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Due Diligence of GE Shipping 51% acquisition by Essar Ltd.

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Presentation on theme: "Due Diligence of GE Shipping 51% acquisition by Essar Ltd."— Presentation transcript:

1 Due Diligence of GE Shipping 51% acquisition by Essar Ltd.

2 Group 2 Abhishek Paronigar PGP-05-041 Mansi TandonPGP-05-066 Soumyadipta DeyPGP-05-083 Richa GuptaPGP-05-092 Rohit KanugaPGP-05-098

3 Overview of the presentation Global Perspective of Shipping Industry Brief Snapshot of GE Shipping (GES) Analysis of Fleets, assets, employees Past Financials The Shipping Industry Investment Perspective Valuation

4 The Shipping Industry Global Perspective On Shipping Industry

5 Shipping Industry

6 Shipping Industry: Global Trends Oversupply of vessels imminent Rapidly growing World Fleet Orderbook at 20% YOY Rise in the delivery of vessels, growth of 15% YOY in 2005 Decline in scrapping to 9-14 DWT from 27-29 DWT to increase available shipping Freight rates to decline by 5% -20% for various vessel types in the coming 2-3 years

7 Trends in Tanker Segment Current Freight rates in the tanker segment have peaked Quarterly cyclicality in oil demand leads to volatility in freight rates Future Outlook Seaborne trade of oil to be impacted by slow-down in incremental demand for oil Product Tankers earnings to be less volatile Seaborne trade of oil to be impacted by slow-down in incremental demand for oil Scrapping to decline as average age of tanker fleet decline China and India to fuel growth

8 Trends in Bulk Segments Current Dry Cargo index declining Dry cargo trade to growth at 4% to be slower Future Outlook Surplus tonnage in dry bulk segment to result in freight decline Cape size vessel deliveries in the coming years to be higher than historical levels China turning into a net exporter of steel

9 Trends in Container Segments Current Freight rates peaked in the container vessel segment in Apr'05 and is in the range of US$ 34,000/day - US$ 44,000/day Deliveries growing rapidly Future Outlook Freight rates to go down in the coming months

10 Offshore Business Demand & Supply of Dry Bulk Energy Security promoting Offshore business Additional Investment & Cash reserves of Oil companies being used for E&P projects Strong rig demand promoting surge in day rates Bulk Carriers Scenario Deliveries for new offshore support vessels insufficient to meet demand Demand for larger vessels to increase over the next 3 years as drilling moves deeper

11 Tonnage Surplus Decreasing surplus leading to freight rates peaking Increased delivery and reduced scrapping will lead to increase in tonnage surplus and thus fall in the freight rates

12 The Shipping Industry Indian Shipping Industry

13 India Crude Reality India is 6 th largest Oil Consumer (112mt per annum) 2 nd largest growing market (10 yr CAGR at 6.1%) 7 th Largest Oil Importer (77% of domestic consumption) Oil Imports ($38.70 bn contribute 47.20% of total imports) Going Forward –Additional capacity expansion to result in potential market for shipping crude into India –LNG trade is going to be a growing sector

14 Indian Shipping Fleet Growth

15 Indian Tonnage Vs World Introduction of tonnage tax to boost Indian tonnage Share of Indian ships in Indian overseas trade at 15%

16 Indian Fleet Vs World

17 India Vs world - Summary

18 Ships Crude Oil Carriers: capable of transporting vast quantities of liquids ClassTonnage (dwt)Description Panamax60,000 – 80,000 Capable of fitting through Panama canal Aframax80,000 – 120,000 based on the Average Freight Rate Assessment (AFRA) tanker rate system. Suezmax130,000 – 160,000 Capable of fitting through the Suezcanal VLCC240,000 – 320,000 Very large crude oil carrier ULCC350,000 – 500,000 Ultra large crude oil carrier

19 Ships Dry Bulk Carriers: Used to transporting bulk Cargo items such as ore, grains ClassTonnage (dwt)Description Handysize10,000 – 40,000 Handymax40,000 – 60,000 Panamax60,000 – 100,000 Capable of fitting through the Suezcanal Capesize100,000 + Too large to traverse through the Suez or Panama canal. These go round the Cape of Good hope

20 Regulatory Environment 100% FDI allowed in Shipping Automatic approval for FDI upto 74% in shipping 100% investment by NRI’s with full repatriation benefits No permission required for raising Forex loans from abroad by mortgaging vessels with the lender. Tonnage Taxation regime implemented in 2005 replacing the Corporate Taxation regime

21 Regulatory Environment Disadvantages for the “Indian Flagged” ships High Crewing Cost & Shortage of Officers Employees on Indian flagged ships bound to pay Income Tax - disincentive vis a vis Other countries Plethora of Other Taxes: Capital Gains Tax, Service Tax, etc

22 Great Eastern Shipping Corp GE Shipping : Company Profile

23 Brief Snapshot of GES Incorporated on August 3 rd, 1948 More than 5 decades in shipping 41 vessels, all owned, transporting bulk commodities 9 new building vessels on order Rated “AAA” ( Domestic currency debt) since 1996 Demerged the offshore division on 16 th October 2006 with the objective to unlock shareholder value High liquidity and adequate floating stock – 27% with promoters and 43% with the public

24 Business Profile The Great Eastern Shipping Company Ltd. Shipping businessOffshore business Tanker Dry Bulk Wholly owned subsidiary Greatship (India) Ltd. Offshore oil field support and Logistic services It is India’s largest Private shipping company with a global customer base and strong financials

25 Fleet – Asset profile Fleet (41) 2.96 mn dwt 13.1 yrs LPG Carriers (2) Product Carriers (16) Crude Oil Carriers (14) Dry Bulk Carriers (9) 1.86 mn dwt 10.61 years 0.68 mn dwt 17.40 years 0.05 mn dwt 24 years 0.38 mn dwt 16.1 years Tonnage Avg.Age VLCC (1) Suezmax (5) Aframax (8) Panamax (2) Medium range (8) General purpose (6) Panamax (1) Handymax (5) Handysize (3)

26 Time Charter Yields Time Charter Yields (TCY) ($/day) 2006 - 20072005 – 2006 Q1Q2Q1Q2 Tanker - Crude 26,58232,01526,92219,847 - Product 19,90820,83419,43720,293 LPG Carrier 16,386 16,50516,386 Dry Bulk 15,48715,23122,59015,545

27 Employees Before Demerger Onshore staff Floating Staff No. of Employees 174 529 After the Demerger 80 odd employees were shifted to the Offshore business

28 Employee Cost 2006 ( USD) 2005 (INR) 2006 (USD) 2005 (INR) Wages & Salaries9915143864401054854738386 Social Security Cost 1047046319311212503643 Other Pension Cost 391831733456531732388531 Total14880465830891698707630560

29 Other Salient Features Broad based research Continuous evaluation of fleet through judicial sale/purchase activities Benchmarking with global standards De-risking – Through diverse asset base – Long term employment

30 Clients – GE shipping British Petroleum Exxon Mobil Shell ONGC Reliance Hindustan Petroleum Corporation Ltd. Bharat Petroleum Corporation Ltd. Indian Oil Corporation Transammonia Glencore Fortum Hyundai Heavy Industries Co. Ltd. Saudi Aramco

31 Industry Drivers for Shipping Industry

32 Drivers for the Shipping Industry

33 Key Parameters in Shipping Industry Management Control: Decisions on fleet mix, mix of time charter and spot rates Fleet Mix: Decisions on the segment to cater to (tankers, dry bulk, gas, container ) or the less volatile offshore business Valuations: P/E ratios does not properly reflect the valuation of the highly volatile shipping business. Hence P/BV is a better indicator of this asset intensive business

34 Key Issues in Global Shipping Safe ships: Homeland Security regulations Fewer ships: Fleet portfolio/shipper consolidation Fewer ports: Global hubbing/port consolidation Better ports: Greater efficiency, better landside distribution Enough ships: Capacity supply

35 Financial Highlights Financials of GE Shipping

36 Financial Highlights

37 The Last Five Years… * Residual Company

38 Cash Flow Statement

39 Balance Sheet

40 GE Shipping De-merger  Demerger of GE Shipping

41 Demerger Details The offshore division was made into a separate company called Great Offshore on October 16, 2006 Done with the purpose of unlocking shareholder value The demerger had to be revised due to reservations form ONGC about promoter backing of the new entity. Mr. Vijay K Sheth was then transferred to Great Offshore and ceased to be an MD of GES Every 5 equity shares held prior to Book Closure got 4 equity shares of GE shipping and 1 equity share of Great Offshore. However, refocus on Offshore business through Greatship( India) Ltd. Seems To suggest that the demerger was due to family reasons and not “unlocking Shareholder value ”

42 Snapshot of Demerged Entities Size of the demerged Great Offshore Company is 15% of the revenues of GE Shipping Market gives a better premium to Offshore companies owing to their strong earnings potential GE Shipping with its focus on Offshore Activities through subsidiary Great Ship India Ltd. Is poised to benefit from the increase in E&P activities. Investing into GE Shipping at its current low valuations is an attractive proposition.

43 GE Shipping De-merger  Valuation of GE Shipping

44 Valuation Concerns PE is not a useful metric to Value Shipping Companies –Shipping is a highly volatile business and freight rates are determined depending on global supply and demand. Price to book value (P/BV) would be an appropriate –Asset intensive nature of the shipping business. Captures the Balance Sheet strength of the business. Net Asset Value Method is most appropriate –Book value does not indicate the market value of the fleet. NAV method captures the market value of the fleet. For Cyclical businesses like Shipping, Market and Assets (NAV) Based Multiples are more relevant. –In valuing GE Shipping more emphasis has been given to this concern. Price to Earnings would be apt for Offshore companies –Revenue visibility is higher and also less volatile.

45 Revenue Forecast Assumptions. The company’s subsidiary Greatship (India) Ltd. At present has 1 Support Vessel. But the company has a huge Vessel Delivery Schedule. The Cash Flows arising out of these have been factored into our valuation. However the renewed focus on Offshore business after the demerger with Great Offshore indicates that the demerger was due to control and family reasons rather than “unlocking shareholder value”. Disputes on the Non Compete agreements could be a cause of concern. Apart from looking at the market factors, the Sales projections have been made considering the Vessel Delivery Schedules of GE Shipping and its Subsidiary.

46 Valuation Forecasts Based on the Global trends and Demand –Supply factors outlined earlier, we estimate a downward trend in Average Yields. The Drop in yields is as high as 15% for VLCC carriers. * Based on Industry reports and interactions Capex requirements of the company for the Next Three Years are taken as GE Shipping – Approx Rs. 2300 Crores Great Ship (India) Ltd – Approx Rs. 1710 Crores. The company also has not been leveraged to a large extent and intends to expand when asset prices reduce over time. Average Yields:

47 DCF Valuation Terminal Growth (%) 4 Beta Equity 0.66 Debt Equity 0.86 WACC (%) 12.3 Enterprise Value Rs. 4267 Crores Equity Value Rs. 3713 Crores No of Shares 15.22 Cr. Shares Value Per Share Rs. 244 Growth for the Next three years is assumed at 5.5%. Terminal Growth is assumed to be 4%.

48 GE Shipping De-merger  Relative Valuation

49 Comparable Company Profile

50 Competition Analysis

51 Comparable Multiples CompanyEV/EBIDTAP/BV Essar Shipping8.410.67 GE shipping4.371.33 Mercator lines6.271.27 SCI2.711.02 Varun Shipping5.611.35 Industry Average4.441.11 Price per share (Rs)228233

52 Net Asset Value Depressed market prices and Rising asset prices have resulted in attractive Price/NAV prices. Buying into this sector looks attractive for an existing player

53 Market Vs. Book & NAV The market price of GE Shipping has improved drastically viz a viz its Book Value and Net Asset Value. The Stock still trades at approx. 0.5 to 0.65 times its Net Asset Value.

54 Valuation Assessment DCF – Rs.244 Relative range – Rs. 228 to 233 NAV per share – Rs.400 Current Market price – Rs.230

55 GE Shipping De-merger  Investment Case for GE Shipping

56 Strengths of GE shipping Largest private sector shipping industry Management has decades of experience Approvals from most of the Global oil majors Follows a blend of long term contracts and spot exposure to reduce volatility Expansion plans in place to benefit from increasing commodity trade Strengthening presence in the offshore business as well

57 Strengths of GE shipping Rated as Asia’s third best company under a billion in Forbes list, 2006 Business Today rated it amongst the top 5 investor friendly companies. Low leverage of 0.67 Strong client base

58 Concern Areas for GE shipping 60% of GE shipping fleet is single hull Exposed to inherent volatility in the shipping industry –Cyclical industry –Freight rates are highly volatile Offshore business yet to take off

59 GE Shipping De-merger  Essar Shipping

60 Essar Shipping – A Snapshot One of the world’s leading integrated sea logistics company Experts in transportation solutions for the global energy business Accounts for 14% of Indian fleet Owns country’s largest, double hull VLCC One of world’s largest owner/operator od Suezmax tankers Strong management team and consistent financial performance

61 Essar – A snapshot Experts in transportation solutions for the global energy business Owns India’s first and largest double hull double bottom VLCC Internationally recognized player, with a majority of vessels on international charters End-to-end sea logistics company

62 Essar – A snapshot Internationally recognized player, with a majority of vessels on international charters Has customers from rig to refinery and beyond Handles 5 mn metric tonnes of coastal dry bulk cargo Amongst the low cost operators globally with exemplary safety records

63 Essar Fleet Total Fleet (30) Dry bulk carriers (16) Tugs (4) Offshore units Containers (7) Product Tankers (7) Fleet valued at USD 415 mn (Rs. 1.9 bn) Fleet is modern, sophisticated, fuel efficient. Fleet is among the youngest in India with average age of 14 yrs compared to world average of 19 yrs VLCC (1) Suezmax(6) Bulk carriers (7) Mini-bulk carriers(7)

64 Strategic perspective - Essar Essar Leader in Offshore business Leader in logistics Presence in other segments as well GE shipping largest private player with focus on dry and wet bulk segment increasing focus on Offshore through Greatship (India) Importance of acquisition Essar strengthens presence in the highly leveraged and rewarding Offshore segment Essar gets an opportunity to diversify into other shipping segments with a significant scale and client base

65 Essar – looking for opportunities Essar is already restructuring its business – it is hiving off Essar Logistics & Vadinar Oil Terminal ( wholly owned subsidiaries) It has pumped fresh equity worth 1500 cr to be used to – repayment of liabilities – expansion plans in power, steel and shipping GE shipping is certified by ISO – hence no compromise on quality and safety standards

66 In a Nut shell Essar is looking for investment opportunities GE Shipping has low book value and high NAV Offshore business has very high margins and is set to grow in India GE has growing presence in Offshore business –Delivery of huge number of offshore vessels by 2009 Current valuation of GE Shipping does not reflect the growth potential of its Offshore division

67 Advantages for Essar Market share to increase from current 7% to 30% Substantial client addition esp. in the dry bulk segment Ownership of additional 41 fleets (excluding those yet to be delivered) which compliment the existing fleet composition

68 Questions

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