Background & Business

• GESCO, India’s premier shipping & offshore services provider is a highly diversified fleet operator continuously evaluating optimal mix fleet through judicious sale and purchase of vessels. It also benchmarks with global standards in the shipping and offshore industry and believes in de-risking its business model.
• With more than 50 years of experience backed with strong financials GESCO aims to capitalize on the opportunities in marine logistics in the energy sector. GESCO has three segments of business i.e. delivery and scrapping of tankers, dry bulk carriers & oil field services.
• Fleet Profile: GESCO current fleet of 69 vessels comprises of 38 ships (an aggregate tonnage of 2.5 Mn dwt with an average age of 12.9 years) and 31 offshore vessels (17 Offshore Supply Vessels, 2 Drilling Rigs, 1 Construction Barge, 11 Harbour Tugs). GESCO has successfully carried out verification audits on some of the vessels complying with International Ship & Port Facility Security (ISPS) Code for the entire fleet.
• Subsidiaries: GESCO has three subsidiaries located in the strategic regions of London, Singapore and Fujairah being established and started its operations in 1974,1994 & 1999 respectively to address the latest developments in the shipping sector in a global arena and help in the deployment of vessels in cross trade.

Investment Positives

• Revenue Model: GESCO follows a policy of locking a large proportion of its tanker carrier in period cover resulting in a steady flow of earnings throughout the year. In a period cover a ship is deployed for a particular time period at pre determined fixed rates deriving consistent revenues over a period of time whereas in spot market the freight rates are exposed to market volatility.
• Certifications: GESCO has become the country’s first shipping firm to meet compliance norms set by the International Convention on Standards of Training Certification and Watch-keeping for Seafarers. GESCO bonds enjoy `AAA` rating while the preference shares are rated `pfAAA` from CRISIL.
• Age Profile: GESCO enjoys a better fleet average of 12.6 years compared to Indian fleet average of 16.5 years whereas the world fleet average is 12.2 years. GESCO dry bulk carrier average age is around 18.5 years and its tanker average age is around 11 years. Vessels are being sent for dry-docking once in two and half years which is mandatory and better for the life of the ship.
• Robust Reforms: The new initiatives by the government in the interim budget with the finance minister introducing the tonnage tax (net registered tonnage) method to assessing taxes for shipping companies. The whole industry would be benefited in terms of taxation where the shipping companies which currently avail of section 33AC benefits thereby paying close to MAT levels of around 8- 10%. GESCO would be the major beneficiary with the tonnage tax being introduced as it has doubled its capacity from 1.21 dwt to 2.36 dwt y-o-y dwt and with the tonnage tax, payable tax may come down to as low as around 2% from 10 to 12% reflecting increase in bottom-line.

Recent Developments

• GE Shipping has informed that it has entered into a contract for construction of a new building medium range (MR) product tanker (double hull) of 47,400 DWT with STX Shipbuilding Company, Korea. The said vessel will be delivered by the third quarter of 2007.
• GESCO has plans to add ten new vessels and two second hand bulk carriers in the next two years chalking out a capital expenditure of Rs1170 Crs and it recently concluded road shows to tap the overseas markets in order to raise funds worth $ 50 million via non-secured debt.

Latest Results (March 2004)

GESCO reported a net profit of Rs185 Crs up 98% from Rs93 Crs While its income from operations was up by 73% y-o-y to Rs.462 Crs from Rs266 Crs. The main driver of this quarter’s performance was an increase in shipping tonnage by 87% especially in the high earnings crude tankers.

For the full year ended March 2003, the company posted a 107% increase in net profit to Rs471 cr, while the total income grew by 42% to Rs1426 cr over the previous year. A higher deployment of ships in the spot markets, both in tankers and dry bulk carriers, coupled with very strong freight rates contributed significantly to the surge in profits.

Valuation & Recommendation

With average freight rates in the dry bulk segment at their peak and 100% increase in tonnage growth, it appears that GESCO is set for sustained growth. E&P sector has revitalized the outlook for oil field services sector setting a long-term growth path for GES in the future attaining stronger growth rates in all its segments. The board has proposed final dividend of Rs4 per share. It had earlier declared an interim dividend of Rs2.5 per share. The dividend yield works out to an attractive 5.3%. At CMP of Rs129, the stock trades at 5.3 X FY04 EPS of Rs 24.3. We recommend investors to accumulate the stock with medium term perspective.

Financials

	Q4FY04	Q4FY03	% Change	12m FY04	12m FY03	% Change
Net Sales	462.0	266.4	73.0	1351.9	955.5	41.0
Net Profit	184.8	93.1	98.0	471.1	227.3	107.0
OPM	53.6	48.8		49.2	42.0
EPS	38.8	19.6		24.8	11.9
Equity	190.3	190.3		190.3	190.3