Saturday, May 15, 2010


Company Profile
Great Eastern Shipping Ltd (GESL) is India’s largest private sector shipping company. The company has two main business: shipping and offshore. Shipping involves transportation of crude oil, petroleum products, gas and dry bulk commodities. Currently, company has 37 ships comprising of 31 tankers with average age of 10.9 years and 6 dry bulk carriers with average age of 13.6 years. The offshore business imparts services to the oil companies in carrying out offshore exploration and production (E&P) activities through its fifteen vessels.

Investment Rationale
Substantial value unlocking in offshore business
• Looking at the potential of offshore business, company is expanding its fleet size aggressively. GESL will be having youngest fleets in offshore segment by FY12 with an average age of 3 years. GESL has a capex plan of USD 362 mn (approx Rs. 1630 crore) for nine more assets.

• GESL is planning to list its wholly owned subsidiary, Greatship India as a separate entity. Separate Listing of offshore segment would provide an opportunity to GESL’s shareholders to unlock higher value.

Committed capex for shipping business
• GESL plans to add eight new fleets by FY12 with capex of around USD 577 mn (approx Rs. 2600 crore) aggregating 1.31 mn. dwt. Higher dividend pay out ratio and healthy cash position

• GESL with its higher dividend pay out ratio and healthy cash position is expected to give constant returns over a longer period.

Expertise in sale and purchase of vessels
• Second hand market for sale of ships had been constantly and judiciously used by Great Eastern Shipping Ltd near peaks of shipping cycles that has enabled company to realize significantly superior assets prices.

Turnaround in the world economy & favorable movement of freight rates
• For 2010, International Energy Agency (IEA) has revised its forecast of oil demand significantly upwards to 86.3 million barrels per day. Increased oil demand, accelerated phase out of single hull tankers, continues slippage and cancellation of order book will keep tanker rates
firm in near future.

• GESL with its 80% fleet size in tanker segment is well poised to take advantage of accelerating tanker freight rates.

At current market price of Rs. 299/-, the stock is trading at P/E of 6.0x and 4.6x for FY11E and FY12E earnings respectively and with an EV/EBITDA of 5.2x in FY11E and 4.4x in FY12E. Our SOTP based target price stands at Rs. 363, which represents 21% upside from current level. We hereby initiate coverage on GE Shipping Ltd. and recommend buy rating with a target price
of Rs. 363 in 12 months.

To read the full report: GREAT EASTERN SHIPPING