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BUSINESS ECONOMICS PROJECTGE Shipping Co. Ltd.Amity Global Business School, Hyderabad.P.V.S.SANJEEV KUMAR57BIPIN KUMAR SINGHNANDITA SADANIAKSHITA GUPTA01ROHIT REDDYA.VENKATA SURESHM.VENKAT RAJUG.ANUSHA<br />THE GREAT EASTERN SHIPPING CO. LTD.<br />CAPITAL EXPENDITURE PLAN<br />GE-Shipping is India's largest private sector shipping company. It started as a sea-logistics support shipping line six decades ago for a family trading business (owned by the Sheths and the Bhiwandiwallas). Later it diversified into areas like offshore oil field services. GE Shipping has earned the status of being a preferred shipping service provider in the country.<br />BACKGROUND<br />GES was promoted by the Mulji (Sheth) brothers and Bhiwandiwalla family who started their own shipping line with one ship (SS Fort Alice) to help expand the reach of their trading businesses. It got incorporated on 3rd August 1948 and over the past 60 years it has become India’s largest private sector shipping company.<br />Responding to the demands of the oil industry, GES ventured in offshore services in 1983 with the purchase of Malaviya One – India’s first offshore supply vessel. In Oct’06, the company demerged its offshore operations into Great Offshore Ltd. as part of its business realignment exercise. In the same year, Greatship (India) Ltd (GIL), a wholly owned subsidiary took delivery of its first asset Greatship Disha, a platform supply vessel. <br />On a consolidated basis, it owns and operates 41 marine vessels aggregating 2.85 mn dwt and 6 Offshore Supply Vessels (OSVs). It also operates various in-chartered assets in both these segments.<br />MANAGEMENT PROFILE<br />The Great Eastern Shipping Company Limited came into being in 1948. The Chairman of the company was Mr. A.H. Bhiwandiwalla, while Mr. Vasant Sheth, was the Managing Director. Mr. Sheth handled and managed the company, assisted by Kanaiyalal Sheth. Bhiwandiwalas have withdrawn and the management now solely rests with Sheths. Mr. K.M. Sheth is now the Executive Chairman of GE Shipping. Mr. Bharath K. Sheth is the Managing Director and also the Deputy Chairman of the company.<br />OPERATIONAL STRUCTURE<br />G E Shipping’s two major areas of business are:<br />Shipping division: Transportation of crude oil, petroleum products, gas and dry bulk <br /> commodities.<br />Offshore division: Offering wide range of services to oil companies including carrying out<br /> offshore exploration and production activities by providing exploratory drilling<br /> rigs, offshore support vessels, tugs, construction barges, etc. <br />Both the shipping and offshore divisions have been awarded the ISO 9001:2000 standard certification by DNV. With more than 60 years of experience, a large and diversified fleet and strong financials, the company aims to capitalize on the opportunities in marine logistics, in the energy sector and offshore oil field services also.<br />Subsidiaries<br />The Company’s subsidiary, Greatship (India) Limited, has achieved significant size of operations and has added Rs.44.7 crores to the consolidated net profit to the Company. The coming year is likely to see a much bigger contribution from them as they take deliveries of 9 new state-of-the-art vessels and a newly built 350 feet Jack up Rig.<br />GE Shipping’s subsidiary, Greatship (India) Limited has three subsidiaries:<br />1. Greatship Global Holdings Ltd., Mauritius.<br />2. Greatship Global Offshore Services Pte. Ltd., Singapore.<br />3. Greatship Global Energy Services Pte. Ltd., Singapore.<br />GE Shipping also has subsidiaries, located in the strategic regions of London, Singapore and Fujairah (Sharjah):<br />1. The Great Eastern Shipping Co. London Ltd.<br />2. The Greatship (Singapore) Pte. Ltd.<br />3. The Great Eastern Chartering LLC (FZC).<br />The international operations of the company have been largely aided by these subsidiaries, which provide a window to the latest developments in the shipping sector in a global arena and help in the deployment of vessels in cross trade.<br />CORPORATE STRUCTURE<br />BUSINESS MODEL<br /><ul><li>Shipping Division:</li></ul>The shipping division owns and operates 41 vessels aggregating 2.85 mn deadweight (dwt) at an average age of 10.6 years. About 76% of the company’s tanker dwt is double hulled. The company along with its subsidiaries also operates 9 in-chartered ships. <br />The product mix of assets includes 30 tankers with avg age of 9.7 years. These vessels are equipped to carry crude oil, petroleum products and LPG. The fleet also includes 11 dry bulk carriers with an avg age of 13.8 years. These vessels cater to the shipment requirements for bulk commodities such as grain, coal, iron, and other minerals. In addition, the company has also in-chartered 4 tankers and 5 bulk carriers of various sizes. The clients’ list includes oil majors, SAIL, Oldendorff, K-Line, etc. The direct and indirect operating expenses related to the shipping revenues range between 50-55%. These include direct operating costs (15-20%), staff cost (8-10%), other expenditures (5-10%), repair & maintenance costs (5-10%), in-chartering costs, etc.<br /><ul><li>Offshore Division:</li></ul>The Offshore segment provides support services to the offshore exploration and production activities through an asset base of 4 Platform Support Vessels (PSVs) and 2 Anchor Handling Tug cum Supply Vessels (AHTSVs). These vessels are fixed on time charter with an average duration of 2.1 years. Presently, these vessels are operating in North Sea, Gulf of Mexico and in the Indian waters. Additionally, GIL also operates 3 inchartered assets - 1 AHTSV and 2 PSVs. The operating margin in the offshore services is slightly better than that in the shipping business. It ranges between 60-75% depending on the asset, its sophistication and age.<br />FINANCIAL PERFORMANCE<br />GE Shipping has consistently posted strong growth in total shipping business. For FY 09 on a consolidated basis, income from operations increased 14% to INR 4123.93 Crores as compared to INR 3615.4 Crores in FY08. Company’s profit after tax slightly decreased 3% from INR 1407.7 Crores in FY09 as compared to INR 1453.51 Crores in FY08 mainly due to increase in operating expenses to INR 2061.04 Crores in FY09 from INR 1616.6 Crores in FY08. The Company’s Net current assets increased 49% to INR 1615.73 Crores in FY09 from INR 1080.62 Crores in FY 08.<br />On a standalone basis in FY09, GE Shipping had a debt-equity ratio of 0.62. GE Shipping’s<br />Interest coverage ratio in FY09 is 12.96 and better than its peers. In the long term we expect GE Shipping to maintain its credit metrics at comfortable levels though they are likely to get affected in the short term owing to the current global economic crisis leading to pressure on its<br />margins.<br />GE Shipping has maintained a substantial cash reserve was INR 2575 Crores as on 31st July 09 as compared to INR 2217.67 crores in FY2009 on a consolidated basis. The outstanding capex commitment is USD 437 million out of which USD 106 million is already paid thus the net<br />committed capex stands at USD 331million which is comfortably covered by company’s existing<br />cash reserves.<br /><ul><li>Performance of Subsidairies:</li></ul>Greatship (India) Limited, a G E Shipping subsidiary achieved a profit of INR 50.63 Crores in FY09 on a standalone basis and INR 44.72 Crores on a consolidated basis in FY09. The Net worth of the GIL was INR 1283.76 in FY09 as compared to INR 688.45 Crores in FY08. The Great Eastern Shipping Co. London Ltd another subsidiary incurred losses of INR 32.9 Crores in FY09 as compared to INR 1.09 Crores in FY08. The other subsidiaries of GE Shipping have no significant impact in terms of revenue and profit/losses.<br /><ul><li>GE Shipping’s performance vis-à-vis other companies:</li></ul>There is no other shipping Co. in the private sector in the country which has matching operations. The only significant competition is from Shipping Corporation of India, which is essentially a Govt. controlled company.<br />GE Segment wise Breakup: Revenue and Profit<br />The Company’s segment wise breakup of revenue and profit are as follows:<br />Rs. In crores20082009Revenue3203.513364.74Tanker Business1986.182254.38Dry Bulk1217.331110.36Profit 1374.691356.73Tanker Business673.598800.471Dry Bulk701.092556.259<br />GE Shipping has consistently posted strong growth in total shipping business. For FY 09 on a consolidated basis, income from operations increased at a rate of 14% to INR 4123.93 Crores as compared to INR 3615.4 Crores in FY08. However the Company’s profit after tax decreased slightly to 3% from INR 1407.7 Crores in FY09 as compared to INR 1453.51 Crores in FY08 mainly due to increase in operating expenses to INR 2061.04 Crores in FY09 from INR 1616.6 Crores in FY08. The Company’s Net current assets increased 49% to INR 1615.73 Crores in FY09 from INR 1080.62 Crores in FY 08.<br />In FY09, G E Shipping’s tanker business accounted for around 67% of the net revenues and 59% of the operating profits. The company’s tanker earnings derived from spot market was 64% in FY09. The crude tankers, including ‘spot’ and ‘period’, earned an average Time Charter Yield (TCY) of $ 41200/day in FY09 as compared to $ 300000/day in FY08. The product carriers,<br />including ‘spot’ and ‘period’, earned an average TCY of $ 23700/day in FY09 as compared to $20250/day in FY08.<br />The company had a tanker fleet of 31 tankers aggregating 2.38 million dwt, with an average age of 9.9 years as on 31st Mar 2009 as compared to 33 tankers aggregating 2.35 million dwt with an average age of 10.53 years in 31st Mar 2008.<br />In FY09, the company’s dry bulk fleet business contributed 33% of the net revenues and 41% of the operating profits. The dry bulk vessels, including ‘spot’ and ‘period’, earned an average TCY of $ 39800/day in FY09 as compared to $ 38400/day in FY 08. However, in FY09, second-hand value for modern and older tankers witnessed a drop of 40-60%, while modern and older drybulk carriers saw a drop of 60-80%.<br />The company’s dry bulk fleet stood at eight vessels aggregating 0.50 million dwt, with an<br />average age of 13.3 years as on 31st Mar 2009 as compared to 13 vessels aggregating 0.72 million dwt with an average age of 14.48 years in 31st Mar 2008. The Company’s order book comprises of nine new vessels aggregating 0.92 million dwt, in crude, product and dry bulk carriers segment and expected to be completed in 2011.<br />CAPITAL EXPENDITURE PLAN<br />Total planned capital expenditure of USD1.6bn over the next 4 years..<br /><ul><li>Shipping Division:</li></ul>The present fleet of 41 ships has an average age of ~11 years. With investment of ~USD780mn over the next 4 years, GES plans to add 12 new built vessels by end FY12. This should increase fleet size by 10 vessels to 51 with total dwt of 3.8 mn and avg age of 9 yrs.<br /><ul><li>Offshore Division:</li></ul>In a bid to increase its market size and capacity in the offshore services segment, GIL has committed ~USD815mn to acquire 21 assets over the next 4 years, including a jack up rig. Additionally, it has also in-chartered a Jack up Rig on bare boat charter (BBC) from Mercator, Singapore. The rig is in-chartered for 3 years and would be joining the fleet by Mar’09.<br />The capex will be financed through a mix of debt and internal accruals in the ratio of 2.3:1. GES’ Peak DER would be ~1.2:1. The debt will be arranged phase wise ~6-8 months prior to its requirement.<br />With the merger of GAL Offshore Services Ltd., the offshore division commissioned of 3 distinct activities viz. (i) operation of tugs, comprising offshore supply vessels, harbour tugs and<br /> anchor handling tugs <br /> (ii) Oil drilling and <br /> (iii) offshore constructions.<br />Capital Expenditure: Year on Year<br />Great Eastern Shipping Company Ltd (GE Shipping) has announced that the Company has signed a contract to sell its single hull Very Large Crude Carrier (VLCC) Ardeshir H Bhiwandiwalla. The 1992 built - 2,65,955 dwt VLCC was acquired in June 2004. The ship is scheduled to be delivered to the buyers during the third quarter of FY 2007-08.<br />Great Eastern Shipping Company Ltd has earmarked a capital expenditure of Rs 1,170 crore in the two years for its expansion strategy even as the entity has concluded road shows to raise $50 million through issuance of non-secured debt from the international market. <br />The company has committed a capital expenditure of Rs 1,170 crore for fiscals 2004-05 and 2005-06, which involved acquisition of 10 new vessels and two second-hand dry bulk carriers.<br />In the financial Year 2005-06 the company laid up 6 ships out of which 5 were older ones which take longer time to repair and they are more expenditure intensive.There was 85% increase in the dry dock expense in the 3rd quarter that year.The impact of the high crude oil prices was negative for the bunker cost and the bunkers cost as a percentage of direct operating expense went up from 48% to 59% that quarter.<br />In 2008, GE Shipping had a total capital expenditure commitment of around $589M, which resulted in additional tonnage of about 0.85M dwt. Currently, it has a fleet of 47 vessels, comprising 34 tankers and 13 dry bulk carriers, aggregating 3M dwt.<br /> The capex for 2007 was $160 million which was for the 5 product tankers. The offshore capex was $80 million. GE has a capital expenditure commitment of approximately Rs 2,910 crore, which will result in addition to the tonnage of about 0.90 dwt.<br />GE shipping costs are on:<br /><ul><li>DRAGGERS/TUGS/BARGES/ON HIRE/S&P
SHIP MANAGEMENT</li></ul>Acquisitions( Part of Capital Expenditure)<br /><ul><li>Vessels acquired in FY 2004-05:</li></ul>Dry Bulk Tankers<br />VesselsYear BuiltDWT (m.t.)Jag Radha198335,676Jag Rupali198337,092Jag Labh 198896,551Jag Pahel200446,319Ardeshir H Bhiwandiwalla 1992265,955Jag Lok 2005158,280<br /> Sub Total : Vessels - 6 , DWT(m.t.) – 63,9873.<br />Gas Carriers<br />VesselsYear BuiltDWT (m.t.)Jag Viraj199117,577<br /> Sub Total : Vessels - 1, DWT(m.t.) - 17,577<br /> Total : Vessels - 7, DWT(m.t.) - 657,450<br /><ul><li>Vessels acquired in FY 2005-06:</li></ul>Dry Bulk Tankers<br />VesselsYear BuiltDWT (m.t.)Jag Ravi 199745,342Jag Rahul 200352,364Jag Reena 200045,659Jag Lyall 2006110,531Jag Lalit 2005158,344<br /> Total : Vessels - 5 , DWT(m.t.) - 412,240<br /><ul><li>Vessels acquired in FY 2006 – 07:</li></ul>Dry Bulk Tankers<br />VesselsYear BuiltDWT (m.t.)Jag Akshay199473,350Jag Arjun 1996164,796Jag Panna 200737,154Jag Layak1996147,834Jag Parwar198829,998Jag Payal200737,159Jag Prakash200747,400<br /> Total : Vessels - 7, DWT (m.t.) - 537,691<br /><ul><li>Vessels acquired in FY 2007 - 08</li></ul>Dry Bulk Tankers<br />VesselsYear BuiltDWT (m.t.)Jag Ratan 200152.179Jag Riddhi 199747,240Jag Prerana 200747,400Jag Lakshita 2000147,000Jag Lateef 2000147,092Jag Pushpa 200747,400<br /> Total : Vessels - 6, DWT (m.t.) - 488,311<br />Year 2005:<br /><ul><li>GE Shipping wins crude supply order for MRPL.
GE Shipping acquires 26-pc stake in USL.</li></ul>Year 2006:<br /><ul><li>G E Shipping contracts to buy a Geared Panamax Dry Bulk Carrier - December 20, 2006
G E Shipping contracts to buy a Product Tanker - December 7, 2006
Greatship(India) Limited contracts to buy a modern Platform Supply Vessel-Sep.13, ‘06
G E Shipping contracts to buy a Capesize Drybulk carrier - September 7, ‘06.
G E Shipping orders a new building Self Propelled (Cantilever type) Independent leg, Jack Up Drilling unit - August 28, 2006.</li></ul>Year 2007:<br /><ul><li>G E Shipping contracts to buy 2 more Kamsarmax Dry Bulk Carriers - December 18, 2007.
Greatship orders two state-of-the-art construction support vessels (MPSVs/ROV Support Vessels) - December 18, 2007.
New building order placed for 2 more Supramax Dry Bulk Carriers - December 13, 2007.
G E Shipping contracts to buy 2 Supramax Dry Bulk Carriers - November 30, 2007.
Greatship forays into high end Multi Support Vessels (MSVs).
New Building order placed for 2 Kamsarmax Dry Bulk Carriers - October 13, 2007.
G E Shipping augments its Dry Bulk fleet - acquires a modern Supramax - July 18, 2007.
G E Shipping contracts to buy another modern Suezmax Tanker - July 6, 2007.
Order for Two nos. 80 T AHTSVs placed- June 27, 2007.
G E Shipping contracts to buy a modern (double hull) Suezmax Crude Carrier - June 21, 2007.</li></ul>Great Eastern Shipping Company (GE Shipping) announced that the Greatship (India) (GIL), a wholly owned subsidiary of the company, has entered into a joint venture with DOF Subsea ASA, Norway. This joint venture, to be named `GREATSHIP DOF SUBSEA` will focus on subsea project opportunities in the Indian subcontinent.<br />DOF Subsea ASA is a world-wide supplier of subsea services with a presence in all the major offshore hubs in the world. Their core business is the execution of complex subsea operations down to depths of 4,000 meters. The DOF Subsea group employs more than 800 skilled employees worldwide, 25 offshore vessels (8 under construction), 31 ROVs (10 more to be delivered), 1 AUV/UUV system and diving spreads. DOF Subsea currently owns the largest and most modem fleet of subsea construction vessels (including new buildings) in the world.<br />Greatship (India) is a global offshore oilfield services provider, with six assets operating across the world and twenty under construction. Since their inception in 2006, the Greatship group has rapidly established itself as a supplier of state of the art assets and services to the offshore domain. The group`s order book includes PSVs, mid-sized and large AHTSVs, MPSSVs, MSV, ROVSVs and a premium 350 jack up rig.<br /> <br />Our View: Valuations & Recommendations<br /><ul><li>Shipping major, the Great Eastern Shipping Co Ltd, has taken up a $1.6-billion capital expenditure (capex) plan over the next three years, a top company official said.
Acquiring 8 ships, which include 6 bulk carriers and 2 oil tankers, along with 13 offshore supply boats and an oil drilling rig. The project will be financed partly through internal accruals and partly through borrowings.
Negotiation for loan at 0.65% over Libor, but banks would provide 4.5 to 5% over Libor, which means borrowing costs come to almost 7-7.5% along with the dollar-rupee exchange risk.
Most of the ships are due for renewal and if GE takes over, it has to spend a lot of money. Therefore, it does not make any sense to takeover Great Offshore.