The Great Eastern Shipping Company Limited (GESHIP) through its subsidiaries, engages in the shipping business in India. The company’s shipping business involves in the transportation of crude oil, petroleum products, gas, and dry bulk commodities. It operates with a fleet of 31 tankers. Most recently, it divested the exploration and offshore services business. My objective in this analysis to see if GESHIP is a good fit for my long term portfolio
The whole reason for any business to exist is to generate sales revenue and make more profits. At a minimum, the parameters listed below should have continuously increasing trends. All the data below is based on last 8 years i.e. from 2000 to 2008.
- Revenue: Overall, an increasing trend with average growth of 16% (SDev. 26%). High volatility going negative on many occasions. Additionally, the company is also taking on large debt. Not a good observation.
- Earnings per share: EPS has grown with average of 72% (SDev. 91%). This high growth is due to sudden jump in Year 2004 and 2005. The EPS growth rate is very different than revenue growth rate (72% vs. 16%). Not a good observation.
- Net cash flow from operations: Overall, cash flow has in increasing trend. In view of erratic EPS growth rate and high debt, I would view this as neutral observation.
- Profit/Loss from operations: Lack of consistency. Not a good observation.
- Reported net profit: Overall, an increasing trend. Neutral observation.
- Gross margins: Reducing trend. Year 2009 GM at 39% which is less than historic average of approximately 54%. Not a good observation.
- Operating margins: Reducing trend. Year 2009 OM at 54% which is less than historic average of approximately 59%. Not a good observation.
Quality of Dividends
In this part of my analysis, I am trying to understand dividend growth rate, consistency, and ability of the corporation to demonstrate sustainability. In is also an indirect way to gauging management’s policy vis-à-vis sharing the profits with common shareholders.
- Dividend per share: Chart 3 shows dividend is more or less flat for last 4 or 5 years. With economy booming between 2004 and 2007, I would have expected increase in dividends. Not a good observation.
- Payout factor: This is ratio of dividends per share divided by EPS. This has been consistently less than 50% and last few years it is fixed at 10%. Not a good observation.
- Dividend growth rate: Non existent. No sufficient dividend history. Not a good observation.
- Ratio of cash from operations to reported net profit: Although still above one, it is trending downwards. Neutral observation.
- Ratio of profits from operations to reported net profit: Below the desired value of one. Not a good observation.
- Ratio of Cash from operations to total debt: This ratio is less than one Cash generated by operations is not sufficient to cover debt. Not a good observation.
Projected Beta-based Expected Return:
I measured Beta of GESHIP’s stock risk (or price movement) relative to the S&P CNX NIFTY (or index movement). Here, I am trying to understand how a stock price behaves relative to the market and how to factor in the capital appreciation into my expected returns.
- The stocks three year Beta value is 0.63. This means GESHIP stock is very more closer related to S&P CNX NIFTY index.
- The expected return is 12% relative to market index.
After going through this analysis so far, I do not believe GESHIP can fit into my long term portfolio.
- It seems that the company is continues to raise it debt levels. This has given it a bump in revenue and profits (?). I did not confirm more details on this aspect because it was not worth the time and effort.
- The promoters have approx. 31% holdings even after divesting part of its operation.
- During the last few years, when Indian economy was booming, it appears that GESHIP has taken lot of debt. The dividends (or sharing profits) for shareholders did not increase. If the earnings are showing phenomenal growth, why it is not sharing increase earnings with shareholders.
I fully understand that GE shipping operates in a very cyclical industry. However, the kind of volatility I am seeing in earnings, cash flows, debt, and revenue is something that makes me uncomfortable.
I do not like the idea that I should expect my returns only from change in share values. I am interested in investing in company shares only when I believe my value of investments will grow as the company grows with India’s economy. In this case, company is showing phenomenal growth, but at the same time, it has taken lot of debt. For me the quality of earnings is not good.
I will not buy common shares of GESHIP. It does not meet my investing objectives.
Disclaimer: This analysis is in the context of my long term investment philosophy. It is in line with my investment objectives and my personal risk profile. Please do your own research before making an investment decisions for GESHIP.
500620, GESCO, GESHIP, Great Eastern Shipping Company Ltd