Company stood at 29 tankers with an average age of 11.44 years. The sustained weakness in oil prices has led to high demand of crude oil tankers. The falling crude oil prices have increased the global crude oil trade and the same is expected to continue in the coming quarters also.

INVESTMENT CONCERNS

Negative Impact of GST

The Goods and Services Tax (GST) rate structure is expected to have an adverse impact on India’s shipping industry. From July 1 2017, a 5% GST (integrated GST or IGST) would be levied on Indian shipping companies that transport cargo from or to India and the same would also be applicable to Indian companies that buy or sell vessels. While 5% cost may not look significant, shipping is a capital intensive industry and one vessel could cost at least about Rs. 1,280 Cr. and a 5% levy will account to Rs. 60 Cr.

This 5 % levy is not applicable to foreign ships carrying the same activities. As a result of this discrimination, many Indian customers would prefer to use foreign companies and thus will affect the Indian shipping to operate profitably.

Subdued Crude Oil Prices

GE Shipping through its subsidiary Greatship Ltd operates 23 offshore vessels. With drilling demand continuously declining since the peak in 2014, offshore fleet utilization levels continued to stay at historically low levels of 55%. On the demand front, with crude prices falling sharply since 2014, offshore Exploration & Production spending has also come off significantly.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.