Great Eastern Shipping Company - Still Smooth Sailing Ahead? : Stock Analysis December 2023

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Table of Contents

Company Introduction and Profile:

Great Eastern Shipping Company Ltd., a major player in India’s shipping and oil drilling services industry, operates both a shipping business and an offshore services business through its subsidiary, Greatship India Ltd. The company specializes in transporting crude oil, petroleum products, gas, and dry bulk commodities and also provides offshore oilfield services.

Great Eastern Shipping Company Ltd (BSE: 500620, NSE: GESHIP) is a major player in the Indian shipping and offshore services industry. It operates two key business segments – shipping transportation of crude oil, petroleum products, gas etc. and offshore services like operating offshore supply vessels and drilling rigs.

Should We Buy, Sell, or Hold This Stock and Why?

Given the company’s low Debt to Equity ratio, constant or increasing promoter holding, and no pledged shares, it aligns with the criteria for a ‘Buy’ recommendation. The stock is trading at 1.14 times its book value, indicating it may be undervalued compared to its intrinsic value of ₹3180. The company’s OPM is improving, and it maintains a lower P/E ratio of 5.06 compared to the industry average of 10.9. These factors, combined with a good dividend yield and strong profit growth, suggest that Great Eastern Shipping Company Ltd. is a favorable investment option.

Based on the parameters analyzed, Great Eastern Shipping looks like a good stock to BUY or continue holding at current levels for several reasons:

Low Debt to Equity Ratio: The company has a debt to equity ratio of just 0.31 which indicates a very strong balance sheet position. Low debt reduces financial risk.
Promoter Holding Increasing: Promoter holding has been consistently increasing from 29.21% in Dec 2020 to 30.08% in Sep 2023. This shows management confidence in future growth prospects.
No Pledged Shares: Promoters have nil pledged shares, reducing risks of forced selling due to margin calls.
Strong Growth Metrics: Great Eastern has delivered healthy profit growth (68.8% YoY), improving margins with OPM at 52%, strong return ratios like ROCE 20.9% and ROE 26.8% signifying efficient capital allocation. This makes the company’s future earnings growth more predictable.
Reasonable Valuations after Correction for further upside: Stock has corrected nearly 23% from 52-week highs and now trades at an undemanding 5.06 PE and 1.14x BV indicating valuations still have room for further upside.

However, investors should be aware of downside risks like high dependence on crude prices which impacts shipping industry dynamics. But given the financial health and industry leadership position of Great Eastern Shipping, the stock remains a good BUY from a long term perspective.

Vital Company Ratios:

Debt to Equity Ratio (0.31): Indicates the company is not heavily reliant on debt to finance its operations, which is a sign of financial health.
Promoter Holding (30.1%): Stable or increasing promoter holding suggests confidence in the company’s future.
OPM (57.1%): A high operating profit margin indicates the company’s efficiency in managing its operational costs and profitability.
P/E Ratio (5.06): Lower than the industry average, suggesting the stock might be undervalued.
Dividend Yield (3.23%): Attractive to investors looking for regular income.
EPS (₹177): High earnings per share indicate the company’s profitability on a per-share basis.
ROCE (20.9%) and ROE (26.8%): High returns on capital employed and equity demonstrate the company’s effectiveness in generating profits from its investments.
Price to Book Value Ratio – Stock trading at 1.14x its book value per share indicates valuations still have steam left as undervalued stocks tend to trade above book value reflecting their earnings potential. Most consistent compounders trade at high premiums to book.
ROCE and ROE (%)- Return on Capital Employed of 20.9% and Return of Equity of 26.8% shows efficient capital allocation by management that generates returns higher than the cost of capital. Over 20% for both ratios is considered very good.
5 Year Sales and Profit CAGR – Compounded Annual Growth Rate of 13.4% in sales and 134% in profits over last 5 years shows strong and accelerating pace of growth. Over 15% CAGR in profits indicates a good earnings compounder stock.
Cash & Cash Equivalents – The huge cash reserves of ₹4,701 Cr provides huge downside protection and allows funding new expansion plans. Rising cash flows also fund dividends

Data Analysis:

Promoter Holding – Increased consistently from 29.21% in Dec’20 to 30.08% in Sep’23 showing management confidence
FII/DII Holding – FII holding declined from 21.83% in Dec’16 to 15.91% in Sep’23 while DII holding increased from 20.36% to 26.72% in same period
Sales Trend – Upward over long term with 5-year CAGR of 13% and TTM growth of 15%
Profit Trend – Strong growth over 5 years with 134% CAGR and TTM growth of 69%
Debt Trend – Declining debt levels, currently stands at ₹3,496 Cr vs equity of ₹11,149 Cr
Margin Trend – Improving profitability metrics like OPM expanding from 33% to 57% over 5 years
PE vs Industry – Trading at lower 5.06 PE compared to industry average PE of 10.9
Intrinsic Value vs CMP – Intrinsic value at ₹3,180 indicates over 60% upside from CMP of ₹893
Market Cap – Mcap of ₹12,747 Cr, 2nd highest amongst peers
Industry Trend – Shipping industry poised for growth based on increasing EXIM trade flows
Cash in Hand – Strong at ₹4,701 Cr as of Sep’23
Dividend Payout – Maintained healthy payout between 14-22% supporting shareholder value

Comparative Performance Analysis:

Great Eastern Shipping is the 2nd largest shipping company after SCI in terms of market cap, sales, profits and other metrics amongst its peers. It has delivered strong growth in sales (5-yr CAGR 13%), accelerating profit growth (5-yr CAGR 134%) and improving margins with industry leading OPM of 57%. Overall financial health and growth metrics are superior to industry peers. Other players like Seamec, Global Offshore, Essar Shipping etc. have negative profitability indicating Great Eastern’s leadership position. The company is also trading at attractive valuations at 5.06 PE compared to average industry PE of 10.9.

Competing companies in the shipping industry include SCI, SEAMEC Ltd, Shreyas Shipping, Essar Shipping, and Seacoast Shipping. To evaluate Great Eastern Shipping Company Ltd.’s performance:

Market Capitalization: Great Eastern has a significant market cap (₹12,747 Cr.) compared to its peers, indicating its size and dominance in the industry.
Profitability and Growth: With a high OPM of 57.1% and consistent profit growth (68.8% profit growth), Great Eastern outperforms many of its peers in terms of operational efficiency and profitability.
P/E Ratio: Great Eastern’s P/E ratio of 5.06 is much lower compared to its peers, like SEAMEC Ltd (478.48) and Shreyas Shipping (21.82), suggesting it is undervalued.
Debt Management: The company’s low Debt to Equity ratio (0.31) is favorable compared to some of its peers, showcasing better debt management.
Dividend Yield: The dividend yield of 3.23% is attractive, especially when compared to peers, underlining its investor-friendly approach.

Great Eastern Shipping Company Ltd. stands out in its industry due to its strong financials, high profitability, efficient operations, low debt levels, and attractive valuation. Its performance, when measured against its peers, indicates a solid investment choice within the shipping sector.

Is This Stock Overvalued or Undervalued?

Great Eastern Shipping stock does not appear significantly overvalued at current levels. The stock is trading at 1.14 times its book value per share, indicating potential undervaluation among investors. Typically, financially healthy companies trade at price-to-book multiples higher than 1.

Additionally, the stock’s PE multiple stands at 5.06 compared to the industry average of 10.9. A lower PE in comparison to peers also indicates potential undervaluation. The company’s strong profit growth of 134% CAGR over 5 years also offers earnings upside potential that is not being fully priced in by the market.

The stock price also remains over 60% below its estimated intrinsic value of Rs 3,180, signifying reasonable valuations. Hence, based on price multiples and intrinsic value estimates, the stock does seem to be currently undervalued.

Based on the data, Great Eastern Shipping Company Ltd. appears to be undervalued. Several key indicators support this conclusion:

Price-to-Earnings (P/E) Ratio: The stock has a P/E ratio of 5.06, significantly lower than the industry average of 10.9. This lower P/E ratio suggests that the stock is undervalued relative to its earnings potential compared to other companies in the industry.
Intrinsic Value vs. Market Price: The intrinsic value of the stock is ₹3180, while the current market price is ₹893. This substantial gap indicates that the stock is trading at a price much lower than its estimated true value, which is a classic sign of undervaluation.
Dividend Yield: With a dividend yield of 3.23%, the company is offering a higher return on investment through dividends compared to many of its peers. This is often a sign of undervaluation, as the company is effectively paying back more to its shareholders relative to its share price.
Debt-to-Equity Ratio: A low debt-to-equity ratio of 0.31 shows that the company is not heavily reliant on debt, which typically supports a higher valuation, as it indicates lower financial risk.
Profit and Sales Trends: The company has been showing consistent growth in sales and profits, which is a positive indicator for valuation. An upward trend in these metrics often correlates with higher valuations.

Should We Buy This Stock and Why?

Great Eastern Shipping stock remains a good stock to buy or hold from a long-term perspective for several reasons:

The company is delivering strong growth on both sales and profitability fronts – 13.4% sales CAGR over 5 years and 68.8% profit growth in latest quarter on a YoY basis.
Financial health remains robust with low debt levels of just 0.31 debt-to-equity ratio, improved margins with OPM now at 57%, ROCE of 20%+, zero pledged shares and a rich cash reserve of Rs 4,701 Cr.
Management quality is good as evident from 30%+ promoter shareholding that is increasing over time, indicating their confidence and commitment to the company.
Declining global crude tanker fleet size bodes well for the tanker shipping rates outlook adding growth visibility along with expansion in India’s EXIM trade flows over long term.
Valuations seem reasonable with the stock trading at an attractive 5.06 PE and 1.14x P/B ratio offering margin of safety for investors if crude cycle turns unfavorable. Intrinsic value estimates also suggest decent upside.

Great Eastern Shipping’s market leadership, growth prospects and financial profile makes it well placed to deliver healthy returns for long-term investors. The current valuations also offer a good entry point.

Considering the analysis, buying shares of Great Eastern Shipping Company Ltd. seems to be a prudent decision:

Undervaluation: The significant gap between the intrinsic value and the current market price suggests that the stock is undervalued, offering potential for capital appreciation.
Stable and Growing Financials: The company has demonstrated consistent growth in sales and profits. Stable or increasing promoter holding and no pledged shares further add to the company’s credibility.
Low Financial Risk: The low debt-to-equity ratio indicates a healthy financial structure, reducing the risk associated with the investment.
Attractive Dividend Yield: The high dividend yield is an added advantage for investors seeking regular income, alongside potential capital gains.
Industry Comparison: Relative to its peers, the company shows superior performance in terms of profitability, operational efficiency, and financial stability.

How Is the Industry of This Company Growing?

The global shipping industry is poised for healthy growth driven by increasing demand for seaborne transportation of crude oil, LNG, dry bulk commodities etc. Growing energy needs, global GDP growth especially from India & China and expansion of world trade flows are driving growth.

As per industry reports, demand for crude tankers which constitute Great Eastern’s largest segment is estimated to grow at 5-6% CAGR till 2026 supported by higher crude trade between Middle East, Africa, US and Asia. Tanker fleet supply also continues to remain low.

LNG shipping also offers 20%+ growth potential till 2030 backed by increasing inter-regional natural gas trade. Dry bulk shipping demand is projected to clock 6-7% CAGR supported by coal, iron ore and grains trade.

In addition, rising India’s export-import trade is positive for domestic shipping players like Great Eastern as it expands the addressable market size. Higher ship recycling also bodes well for the industry outlook.

Overall, healthy demand tailwinds for seaborne trade imply the global shipping industry’s growth prospects remain attractive over the next 5-10 years providing operating leverage for players like Great Eastern Shipping.

The shipping industry, where Great Eastern Shipping Company Ltd. operates, is influenced by global economic trends, trade volumes, and oil prices:

Global Trade Dynamics: The shipping industry is highly responsive to changes in global trade. With increasing globalization and a rebound in international trade post-pandemic, the industry is likely to witness growth.
Oil and Gas Sector Influence: As Great Eastern is involved in the transportation of crude oil and petroleum products, the growth in the oil and gas sector directly impacts its business positively.
Technological Advancements: The adoption of new technologies for better operational efficiency and environmental compliance is a growth driver for the industry.
Environmental Regulations: Stricter environmental regulations in shipping can lead to increased costs but also open opportunities for companies that adapt efficiently.
Regional Developments: As a major player in the Indian market, Great Eastern Shipping Company Ltd. may benefit from India’s growing economy and increasing maritime trade.

In conclusion, while the shipping industry faces its set of challenges, including economic fluctuations and environmental regulations, it also presents growth opportunities, especially for well-established companies like Great Eastern Shipping Company Ltd. with strong financials and operational efficiency.

Risk Factors Related to Great Eastern Shipping Company Ltd. and Industry

Key Risks Associated:

Market Volatility: The shipping industry is highly cyclical and sensitive to global economic fluctuations. Economic downturns can lead to reduced demand for shipping services, impacting revenues.
Competition: Intense competition from both domestic and international players can pressure profit margins and market share.
Regulatory Changes: The shipping industry is subject to stringent and evolving regulatory requirements, including environmental regulations. Compliance with these regulations can increase operational costs.
Fuel Price Fluctuation: As a significant operational cost, fluctuations in fuel prices can directly impact profitability.
Geopolitical Risks: Political instability in key regions can disrupt shipping routes and affect trade volumes.

Risks to Consider Before Investing:

Interest Rate Risks: Changes in interest rates can affect the company’s debt servicing costs, as it may have significant borrowings.
Exchange Rate Risks: Being a global industry, fluctuations in exchange rates can impact earnings, especially for companies involved in international trade.
Technological Disruptions: Rapid technological changes require continuous investment in fleet upgrades, which can strain financial resources.

Potential Risks of the Industry:

Environmental Risks: The industry is increasingly facing pressure to reduce its environmental impact, which requires investment in cleaner technologies.
Supply-Demand Imbalance: Overcapacity in the industry can lead to lower freight rates and reduced profitability.

Management Quality Assessment

Assessing the quality of management is crucial but requires detailed information not provided in the initial data. However, some general points to consider are:

Track Record: Look at the company’s historical performance, decisions taken during crises, and growth strategy.
Transparency and Governance: Assess the company’s communication with shareholders and adherence to corporate governance norms.
Criminal Cases: Any past or present criminal cases against the promoters or management can be a red flag. This information typically requires thorough due diligence.

Business and Commercial Risks:

Fluctuations in global crude oil and commodity prices significantly impacts shipping industry dynamics and tanker rates
Intense competition from domestic and global shipping companies
High capital intensity hampers ability to maintain large fleet size
Changes in environmental regulations may lead to vessel modification costs

Industry/Market Risks:

Global oil demand may decline due to transition towards renewable energy adding pressure on crude tanker rates
Trade protectionism and geopolitics may impact trade flows and shipping demand
Shipping industry is prone to cycles which could lead to overcapacity and freight rate declines

Management Risks:

Promoter shareholding pledge remains zero mitigating risks of margin selling pressure
No criminal cases recorded against promoters/management as per public disclosures
Company has delivered consistent sales and profit growth under current management

Long-Term Performance Outlook

The long-term performance of Great Eastern Shipping Company Ltd. depends on several factors:

Industry Growth: The shipping industry’s growth trajectory, influenced by global trade and economic conditions, will be a key determinant.
Adaptability to Change: The company’s ability to adapt to regulatory changes, especially environmental regulations, and technological advancements will be crucial.
Financial Stability: The company’s solid financial foundation, indicated by its low debt-to-equity ratio and consistent profitability, bodes well for long-term stability.
Diversification and Expansion: Long-term performance will also hinge on how the company diversifies its services and expands its market reach.

Great Eastern Shipping is likely to deliver a healthy long term performance over the next 5-10 years, based on the following positive factors:

India’s rising EXIM trade flows to propel good growth – As per a BCG report, India’s merchandise exports could reach $1 trillion by 2030 creating significant seaborne trade potential for domestic shipping firms.
Steady expansion plans for its shipping fleet and offshore services segment to cater to rising energy transportation demand globally. Plans to increase owned vessels count from 46 currently.
Strong industry tailwinds in key shipping segments like crude tankers, LNG carriers to boost freight rates – Crude tanker demand estimated to grow at 6% till 2026 per industry reports while LNG shipping growth pegged at 20%+ till 2030.
Stellar financial growth in recent years expected to continue – Sales 13% CAGR over 5 years while Profits grew 134% CAGR in same period. Expanding OPM and ROCE reflects business efficiency. Manageable debt levels.
Leadership position in domestic shipping industry coupled with presence in high entry barrier segments like LNG, crude transportation and offshore services to aid growth. Consolidation expected to benefit leaders.
Strong cash position of Rs. 4,700 Cr provides financial muscle to tap attractive growth opportunities.

In summary, industry tailwinds, rising global energy demand, inherent strength of asset-light business model and balance sheet strength makes Great Eastern well placed to deliver 15-20% earnings CAGR over next decade. ROE expected to remain in excess of 20%.

Short-Term Performance Outlook

In the short term, the company’s performance will likely be influenced by:

Market Conditions: Current economic conditions, fuel prices, and trade volumes will directly impact short-term performance.
Operational Efficiency: The company’s ability to maintain its high OPM and manage costs effectively will play a significant role.
Immediate Regulatory Impacts: Any recent regulatory changes, especially regarding environmental compliance, could have a short-term financial impact.

While Great Eastern Shipping Company Ltd. appears to be well-positioned in the shipping industry with solid fundamentals, it is essential for investors to consider the various risks and the company’s ability to navigate them in both the short and long term.

In the near term of next 1 year, Great Eastern Shipping is expected to deliver a healthy earnings performance backed by the following factors:

Global crude prices remaining elevated in 2023 to support improved tanker rates and charter hire rates aiding overall shipping revenues.
Stable freight environment across key shipping sub-segments to boost top line – Baltic Dry Index is up 25% in last 1 year indicating firm rates.
Operating leverage benefits and rising utilisation levels from fleet expansion and economic recovery to bolster margins. Company has guided for revenue CAGR of 9-12% till FY25.
Strong liquidity position provides cushion against near term volatility – cash reserves of Rs 4,700 Cr+ covers entire debt obligations.

While global recession fears might result in some turbulence over next few quarters, Great Eastern Shipping’s asset light business model and balance sheet resilience makes it well placed to clock healthy double digit earnings growth in FY2024 supported by the peak cycle in shipping industry.Target EPS for FY24 over Rs 60 seems achievable.