AMBIT INSIGHTS

GE Shipping BUY
Cheap valuations limit downside
Result Update
Standalone loss of Rs1.9bn was below our estimate of Rs2.5bn as lower-than-
expected forex losses offset disappointments in net revenues (~30% below Stock Information
expectation). Subdued freight rates in the tanker segment imply that such Bloomberg Code: GESCO IN
trends will continue in the near term (Rs390mn loss in FY19E). But
CMP (Rs): 311
management’s improved outlook for tanker freight rates and ~15% upgrade
to offshore NAV suggest our initial thesis is on track. GESCO’s tanker TP (Rs): 569
shipping business will turn around as moderating fleet supply (est. -0.4% Mcap (Rs bn/US$ bn): 47/0.6
CAGR) improves charter yields over FY18-22E and fleet expansion of 50% over 6M ADV (Rs mn/US$ mn): 22.5/0.3
FY16-18 can drive 26%/67% EBITDA/PAT CAGR over FY18-22E. Offshore
earnings will improve from FY21E as day-charter rates for rigs increase from
cyclical lows. Our 2-year DCF value of Rs569 implies low exit multiples (6.2x Stock Performance (%)
FY22E EV/EBITDA) on recovering but pre-upcycle EBITDA. Earnings recovery is
1M 3M 12M YTD
tough to time but valuations are adequately punished to offer margin of
safety to early investors (0.8x P/NAV, 30-40% below global peers). Absolute 10.9 3 (19.6) (22.2)
Rel. to Sensex 15.1 8 (23.9) (25)
Source: Bloomberg, Ambit Capital research

Result overview
Declining freight rates drive 3% net revenue decline Ambit Estimates

GESCO’s net shipping revenues were down 3% YoY as decline in average TCY (time (Rs mn) FY19E FY20E FY21E
charter yield) offset positive impact of rupee depreciation (9% YoY) and increasing Net revenues 2.95 3.6 4.2
revenue days (up 8% YoY). Fleet expansion (up 2% YoY) due to acquisition of 3 gas Net profit (2.0) (3.9) 1.1
carriers drove increase in revenue days. TCY decline of 11% YoY and 16% QoQ was Diluted EPS (Rs) (26) 8 48
driven by declining rates in crude carriers (35% YoY and 6% QoQ) and product Source: Ambit Capital research
tankers (25% YoY and 30% QoQ).

Derivative losses adding pain

Indirect costs rose 6% YoY as 9% YoY increase in employee costs offset flattish other
expenses (up 1% YoY). This combined with 3% decline in net revenues led to core
EBITDA decline of 15%. INR depreciation (9% YoY and 4% QoQ) led to derivative MTM
loss of Rs2.2bn on standalone basis (Rs2.1bn for consolidated) which compounded the
pain. This was on account of derivative contracts entered into in order to synthetically
gain dollar exposure to rupee denominated borrowings. So, EBITDA declined 86% YoY
to a wafer-thin Rs349mn. That said, it’s pertinent to note that GESCO’s revenues and
assets are dollar-denominated and any depreciation in rupee is positive for the
company’s valuations even after adjusting for increase in dollar-denominated debt.
Accounting norms prevent the company from recognising revaluation gain but at the
same time mandate recognising loss on revaluation of its dollar-denominated
borrowings.

Limited capex will rein in leverage

GESCO’s net debt is now Rs20bn (standalone) and Rs28.5bn (consolidated). At 0.44x
net-debt/equity, GESCO’s leverage is broadly at acceptable levels. Debt levels should
not increase hereon with capex plans limited to regulatory compliance with IMO-2020
(US$20mn capex by Dec’19) and Ballast water treatment (US$30mn by FY24).

Offshore at inflection point

Rough math indicates that offshore revenues declined by ~32% YoY due to muted Research Analyst
rates in rigs. But management highlighted that market has bottomed due to increase
in oil prices. In fact, pricing for certain rigs has improved 20-30% YoY. All other Aadesh Mehta, CFA
aadesh.mehta@ambit.co
vessels are utilized except for one 80tn AHTSV.
Tel: +91 22 3043 3239

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 AMBIT INSIGHTS

Offshore NAV improvement increases consolidated NAV by 4% QoQ

Shipping NAV declined by 3-4% to Rs352 despite INR depreciation by ~4%. This is
due to declining asset values of product carriers and dry bulkers (~4-5% QoQ).
However, offshore NAV increased by ~Rs45/share to ~Rs58 (ex Rs100 embedded in
shipping NAV). Management highlighted that recovery in asset prices of offshore
assets led to such improvement besides INR depreciation. Overall, despite declining
NAV in shipping business, GESCO’s consolidated NAV improved by 4% QoQ to
~Rs410.

Key takeaways from the earnings call

Management optimistic on pricing improvement
Freight rates for product tankers declined significantly this quarter owing to lower
refinery runs due to lower end-product demand. Product consuming countries (China,
India, USA) saw increase in demand but it did not translate into trade. Flat demand
with a robust 4% YoY fleet growth compounded problems and there is no sign of
turnaround in this market. On the dry bulk front, there has been a decline in iron ore
import, albeit offset by increase in coal/bauxite charters to a certain extent. In crude
tankers, fleet is stagnant and helped to absorb excess supply. Freight rates herein
have picked up significantly in October. Increasing crude production in US along with
sanctioning of Iranian oil (and consequently its vessels) could have led to demand
improvement and consequent rate increase. This rate increase has come sooner than
the anticipated seasonal increase in freight rates during winter (Dec-March).
Scrapping trends remain stable with crude tankers seeing the highest scrapping over
Jan-Sept’19 at 4% of the fleet. Scrapping levels for product and dry bulk are low ~1%
of fleet. Scrapping could increase as regulatory costs increase, but it would slow down
in the interim for crude tankers if rates remain as high. GESCO will continue to have a
large spot exposure rather than fix time charters now as it believes prices can go up
further in respective segments.

IMO 2020 would increase product tanker demand

Despite Trump administration wanting deferment, IMO will come through by Jan-20
and the details of enforcement should be out by September’19. If enforced, demand
for MGO (low sulphur oil) would increase to 2.5mn barrels/day, while there is no
clarity on how much capacities refineries created. Given that lead time for capex is
~3-5 years, if the refineries are unprepared we could see significant increase in
spread between HSO and MGO as well as the tonne-mile demand for product
tankers.

Scrubbers for 7 larger vessels

GESCO’s techno feasibility analysis indicates that it is remunerative to fit scrubbers on
its larger vessels due to higher oil consumption and lower payback period (2 years).
Lower payback period is an essential assumption as once the refinery capacities come
through, the high differential between HSO and MGO may not sustain, resulting in
diminishing cost savings for scrubbers. It will fit scrubbers on 7 of its long duration
ships by end-CY2019, implying capex of $20mn. For smaller vessels, forward market
spread between HSO and MGO currently favours cheaper fuel if the acquisition price
is low enough. Constraints for scrubbers will come not from funding (shipping banks
willing to lend to a low leveraged operator) or availability (small manufacturers
offsetting for supply shortage due to capacity constraints of larger European
manufacturers) but from availability of yard capacity.

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 AMBIT INSIGHTS

Where do we go from here?

Management’s improved outlook for tanker freight rates and ~15% upgrade to
offshore NAV suggest that our initial thesis is on track. GESCO’s tanker shipping
business will turn around as sub-par profitability, liquidity crunch and rising regulatory
cost shrunk order books (decadal low of 13%) and increased scrapping to 8-year high.
As moderating fleet supply (est. -0.4% CAGR) improves charter yields over FY18-22E,
GESCO’s fleet expansion of 50% over FY16-18 can drive 26%/67% EBITDA/PAT CAGR
over FY18-22E. Offshore earnings will improve FY21E onwards as day-charter rates
for rigs improve from cyclical lows. Our 2-year DCF value of Rs569 implies low exit
multiples (6.2x FY22E EV/EBITDA) on recovering but pre-upcycle EBITDA. Earnings
recovery is tough to time but valuations are adequately punished to offer margin of
safety to early investors (0.8x P/NAV, 30-40% below global peers).
Exhibit 1: Quarterly snapshot
Rs mn 2Q19 2Q18 1Q19 YoY (%) QoQ (%) 2QFY19E Deviation %
Standalone P&L (Shipping)
Gross revenues from operations 5,689 4,474 5,817 27% -2% 6,480 -12%
Less: Direct costs 2,740 1,419 2,286 93% 20% 2,256 21%
Net revenues from operations 2,949 3,055 3,531 -3% -16% 4,224 -30%
Less: Indirect costs 1,775 1,677 1,941 6% -9% 1,984 -11%
Operating EBITDA 1,174 1,378 1,590 -15% -26% 2,240 -48%
Other income (825) 1,106 (1,731) -175% -52% (2,500) -67%
Total EBITDA 349 2,484 (141) -86% -348% (260) -234%
Depreciation and amortization 1,280 1,205 1,266 6% 1% 1,266 1%
EBIT (931) 1,279 (1,407) -173% -34% (1,526) -39%
Net Finance costs 932 866 921 8% 1% 967 -4%
PBT (1,863) 413 (2,328) -551% -20% (2,493) -25%
Tax expense - (50) - -100% 0% -
PAT (1,863) 463 (2,328) -502% -20% (2,493) -25%
Diluted EPS (12.4) 3.1 (15.4) -502% -20% -
Total Revenue Days 4,400 4,089 4,246 8% 4% 4,246 4%
- # of vessels 49 48 49 2% 0%
- Days/vessel 90 85 87 5% 4%
Average (TCY $ per day) 11,202 12,618 13,345 -11% -16% 14,210 -21%
- Crude Carriers 10,373 15,975 11,011 -35% -6% 16,831 -38%
- Product Carriers (Incl. Gas) 10,323 13,833 14,697 -25% -30% 14,197 -27%
- Dry Bulk 12,447 8,940 13,597 39% -8% 12,649 -2%
Average INR/USD 70 64 67 9% 4%
Indirect costs 1,775 1,677 1,941 6% -9% 1,984 -11%
- Employee benefits expense 1,125 1,034 1,081 9% 4% 1,081 4%
- Others 650 643 860 1% -24% -
Other income (825) 1,106 (1,731) -175% -52% (2,500) -67%
Profit on sale of ships 106 - - -
Forex/Derivative gain/(loss) (1,317) 877 (1,956) -250% -33% -
Treasury and other income 386 229 225 69% 72% -
DU-PONT -
EBITDA margin 7% 45% -3% (37) 11 -7% 14
Depreciation & amortisation 26% 22% 31% 5 (5) 32% (5)
EBIT margin -19% 23% -34% (42) 15 -38% 19
Interest burden 19% 16% 23% 4 (3) 24% (5)
PBT margin -38% 7% -57% (46) 19 -63% 24
Tax burden 0% -1% 0% 1 - 0% -
PAT margin -38% 8% -57% (47) 19 -63% 24
RoE -3% 0% -4% (4) 0
RoCE -1% 2% -1% (2) 0
Source: Company, Ambit Capital research

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Financials
Exhibit 2: Income Statement (Standalone)
Particulars (Rs mn) FY18 FY19E FY20E FY21E FY22E
Total revenues 23,993 19,135 26,901 31,959 36,451
Total exps 14,122 15,374 17,921 17,954 18,112
EBITDA 9,871 3,762 8,981 14,005 18,339
Depreciation and amortization 4,915 4,868 4,441 4,050 3,695
EBIT 4,956 -1,107 4,540 9,954 14,645
Net Finance costs 3,282 2,682 2,280 2,027 2,027
PBT 1,674 -3,789 2,260 7,927 12,618
Tax expense 70 200 200 200 200
Restated profit/ (loss) 1,604 -3,989 2,060 7,727 12,418
EPS 11 (26) 14 51 82
Source: Company, Ambit Capital Research

Balance sheet (Standalone)

Particulars (Rs mn) FY18 FY19E FY20E FY21E FY22E

Equity 52,254 51,257 51,772 56,022 62,852
Borrowings 42,226 33,781 27,025 27,025 27,025
Other liabilities 10,753 10,753 10,753 10,753 10,753
Total liabilities 105,234 95,791 89,550 93,800 100,630
Fixed assets 55,499 50,630 46,190 42,139 38,444
Other non-current assets 17,792 17,792 17,792 17,792 17,792
Current assets 31,944 27,369 25,569 33,869 44,394
Total assets 105,234 95,791 89,550 93,800 100,630
Source: Company, Ambit Capital Research

Cash Flow Statement (Standalone)

Year to March (Rs mn) FY18 FY19E FY20E FY21E FY22E
CFO 5,278 7,169 7,190 11,340 15,372
Capital Expenditure (4,096) 4,868 4,441 4,050 3,695
Investment 46 (2,524) (2,929) (8,300) (10,524)
CFI (3,402) (649) 3,716 (2,247) (4,826)
Issuance of Equity - - - - -
Inc/Dec in Borrowings (2,135) (8,445) (6,756) - -
Interest paid (3,108) (2,682) (2,280) (2,027) (2,027)
FCFF 1,876 6,521 10,907 9,094 10,545
Source: Company, Ambit Capital Research

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 AMBIT INSIGHTS

Du-Pont analysis (Standalone)

FY18 FY19E FY20E FY21E FY22E
EBITDA margin 41% 20% 33% 44% 50%
Depreciation & amortisation 20% 25% 17% 13% 10%
EBIT margin 21% -6% 17% 31% 40%
Interest burden 14% 14% 8% 6% 6%
PBT margin 7% -20% 8% 25% 35%
Tax burden 0% 1% 1% 1% 1%
PAT margin 7% -21% 8% 24% 34%
Asset turnover 23% 20% 30% 34% 36%
RoA 2% -4% 2% 8% 12%
Leverage 2.0 1.9 1.8 1.7 1.6
RoE 3% -8% 4% 14% 20%
RoCE 5% -1% 6% 12% 16%
Source: Company, Ambit Capital Research

Income Statement (Consolidated)

Particulars (Rs mn) FY18 FY19E FY20E FY21E FY22E
Total revenues 33,765 29,522 36,576 41,822 46,507
Total exps 20,744 21,002 23,605 23,703 23,941
EBITDA 13,021 8,519 12,971 18,118 22,566
Depreciation and
7,687 7,432 7,192 6,554 5,973
amortization
EBIT 5,334 1,088 5,779 11,564 16,593
Net Finance costs 4,550 3,854 3,452 3,198 3,198
PBT 784 (2,766) 2,327 8,366 13,394
Tax expense 2879 1172 1172 1172 1172
Restated profit/ (loss) (2,095) (3,938) 1,155 7,194 12,222
EPS -14 -26 8 48 81
Source: Company, Ambit Capital Research

Balance sheet (Consolidated)

Particulars (Rs mn) FY18 FY19E FY20E FY21E FY22E

Equity 69,292 68,346 67,956 71,672 78,307
Borrowings 55,324 53,713 46,957 46,957 46,957
Other liabilities 21,879 15,255 15,255 15,255 15,255
Total liabilities 146,495 137,313 130,167 133,884 140,518
Fixed assets 98,220 89,934 81,956 74,686 68,063
Other non-current assets 1,635 2,282 2,282 2,282 2,282
Current assets 46,640 45,098 45,929 56,915 70,174
Total assets 146,495 137,313 130,167 133,884 140,518
Source: Company, Ambit Capital Research

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 AMBIT INSIGHTS

Du-Pont analysis (Consolidated)

Particulars FY18 FY19E FY20E FY21E FY22E
EBITDA margin 39% 29% 35% 43% 49%
Depreciation & amortisation 23% 25% 20% 16% 13%
EBIT margin 16% 4% 16% 28% 36%
Interest burden 13% 13% 9% 8% 7%
PBT margin 2% -9% 6% 20% 29%
Tax burden 9% 4% 3% 3% 3%
PAT margin -6% -13% 3% 17% 26%
Asset turnover 23% 21% 27% 32% 34%
RoA -1% -3% 1% 5% 9%
Leverage 211% 201% 192% 187% 179%
RoE -3% -6% 2% 10% 16%
RoCE 4% 1% 5% 10% 14%
Source: Company, Ambit Capital Research

Valuation metrics (Consolidated)

FY18 FY19E FY20E FY21E FY22E
EPS (14) (26) 8 48 81
BVPS 459 453 451 475 519
RoCE 4% 1% 5% 10% 14%
RoE -3% -6% 2% 10% 16%
P/E (21.4) (11.4) 38.8 6.2 3.7
P/B 0.65 0.66 0.66 0.62 0.57
EV/EBITDA 5.7 8.7 5.7 4.1 3.3
Dividend yield 2% 3% 4% 8% 13%
Source: Company, Ambit Capital research

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 AMBIT INSIGHTS

Great Eastern Shipping Co Ltd (GESCO IN, BUY)

500
450
400
350
300
250
200
150
Mar-16

Mar-17

Mar-18
Jan-16

Jul-16

Jan-17

Jul-17

Jan-18

Jul-18
Sep-15

Sep-16

Sep-17
Nov-15

May-16

Nov-16

May-17

Nov-17

May-18
Great Eastern Shipping Co Ltd

Source: Bloomberg, Ambit Capital research

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 AMBIT INSIGHTS

Explanation of Investment Rating

Investment Rating Expected return (over 12-month)
BUY >10%
SELL <10%
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events
NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock
POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
* In case the recommendation given by the Research Analyst becomes inconsistent with the rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures (like
change in stance/estimates) to make the recommendation consistent with the rating legend.
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 AMBIT INSIGHTS

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Additional Disclaimer for U.S. Persons

35. The Ambit Capital research report is solely a product of AMBIT Capital Pvt. Ltd. and may be used for general information only. The legal entity preparing this research report is not registered as a
broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and/or the independence of research analysts.
36. Ambit Capital is the employer of the research analyst(s) who has prepared the research report.
37. Any subsequent transactions in securities discussed in the research reports should be effected through Ambit America Inc. (“Ambit America”).
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39. Analyst(s) preparing this report are resident outside the United States and are not associated persons or employees of any US regulated broker-dealer. Therefore the analyst(s) may not be subject to
Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by the research analyst.
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41. This Ambit Capital research report is not intended for any other persons in the USA. All major U.S. institutional investors or persons outside the United States, having received this Ambit Capital
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contained herein has been obtained from published information and other sources, which Ambit Capital or its Affiliates consider to be reliable. None of Ambit Capital accepts any liability or
responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of
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Disclosures
43. The analyst (s) has/have not served as an officer, director or employee of the subject company.
44. There is no material disciplinary action that has been taken by any regulatory authority impacting equity research analysis activities.
45. All market data included in this report are dated as at the previous stock market closing day from the date of this report.

Analyst Certification
Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in this report reflect his or her personal views about
all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this report.

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Ambit Capital Pvt Ltd 3 November 2018