The Great Eastern Shipping Company Limited (GES), located on BSE under Scrip Code 500620 and on NSE as GESHIP, is one of the top shipping companies in India with interests in both shipping as well as offshore services. From the earnings call transcript from January 28, 2025, for the quarter ending December 31, 2024, this analysis looks into the growth strategy, expectations, issues key developments and whether the company is a good investment as of March 02, 2025.
Growth Strategy
GES adopts a cyclical and opportunistic growth strategy designed for the unpredictable shipping industry:
Capital Allocation and Opportunistic Asset Acquisition:
GES focuses on purchasing second-hand ships rather than new builds, taking advantage of market downturns to acquire assets at favorable prices. As Rahul Sheth mentioned during the earnings call, the company expanded significantly from 30 to 50 ships between 2016 and 2018 by capitalizing on low asset values, which led to considerable profits in the following years when freight rates rose.
With a net cash position of around $500 million (negative net debt of Rs. 4,280 crore) and gross debt reduced to $225 million, GES is well-equipped to act quickly when asset prices meet its investment criteria.
In-Chartering as a Flexible Alternative:
When asset prices are high, GES considers in-chartering (leasing ships) to maintain market presence without making large capital investments. Currently, it operates two in-chartered ships, with contract lengths typically between 2 to 5 years, providing the flexibility to benefit from rising freight rates without the risks associated with long-term ownership.
Focus on Core Shipping Segments:
GES operates in various sectors, including crude tankers, product tankers, dry bulk, and LPG carriers, while its subsidiary Greatship specializes in offshore services (jack-up rigs and platform supply vessels). The company has no intention of diversifying beyond shipping, as confirmed by Rahul Sheth, who highlighted its expertise in navigating the shipping cycles.
Non-Linear Growth Model:
GES does not aim for steady, linear fleet growth. Instead, it conserves cash during high-price periods and invests aggressively during market lows. G. Shivakumar articulated this approach: “Eventually our plan is to grow… you will have some periods where we will have quick growth… and some periods where we will just be consolidating.”
Future Outlook
Positive Drivers
Recent U.S. sanctions on 180 tankers, which represent about 3-4% of the global crude fleet carrying Russian crude, could lead to tighter supply and potentially higher freight rates.
Rahul Sheth pointed out that if these vessels leave the legitimate market, it may increase demand for GES’s fleet, particularly since it specializes in crude and product tankers. The aging fleets of crude tankers and dry bulk carriers, with 20% and 10% of vessels over 20 years old respectively, are either exceeding or matching the order books, which stand at 10% each.
The lack of scrapping over the past six years indicates a possible supply crunch if older ships are retired, which would benefit GES’s modern fleet. In the offshore sector, Greatship is experiencing a gradual recovery, with rig re-pricing at higher rates and three rigs operational in Q3 FY25, contributing to revenue growth.
Neutral to Cautious Market Trends
On a neutral to cautious note, the tanker markets underperformed in Q3 FY25, lacking a winter spike in Suezmax or MR earnings due to weak oil demand, with seaborne crude trade down 2% year-over-year and flat product trade. The dry bulk markets also faced challenges, especially sub-capes, as iron ore trade stagnated and Indian coal imports decreased. Asset prices have fallen by an average of 15% (more for older vessels), yet they remain high compared to earnings, which is causing delays in GES’s acquisition plans.
long-term potential
Looking at the long-term potential, the order book for product tankers (23%) and VLGCs (28%) is backloaded to 2027, which reduces immediate supply pressure. If demand surprises on the upside, perhaps due to trade disruptions or sanctions, GES could see benefits from increased freight rates before new supply comes online.
Challenges
Market Volatility and Timing Risk:
The company’s strategy is based on purchasing assets at low prices; however, consistently high asset prices or poorly timed investments could hinder growth. Freight rates might stay low if oil demand growth slows down or if trade patterns return to normal after sanctions and the war.
Sanction Uncertainty:
While sanctions may tighten markets, Russia’s ability to adapt—such as redirecting crude to non-sanctioned ports or boosting product exports—could lessen the impact, as pointed out by Rahul Sheth. The final outcome will remain uncertain until March 2025, after the sanctions are lifted.
Offshore Segment Risks:
The cancellation of Greatdrill Chetna’s contract due to force majeure, which GES disputes, underscores the operational risks in the offshore sector.Delays in re-contracting idle rigs could put pressure on profitability.
High Order Book Pressure:
A doubling of the tanker order book over the past year and a 28% increase in the VLGC order book indicate potential supply risks in 2027, which could lead to lower rates unless balanced by scrapping or an increase in demand.
Key Advancements
Financial Resilience:
A net cash position and decreased debt ($225 million gross) through prepayments increase GES’s resilience in downturns and ability to capitalize on opportunities. The 12th straight quarterly dividend (third interim for FY25) indicates continued shareholder return
Operational Efficiency
All LPG vessels continue to be on time charters, protecting GES from spot market price fluctuations. Offshore ship re-pricings at increased rates during the last 6-9 months support profitability.
Cycle Management:
GES’s track record of buying low (2016-18) and benefiting from upcycles (recent years) is a demonstration of its cycle management skills, returning a standalone NAV CAGR of more than 20% since FY20.
Is GES a Good Buy?
Valuation Metrics (as of January 28, 2025):
- P/E Ratio: 4-5x (per Shrikant Maniyar’s question), suggesting undervaluation relative to earnings.
- Price/NAV: 0.6x (standalone NAV Rs. 1,138/share vs. a share price ~Rs. 900), indicating a discount to asset value.
- Cash Position: ~$500 million standalone, offering significant dry powder.
Pros:
- Undervaluation: At a low P/E and 0.6x NAV, GES seems undervalued, particularly considering its cash corpus and past profitability (Rs. 594 crore net profit in Q3 FY25).
- Upside Potential: Sanctions or the revival of demand might drive freight rates higher, enhancing earnings. A market slide may initiate asset buys, propelling fleet growth and long-term value.
- Financial Resilience: Net cash position and minimal debt create a cushion against volatility and room for expansion, minimizing downside risk.
- Dividend Prowess: 12 quarters of dividend payments are attractive to income investors.
Weaknesses:
- Short-Term Weakness: Low freight rates and high asset values can hold back growth, limiting short-term returns. The Q3 NAV decline (Rs. 45/share) from a $150 million fleet value reduction reflects market sensitivity.
- Execution Risk: Timing the cycle is critical for success; extended high asset prices or a late correction might strain patience.
- Limited Catalysts: As pointed out by Rajesh Khater, “no growth triggers” are not easily apparent, leaving the stock range-bound in the absence of external shocks.
Verdict:
- Long-Term Investors: GES is a compelling buy for patient investors with a 3-5 year horizon. Its undervaluation, cash hoard, and cycle-tested strategy position it to capitalize on inevitable market corrections, delivering outsized returns as seen post-2016. The stock’s discount to NAV and low P/E offer a margin of safety.
- Short-Term Investors: Caution is warranted. Without imminent catalysts (e.g., sanction-driven rate spikes), the stock may languish near Rs. 900 until market conditions shift. Weak freight rates could further pressure sentiment.
Recommendation: Accumulate on dips below Rs. 900, targeting a potential NAV realization closer to Rs. 1,138 or higher if freight markets recover. Monitor sanction developments and asset price trends through Q1 CY25 for entry confirmation.
Conclusion
The Great Eastern Shipping Company Limited is a disciplined, cash-rich player poised to thrive in the next shipping downcycle, leveraging its opportunistic growth strategy. While near-term challenges like weak freight rates and high asset prices temper immediate upside, its financial strength, undervaluation, and historical execution make it an attractive long-term investment. For those willing to weather short-term volatility, GES offers a robust risk-reward profile as of March 02, 2025.