GE Shipping - Earnings buoyed by offshore market - Kotak

GESCO has reported net profit of Rs 1.92 bn (+120% YoY) ahead of our expectation of Rs 1.25 bn. Profit was aided by foreign currency translation gain of Rs 0.55 bn. Shipping markets continue to be weak with steady global fleet growth capping any significant spurt in the freight rates. The offshore segment was strong in the quarter with crude prices staying firm in the quarter. Consequently consolidated revenues have remained flat YoY amidst weak shipping market and buoyant offshore market.

Earnings for shipping companies' continue to be very volatile. We expect the cyclical weakness in the shipping market to continue for another two quarters. We expect the shipping segment of GESCO to report flattish/declining numbers YoY amidst declining fleet of the company as the company continues to discard old ships. However we expect the offshore subsidiary, GIL in which the parent has incurred heavy capex to show healthy growth in revenues and profitability. Overall we expect the company to report 4% CAGR in revenues and 26% CAGR in profitability over FY12 to FY14E. We value the consolidated entity at 30% discount to NAV of Rs 400/ per share, which comes to around Rs 280 and have a BUY rating. We estimate the asset prices to remain stable in near term for shipping companies. Downside risk could be: 1) Fall in crude prices, 2) Deterioration of global trade.

Source : Equity Bulls

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