GE Shipping’s operating profit up by 4%, but 17% up sequentially

Great Eastern Shipping Co.’s operations in the June 2011 quarter (Q1) were affected by a slump in the global shipping market. Margins suffered as revenues grew at a lower rate than costs did.

Net profit (after minority interests) fell by 5.4%, despite higher other income and lower interest costs, which were offset by depreciation and a higher tax incidence.

On a sequential basis, however, sales rose by 21% and operating profit by 17%. That was mainly due to higher volume of business, as rates were under pressure on a sequential basis too.

GE Shipping gets over two-third of its revenues from shipping and the rest from its offshore services business.
In the June quarter, revenues from shipping rose by 8.2% over the year ago period, while that from offshore services rose by 7%. That may seem strange considering overall sales rose by only 6%, but is explained by other income in segment revenues.

Its operating profit margin fell by three-fourth of a percentage point, as employee costs rose by a third, repairs and maintenance by 15%, but it kept the increase in direct operating expenses at 4.5%, and hire charges for ships too declined. That enabled it to minimise the drop in profitability.

Other income rose by 45% (explaining why its addition to segment revenues propped up growth), while interest costs fell by 21%. Its profit before tax was flat at Rs 187 crore, but higher tax caused a 5.4% drop in its net profit.

Total revenue days during the June quarter were up by just 1.7%, this indicates the growth in business in volume terms.
Average TCY or time-charter yield during the quarter was down 2% for crude carriers, up 5% for product carriers while dry bulk carriers (which transport cargo such as minerals and metals) fell by 32%. TCY is calculated by taking the net freight (revenues less expenses) and dividing by the number of operating days. On the positive side, revenue days rose sequentially by 19%, but TCY has fallen for crude and dry bulk carriers, by 13% and by 9% respectively.

GE Shipping has 9 crude carriers, 16 product carriers and 1 gas carrier in the tanker segment and it has 9 ships in the dry bulk segment. Being spread across both segments minimised the hit on its revenues and profits.

Key factors which affected the tanker segment during the quarter are: the effect of the Japanese earthquake on trade, stagnant developed economies, and the political crisis in the Middle East and North Africa. Outlook: GE Shipping expects Europe’s debt situation to affect this business. The MENA situation is still volatile. New supply of ships and the consequent pressure on realisations, and fuel price increases are further negative factors.

In the bulk segment, Australian floods hit the country’s trade but otherwise, demand was robust. Excess supply was its undoing, however, causing rates to slip. Outlook: Issues such as port congestion, delivery slippages for new ship orders, and higher rate of scrapping of old ships are positive factors. But the negatives appear to outweigh them, due to a steady supply of new ships floating into the market. GE Shipping believes a rebound in trade from China, assuming its monetary tightening eases, could provide a fillip to the business.

GE Shipping has decided to sell three ships, very large crude carriers (VLCCs), which are under construction, and they will be delivered to the new buyer. It took delivery of a new bulk carrier Kamsarmax, a dry bulk carrier but will have to operate it in an environment of depressed rates. In July, it took delivery of a Supramax dry bulk carrier Jag Rani.

Current capital expenditure commitment is about Rs 240 crore, which will add a 80000 dwt (dead weight tonne) ship to its fleet, another dry bulk carrier.

The offshore business is run by its subsidiary Greatship India. The company has a sizeable order book, of about $450 million or about Rs 2,000 crore at current exchange rates. Since crude oil is stable around the $90 a barrel mark, it expects global exploration and production activities to pick up steam. In 2010, global E&P expenditure rose by 10% and

GE expects it to remain healthy for 2 more years. It is of course betting on customers preferring newer assets, such as the ones it has and will add, which should give it an edge over competition.

Revenue visibility
GE Shipping has said that revenue visibility for the rest of the year from the shipping business is Rs 396 crore and Rs 604 crore for the offshore business. This is based on the number of days for which its fleet is booked, probably based on longer term contracts. Changes in the sport market, both on the demand and price front will continue to play a role in its performance.

The share price was down by about 6.2% at the time of posting, while the stock markets were down by 3%.

Read the press release about its performance during the quarter and access its financials here.

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