>GE SHIPPING (DOLAT CAPITAL)

Recovery in global GDP has resulted in higher oil demand (IEA estimates 1.8% in CY10 to 86.6mn barrels/day) leading to spurt in tonne-mile demand and freight rates. Anticipated increase in supply of new vessels is a concern but we believe the impact will be moderated by order slippages, cancellation and phasing out of single hull vessels. Based on the current scenario, we believe tanker freight rates and asset prices will improve from the current level. GE shipping stands as a beneficiary given its exposure to the tanker segment and scalability in its offshore business. We maintain a BUY recommendation with a target price of Rs.407(5x EV/EBITDA).

■ Tanker freight rates to rise on strong oil demand
Recovery in global GDP growth (estimated by IMF 3.9%) should lead to improved oil demand estimated at 1.8% in CY10 to 86.6mn barrels/day resulting in an increase in marine oil shipments by 2.9% in 2010. Generally, the shipping capacity is seen to grow at 1.6x of growth in oil demand. Therefore, we believe that an increase in tone mile demand and slower capacity addition will improve Tanker rates going forward.

■ Accelerated single hull phase out could releive supply side pressure
As the deadline of the mandatory phase out of Single Hull Oil Tankers is approaching, the shipping volume to exit the market will increase in 2010.According to IMO single hull oil tankers will not be allowed from 2010 onwards. At present, advanced countries in Europe and US have disallowed single-hull oil tankers to dock at their harbours from 1st Jan 2010.According to Clarkson estimate ~43.3mn dwt of oil tankers are due to be phased out but the actual phase out will be 70% of the planned or 30.3mn dwt.(9.9% of the total capacity)

■ Freight rates and assets prices will strengthen
In the last few quarters, freight rates across assets classes (tanker, bulker and product carrier) have recovered from the lows of Q3FY09.Recovery in bulk carrier was predominantly led by demand for iron ore in China and tanker rates improved with an increase in oil demand in the US and demand from Asian countries. Going forward we expect the demand will strength in 2010 in both the segments driven by recovery in global growth (IMF predicts 3.9% GDP growth).
This will lead to higher tonne- mile demand and an improvement in freight rates. Recovery in freight rates, resulting in better earning visibility and higher asset prices.

■ Dry bulk-Recovery in economy will bring up demand for Iron ore and coal
BDI touched a historical low of 663 points on Dec 2008 hurt by a decline in real demand as a result of the financial crisis and banks were not issuing letter of credit for the buyers. Bulk shipping is a leading indicator for economic cycles, as bulk shipping carries commodities like iron ore, coal and cement the consumption of which will significantly rise when the economy improves. Therefore, we, expect global bulk shipments to rise driven mainly by increased demand for iron ore and coal from China Europe and US.

Our preffered bet is GE Shipping on account of its largest exposure in tanker segment with 80% double hull vessels with an average age of 11 years and increased exposure in Offshore segment.We maintain a BUY recommendation with a target price of Rs.407.(5x EV/EBITDA).We also maintain a BUY on Mercator Lines with revised target price of Rs.75.

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