Great Eastern Shipping Company Limited - Ready for turbulent time - Antique

Great Eastern Shipping (GE Shipping) is the largest diversified private shipping company in India with consolidated fleet of 32 in shipping and 22 in offshore. The decline in freight rates due to overcapacity and concern on demand growth due to slowdown in global economy has impacted the company over past three year. Though sector outlook in shipping remains challenging, the expansion in offshore with relative stable earnings and strong balance sheet with healthy cash flow reduces the downside risk from current level. We view 16% decline in stock price in past two months as a buy opportunity and upgrade our rating from HOLD to BUY.

Key highlights

Strong balance sheet - an asset in down cycle

The company has a cash balance of INR32bn on standalone and INR41.4bn on consolidated basis with net debt to equity of 0.11x and 0.4x, respectively. The strong balance sheet coupled with modern fleet (average age of 10 years) is expected to help the company in current challenging times. The decline in asset prices will help it to use cash for asset acquisition at attractive prices.

Offshore to reduce volatility in earnings

The company has increased offshore fleet from 4 in FY08 to current 22 vessels, providing earnings growth in challenging times. Offshore has reported a CAGR of 95% to INR12.1bn in revenues and 74% to INR2.26bn in profits over FY08-12. The company has added third jack-up rig in 3QFY13 and is expected to add ~INR1.5bn in FY14e EBITDA. We expect offshore to report earnings CAGR of 25% to INR3.54bn in FY12-14e.

Consolidated NAV at INR429

GE Shipping has invested ~INR17.2bn in offshore subsidiary, Greatship (India), translating into INR112 per share. Net asset value (NAV) factoring offshore investment at cost is ~INR249 per share in 3QFY13. However, management has disclosed the NAV based on mark to market for offshore segment at ~INR429 per share, translating CMP of INR234 into 45% discount to NAV.

Valuation and outlook

At the CMP of INR234, the stock trades at a P/E and EV/EBIDTA of 9.4x and 5.1x, respectively, discounting its FY13 earnings. On P/BV basis, it trades at an attractive level of 0.6x FY13e. The asset prices have started correcting once again due to low freight rates and concern of over capacity (~15% in one year for 5 yr old ships). We believe GE Shipping will be able to get good bargain in tonnage acquisition going ahead due to expected distress sale from leveraged players. We maintain our target price to INR282, however considering 16% decline in stock price we are revising our rating to BUY.

Source : Equity Bulls

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