Ge Shipping

PART II: PROJECT ANALYSIS AND SELECTION

GESC

2006-08GESC 2006-08GESC 2006-08

The ICFAI University 2006-08

Great Eastern Shipping Co. LimitedThe shipping sector will continue to be governed by the dynamics of ever increasing globe trade. Also, with Indian sea-borne cargo traffic expected to grow significantly in the years ahead, I believe our fleet expansion will demonstrate Great Easterns ability to meet market demands and clients needs.

K M Sheth, Executive Chairman, GE ShippingGreat Eastern Shipping Co. Limited, the largest private sector shipping company in India has devised plans to restructure its shipping business and offshore oil field services through demerger. In a conference held with analysts, the Executive Chairman Mr. K M Sheth announced that through demerger, GE Shipping will be spin off into two companies GE Shipping headed by Bharat Sheth, and GE Offshore headed by Vinay Sheth. Speaking to the press on the restructuring plan, K M Sheth, Chairman of Great Eastern Shipping said, The idea behind the demerger is to unlock shareholders values and will result in sharper focus on the two businesses shipping and oilfield services and given the growth momentum in offshore oil services, the new company will be able to harness the potential in offshore business. The demerger, which will be effective from April 1, 2005, will be completed before March 2006.

Earlier, for the fiscal year 2005, the Rs.37 billion GE Shipping thriving in a highly cyclical industry reported a net profit of Rs.1,884.50 million in the Q2 of the financial year 2005-06 registering a 6 percent rise over the corresponding quarter of the financial year 2004-05. The shipping markets are prone to high risks due to fluctuations in freight rates and substantial increase in the prices of the ships. GE Shipping registered a comparatively high growth, generating a strong profits and cash flows and delivering dividends to its investors. The company which operates in an industry that is complex in nature and is highly volatile and unpredictable, has been paying dividend to its investors on streak for 21 years continuously. For the FY 2004-05, the company declared a total dividend of Rs.9 per share. With the freight rates firming up, industry analysts expect the company bettering its previous performances in the current financial year 2005-06. The companys ability to consistently explore opportunities and adopt appropriate business strategies has ensured it to register a better performance every year.

The demerger was approved by the equity holders and secured creditors in September 2005; and the new separate company Great Offshore Limited will come into being with effect from April 1, 2005 and this approval has also been informed to stock exchanges in November 2005. After completion of the demerger, the Sheth family stake of 24 percent will remain unchanged in both the entities and the boards of the two companies would perform their acts independently. Thepaid-up share capital of Great Offshore Ltd. (GOL) will be Rs.380.70 million and GE Shippings share capital will be reduced to Rs.1,522.70 million from Rs.1,903.40 million; and the net worth of GOL would stand at Rs.4,461.20 million and that of GE Shipping after restructuring will stand at Rs.17.41 billion. The shares of GOL will be listed on the Bombay Stock Exchange and National Stock Exchange. The new company formed after demerger will continue the earlier devised plan of implementing the capital expenditure scheme of $75 million towards offshore business that includes purchase of six vessels. Bharat Sheth, Managing Director of Great Eastern Shipping Company, speaking to the press, said the demerger move is part of business restructuring aimed at unlocking the potential of the offshore business and to seize more opportunities. Under thedemerger plan both the companies have agreed not to enter into others business for one year, with GOL focusing on drilling services, marine logistics, marine construction and port/terminal services, offshore supply vessel services, constructions of barges and harbor tug services. Vijay Sheth, the new Managing Director of GOL, speaking to the press said the intention not to enter into other business for one year is to let each others business to grow. The demerger news gave wings to Great Eastern Shipping Stocks with the traders buying the shares on buzz that the offshore and drilling will get a very high valuation. The Great Eastern Shipping has seen a greater swing in stocks, moving from Rs.177.40 on August 16, 2005 to Rs.211.30 on September 2005. Market Analysts view that the high price-earnings multiples of the peer companies in the drilling sector have given impetus to the stocks.

Shipping Industry

Shipping industry has been the backbone of world trade for ages with a world trading fleet of 46, 222 ships, of which about 90 percent are used for intercontinental trade, transport of raw materials and import/export of manufactured goods. According to International Maritime Organization (IMO), the world trading fleet was made up of 46,222 ships with a total tonnage of 597.71 million gross tonnes.

Exhibit 1: World Trading Fleet

General Cargo18,150

Tankers11,356

Bulk carriers6,139

Container Ships 3,165

Passenger Ships5,679

Other Ships1,733

Source: Review of Maritime Transport 2005 UNCTAD.

According to Institute of Shipping Economics and Logistics (ISL), the world merchant fleet stood at 26, 942 with a total tonnage of 779.70 million deadweight tonnage (dwt) at the beginning of the year 2005, with the top ten countries representing 71.80 percent of the total world merchant fleet, including a high amount of foreign flag tonnage (Ship registered in a foreign country, than in the country in which they are owned). According ISL about 94 percent of the total deadweight tonnage of the world merchant fleet can be attributed to about 30 countries in the world, with OECD having large proportion, and controlling about 68.70 percent of the total world merchant fleet.

In the world seaborne trade it is difficult to quantify the value of trade in monetary terms; the trade estimates are generally quantified in terms of tonnes or tonne-miles. The industry susceptible to economic downturns has been witness to a downturn during the worldwide economic recession in the early 1980s and also during South East Asian crisis in late 1990s. But still over the last four decades, the total seaborne trade nearly quadrupled from less that 6 thousand billion tonne miles in mid-1960s to over 27 thousand billion tonne-miles by end of the year 2004. By the end of the year 2004, while the world output grew by 4.1, the overall world seaborne trade grew by 4.3 percent reaching 6.76 billion tons loaded of goods. (See Annexure I). The seaborne trade grew largely due to an increase in growth rate of iron ore and crude oil shipping, which grew by 12.60 percent and 7.60 percent respectively. About half of seaborne trade is in crude oil, oil products, liquefied gas and thermal coal, followed by metals, which account for about 25 percent comprise raw materials, steel products and non-ferrous metal ores and scraps. Agricultural products comprising agricultural raw materials, food products and fertilizers account for about 13 percent, and the rest is comprised of forest products and other industrial materials such as cement, chemicals, alumina etc.

The shipping industry is a perfect competition model with little or no entry barriers. Globally, the shipping industry is fragmented with most shipping companies being relatively small due to the capital-intensive nature of the industry. Vessels constitute about 90 percent of the fixed assets of a typical shipping company. The shipping industry is segmented according to the needs of customer transporting cargo. The industry is broadly segmented into bulk carriers, specialized shipping and liner shipping. Bulk carrier transports cargo such as iron ore, steel, coal etc. The largest bulk carrier can transport upto 200,000 tonnes. Specialized shipping includes tankers for carrying crude oil and containers for transporting motors vehicles. Liner shipping specializes in the transport of high-value traffic carried by container ships, roll-on-roll of vessels, small cargo parcels and passengers. Ships transporting oil/chemical tankers, chemical tankers, liquefied gas carriers, general cargo and heavy lift vessels, and ships supporting offshore oil industry and those supporting small general cargo ships are categorized as other special vessels. At the beginning of the year, the world trading fleet constitutes 46,222 ships with a combined tonnage of 895.8 million dead weight tons with the fleet of oil tankers and dry bulk carriers together making up73.30 percent of the total world fleet. The Crude oil tankers and dry bulk carriers are classified based on their size. (See Annexure I and Annexure II).

Exhibit 2: World Seaborne Trade

Source: http://www.marisec.org/annualreview/annualreview.pdf

Exhibit 3: Different Sectors as a Percentage of Total Number of Ships in the World Fleet 1 Jan. 2005

Source: Lloyds Register Fairplay.

Exhibit 4: Classification of Ships based on Size

Crude Oil TankersVessel Size

ULCC300,000 + dwt

VLCC150,000 299,999 dwt

Suezmax100,000 149,999 dwt

Aframax50,000 99,999 dwt

Dry Bulk CarriersVessel Size

Cape-size80,000 dwt

Panamax50,000 79,999 dwt

HandyMax35,000 49,999 dwt

Handy-size20,000 34,999 dwt

Source: Lloyds Register Fairplay.

Characteristics of Shipping Industry

Shipping industry is one of the most cyclical industries. It is characterized by the shortest buoyancy period and longest recessionary period. Like the rising and falling sea waves, the shipping industry is very volatile, cyclical with each cycle lasting about five to six years, and is also greatly influenced by the world business cycle. Companies operate in a very dynamic environment influenced by global political and economic factors. The industry is capital intensive and is subject to stringent regulations. The shipping markets being increasingly risky due to fluctuations in freight rates and high cost of ships, shipping companies invest heavily when freight rates are on an upswing and when there is a boom in the world business trade. According to Industry analysts there exists a strong relation between the economy, trade and shipping demand. The growth in the world economy and trade increases the requirement of shipping. The volatilities of freight rates also change over time depending on the global world trade, expectation and uncertainty in the market and often affect the operating profits of the shipping companies. Volatility of freight rates arises due to cyclical fluctuations in the business cycle and also due to seasonal fluctuations. According to Industry sources, the freight rates for tankers increase during November and December and drop between January and April. The freight rates for VLCC (Very Large Cargo Carrier) rise in June/July, whereas the freight rates for Suezmax and Aframax drop in June/July. Moreover, these seasonal fluctuations in the freight rates assert more during the market expansions than under the market down turn. Compared to the dry bulk carriers, crude tanker segment are relatively less volatile. Volatility of freight rates and ship prices depend upon the cyclic fluctuations in the market.

Demand-Supply

The demand for shipping services is highly dependent on the level of economic activities and also on the trade agreements between various trade blocks and regions. Order for cargo ships is high when there is upward turn in the business cycle; dry dock results when there is downturn in the business cycle and when freight rates are weaker. As ships are technically sophisticated and highly valued assets and have an average economic life of 20 years, they require a high maintenance cost. An LNG carrier cost around US$ 250 million, while a double-hulled VLCC costs around US$ 90 million and a Handysized chemical ship is around US$ 70 million. Keeping an adequate supply of ships at all times and investing on ships in anticipation of future growth is one of the essential key factors in the shipping industry. In such a scenario, a potential company in the shipping industry wishing to acquire a vessel finds a considerable gap in its personal funds availability and additional funds requirement. The high cyclic nature of the industry combined with high volatile earning of the industry makes the investment process in shipping both risky and complex and calls for management of investment process. Shipping firms are subjected to interest rate risk as they buy ships through debt financing. According to industry sources, about 30 percent investments on the ships are through their own funds and 70 percent is through debt financing. As the fleet is often engaged in cross trading (trading outside their domestic waters), shipping industry is also subjected to credit risk. Industry sources believe that sailing into shipping markets controlled by competitive market forces requires prudent risk management over anticipation of raise and fall in freight rates and ship prices and minimizing a range of financial risks. Considering the inherent volatility of freight rates, and the world maritime trade being dependent on the adequate shipping capacity, freight derivative market was born in 1985, when Baltic Exchange introduced Baltic Freight Index.

Exhibit 5: High Cyclical Shipping Industry

Source: Baltic Freight Index.

Exhibit 6: Baltic Dry Index

Source: Baltic Exchange.The Indian Shipping Industry

India, with a long coastline of 7,515 km is located in geographical proximity to important shipping routes; this gives a natural advantage for growth of merchandise trade and also for growth of shipping industry. The Indian shipping industry is the lifeline of Indias international trade and is estimated at $5.5 billion. The country has one of the largest merchant shipping fleet among the developed countries and is ranked 19th in the world. The domestic shipping industry that started with a mere 1.92 lakh gross tonnage at the time of independence has grown steadily and is ranked among the top 20 leading merchant fleet of the world. Currently, India has about 704 ships with 8.31 million gross tonnage and 13.73 million dead weight tonnage. The Indian merchant fleet constitutes about one percent of the worlds total fleet in terms of numbers and 1.5 percent of the cargo carrying capacity. Over the last two years, Indias gross tonnage has grown at an annual rate of near 14 percent and much of it in the overseas tonnage. While 74 percent of the total Indian cargo is moved by foreign flag vessels, the remaining 24 percent is by Indian flag vessels. According to Industry sources, 56.60 percent of the Indian fleet comprises of oil tankers including very large crude carriers and about 29.60 percent dry bulk carriers while about 3 percent comprises of LPG carriers and 1.5 percent cellular container ships. The average age of the Indian fleet as on date is 17.30 years as against the world average of 20 years. According to Industry sources, around 57 percent of the overseas fleet needs to be replaced in the next five years. As per the revised regulation issued by the international maritime organization, single hulled tankers are to be phased out and replaced with double hulled tankers by 2010. The domestic shipping industry is made up of a few large players that include the government owned Shipping Corporation of India and a few private players Great Eastern Shipping Company, Essar Shipping, Varun Shipping, Mercator Lines and India Steamship Limited accounting for 90 percent of revenues. The domestic shipping industry was in down turn during the economic meltdown of South East Asian countries and also was affected by the recession in Russian economy. The slow growth in world economy in these countries put pressure on the freight rates, and adversely affected the Indian shipping companies, while the global shipping giants were able to sustain the falling freight rates. Over the years, the share of Indian ships carrying the countrys cargo declined from 40 percent in late 1980s to 15 percent by the end of the fiscal year 2003. According to Industry sources, while Indias total volume of trade has grown at the rate of 8 to 10 percent every year, the tonnage has not been able to keep pace with it.

Indian Shipping industry is highly susceptible to recessions in the world trade and global shipping. The industry fortunes are closely linked to international trade and merchandising scenario. The shipping industry gets driven by various factors like freight rates, increase in operating costs,dry-docking expenses, bunker expenses, which have medium as well as long-term implications, making it difficult to make any comment on future earnings. Every ship has to be dry-docked twice every five years to undergo a mandatory fitness test. The firm suffers from loss of working days from the ship resulting in loss of revenue and also dry-dock expenses. Dry-docking expenses depend upon the type of the ship and the extent of damage. According to industrial sources,dry-docking expenses for a panamax would cost between Rs.4-8 million and normally it takes between 10 to 15days of dry-docking for young ships and is even more in case of older ships. The days of dry-docking also depends upon the facilities available. Bunker cost or fuel cost represents 50%-60% of a shipping operating costs and even a small saving greatly impacts the companys financial performance. The volatility in freight rates and bunker price fluctuations could affect the operating profits. Apart from the operating risks, the shipping industry also faces the risks like ownership risk, interest rate risk, exchange risk apart from accidental and losses risk. The ownership risk arises due to fluctuations in the value of the assets that include its scrap value. Generally, firms sell their age-old ships for acquiring new ships or for generating cash flow. According to Industry sources, the ships are sold depending upon the future freight rates and ship prices and in most firms the sale of ships accounts for a high proportion of profits to shipping companies.

Great Eastern Shipping Corporation of India

GE Shipping, the second largest Indian flag bearer and the largest private sector shipping company, was incorporated in 1948; it was promoted by Mulji (Sheth) brothers and A H Bhiwandiwalla & Co. The company began its trade from a small liberty ship SS Fort Elice acquired from USA, and progressed from a domestic bulk cargo carrier to energy transportation and offshore energy services.

Exhibit 7: India Shipping Growth Pattern, Age Profile

Indian Shipping Growth Pattern

PeriodCoastalOverseasIndian ShipsWorld

ShipsMGTShipsMGTShipsMGTMGT

1997-982340.6432446.2004786.843439.00

1998-992500.6562406.2124906.868444.10

1999-20002730.6822406.2315136.913449.40

2000-013160.6972306.1195466.817475.20

2001-023360.7342246.0875606.821487.00

2002-034250.8051915.3726166.178503.00

2003-044360.8082036.1366396.944533.30

2004-054580.8112287.2026868.013546.60

CAGR

Last 7 years10.07%3.37%0.96%2.16%5.30%2.28%

Last 2 years3.81%0.33%9.26%15.79%5.53%13.89%

Age Profile

AgeNos.DWT

< 5 years 731,273,800

5-9 years 881,528,560

10-14 years1001,737,249

15-19 years1372,385,480

> 20 years2674,655,160

Source: www.imaritime.com

In a span of over 50 years, the company under able and dynamic leadership established itself and grew to become the largest private sector shipping company in India, and earned the reputation of being the most dynamic shipping companies in the world creating value for investors. The company, during the regulatory control regime, took unconventional decisions by venturing into bulk trading, establishing in 1974 a fully owned subsidiary at London for international exposure and reach. The company has many firsts to its credit in the history of Indian shipping industry. It was the first Indian company to place an order for construction of ships Jag Ganga and Jag Jamuna at the Kobe Shipyard, Japan in 1949 and also the first Indian company to start a liner cargo service from the west coast of USA and Canada to India. It was also the first Indian shipping company in the private sector to acquire rigs. It was first Indian Company to venture into tramp shipping trade and also the first company to acquire a tanker in 1956. According to Industry sources, GE SHIPPING achieved significant growth despite the regulatory control during the pre-liberalized economy regime, when the government provided regulatory concessions to public sector shipping company Shipping Corporation of India (SCI) and where the purchase and acquisition of ships required mandatory approval from the government. The companys prudent financial management had been instrumental in its survival on two severe recessions in the last fifty years 1958-63 and 1976-86; during this period many shipping companies, both domestic and international, sunk. The company has grown from strength to strength and at one stage was contender to buyout the government owned Shipping Corporation of India, when the government planned to disinvest the company. The company diversified into a variety of businesses including real estate, property development, investment and commodities trading, providing offshore services to oil fields and ports. The company also established two more subsidiaries at Singapore and Fujairah. The Singapore operations was started in 1994, while the operations in Fujairah, United Arab Emirates were established in 1999.Business Structure

GE SHIPPING Business Structure is divided into two major divisions Shipping division and Offshore division. The shipping division offers transportation of crude, dry bulk and gas and its offshore division offers offshore services and port support, and terminal services.

The offshore division owns the largest and most powerful anchor handling tugs. GE Shippings offshore division operates under four businesses offshore drilling services, marine logistics and port/terminal services, marine construction and projects services to construction barge and air logistics. Its offshore division offers services to the oil companies by carrying out offshore exploration and production activities, drilling services through drilling rings, offshore support and logistics support for anchor handling tugs, supply of anchor handling tugs and vessels, and dive support. Its OSV division was started in 1982, taking into consideration the ONGCs plan to replace foreign Offshore Support Vessels (OSVs) with Indian ones. The companys offshore division is exploring opportunities in the exploration and production sector and is looking forward to expand its clientele. With global oil majors vouching for its offshore services, the company is carving a niche for itself in the international market. At present it owns 42 Shipping fleet of total tonnage of 3.017 million dwt having an average age of 13.80 years and 30 offshore fleet of total tonnage of 0.44 million dwt having an average age of 16.20 years.

Major Clients for the Companys Offshore Division

Oil & Natural Gas Corporation

BG Exploration and Production (I) Ltd.

Cairn Energy (I) Pvt. Ltd.

Hardy Exploration & Production (I) Inc.

Mosbacher (I) Ltd.

Niko Resources Ltd.

Petrom SA.

Fleet Category

The companys shipping fleet category includes crude oil carrier, product carrier, gas carrier, dry bulk carrier and its offshore fleet category includes Offshore Support Vessels (OSVs), harbor tugs, construction barge and drilling units. The companys Shipping Division deploys its fleet overseas as well as in coastal shipping. Though GE SHIPPING has a balanced fleet of bulk carriers and tankers, it does not have any presence in LNG and container trade. It has also no presence in ship repair, port development and coastal shipping. The company has mainly focused on dry and wet bulk cargo.

Exhibit 8: GESCOs Fleet Profile

CategoryTypeNos.Total DWT (Mt)Average Age

Shipping Fleet

Crude Oil carrierVLCC 21,898,385 14.00

Suezmax39.50

Aframax911.70

Product CarrierPanamax2728,881 19.00

Medium Range911.00

General Purpose622.20

Gas CarrierLPG Carrier245,97722.00

Dry Bulk CarrierPanamax1343,88510.00

Handymax321.00

Handysize625.30

Offshore Fleet

Offshore Support Vessels (OSV)Platform Supply Vessels413,2332.00

Anchor Handling Tug 810,74018.30

Supply Vessels31,29821.00

Anchor Handling Tugs193816.00

Diving Supply Vessels111,3828.50

Harbor Tugs14,80127.00

Construction Barge27,60031.60

Drilling Units

Source: Great Eastern Shipping Corporation, Annual Report 2005.

Capital Structure

The company began its trading business in 1948 with a capital of Rs.20 lakh. As on March 31, 2005, the companys authorized capital was Rs.3000 million comprising 30,00,00,000 equity shares of Rs.10 each and a paid-up capital of Rs.1903.40 million. The company repeatedly approached equity markets to raise resources. The company raised the capital through redeemable convertible bonds, and right issues. It also issued Global Depository Receipts and Euro dollar issue for raising capital. It issued bonus shares frequently to reinforce and bolster investors interests in the company. The company in 1984 first raised the capital in the market through redeemable convertible bonds with an option for rights issue. The company issued 12,77,500 secured redeemable bonds of Rs.100 each with rights option to convert 50 percent of each bond into 5 equity shares of Rs.10 each at par on 1 September 1985. The other 50 percent was to be exercised once between 1st March 1987 and 31st July 1987. The company gave the bondholders an option of converting the bonds into equity shares. Bondholders exercised their option in March 1986, where about 11,21,856 bonds were converted into 56,09,280 equity shares. The company had given an option of applying for the rights equity offered in October 1986. About 1,42,833 of the remaining bonds exercised their option to convert into equity shares. In 1986 the firm offered a rights issue of 1,87,78,893 shares at par in proportion of 1:2 and also allotted 3,16,300 shares to employees and 3,82,243 shares to its business associates. The rights issue was oversubscribed and the company, in order to retain the over subscription, issued additional shares of 46,94,974. In the same year, the company converted its debts into equity shares by allotting 11,000 shares. It also allotted 30,00,000 shares to International Finance Corporation (IFC) at a premium of Rs.3 per share. Again in 1990, IFC exercised the option of converting part of its outstanding loan into 3.25 million equity shares of Rs.10 each at a premium of Rs.16.44 per share. Later, in December 1990, 32,50,000 equity shares were allotted to IFC in terms of their right to convert the balance of loans.

The company capitalizing on Section 33AC of IT Act, which allows a 100 percent deduction of profits derived from the shipping business provided that amount is transferred to a reserve account. According to Section 33AC, the shipping companies can transfer an amount equivalent to, twice the aggregate of the paid-up share capital, the general reserves and the share premium account to that reserve account (development rebate account) and deploy this amount for acquiring or building only new ships. GE SHIPPING gaining benefits from the IT Act increased its paid-up capital more than four times by the end of 1990s. The tax benefits were removed in 2004 and the government introduced tonnage tax.

Exhibit 9: Capital History of Great Eastern Shipping

YearShares IssuedDetails

1985-8611,996,780Conversion of Debebtures

1986-8726,829,464Rights at Par 1:2; allotment to IFC (at Rs.13 per share, conversion of debentures)

1987-883,692,620Conversion of bonds, Allotment to IFC at Rs.16.87 per share

1990-913,250,000Allotment to IFC at par

1991-9214,263,074Bonus 1: 5

1993-94108,338,343GDR issue at Rs 100 per share; conversions of loans, Rights Issue 2:5

1995-968,490,791Merger with GAL

Source: www.greatship.com

GE SHIPPING BuybackGE SHIPPING, being in a highly cyclical business, where temporary profits upswings alternate with long slack periods, has weathered many downturns in the industry and proved its ability by posting strong financials, generating steady cash for acquisition of new ships. In the post liberalized economy scenario, the firm saw new opportunities and at the same time was exposed to additional challenges and difficulties.

The company embarked on a replacement-cum-modernization program in early 90s. The companys offshore services division GAL Offshore Services Ltd. merged with GE Shipping in March 1995 and the company commissioned three distinct activities under its offshore division- (i) Operation of tugs comprising Offshore Supply Vessels (OSV), harbor tugs and anchor handling tugs (ii) Oil drilling and (iii) Offshore constructions. The merger was approved with swap ratio of7 GES shares for every 4 GE shipping shares. In 1995, GE SHIPPING also set up a treasury division under its modernization program for managing cash surpluses for effective deployment of funds in ship purchases. The company had a surplus fund of Rs.3 billion raised from GDR issues. The company acquired 184 built handymax bulk carriers and 1982-built product carrier under the company replacement and modernization program. The company switched its trade patterns by moving towards voyage charter reducing its coastal services. Under the liberalized EXIM policy, the company began acquiring ships under self-financing scheme.

The Shipping industry being in down cycle, the company ventured into real estate business by 1992 and over a period of time spread its operations in Mumbai, Navi Mumbai, Gurgaon, Pune and Bangalore. GESCO Corporation faced a hostile takeover from the Delhi-based Dalmia Group. GE SHIPPING facing hostile takeovers began increasing its stake in GE Shipping through buy-back of its shares. The Sheths hold a very low equity of 13 percent, while FIs, GDR holders and small shareholders owned the rest. The company in December 2000 announced to buy-back shares from open market worth a size of Rs.1500 million. The offer was opened between 26 December 2000 and 17 April 2001. The company bought back 42,940,921 shares from the open market paying about Rs.34.91 per share. The company paid about Rs.1,499,065,552 towards the consideration. Following the company buy-back program, the companys paid-up equity share capital had fallen to Rs.2159.10 million, and the share of promoter holding was 19.70 percent, while the FIs holding was 16.03 percent, FIIss 6 percent, IFCs 8.29 percent, GDR holders 4 percent and others 46 percent. The company again in August 2001 announced a second buy-back of shares from the open market at a price not exceeding Rs.42 per share upto a maximum extent of Rs.1000 million. The offer was opened on 23 August 2001 and closed on 25 July 2002. The company bought back 25,594,168 shares from the open market at a price of Rs.28.27. The company paid about Rs.723,500,000 towards the consideration. With the two rounds of buy-back of equity, the promoters equity share increased by about 10 percent to 24.53 at the end of September 2002. While the promoter group of GE shipping increased its control over the ownership of the company from the buy-back, industry sources believed that exiting shareholders got a better deal out of the exercise. Industry analysts believe that the price of GE SHIPPING was hovering around Rs.17.00, and the speculation of buy-back from the company raised the share price to Rs.35 at the beginning of the December 2000. And after the secondbuy-back the price of the share came down to Rs.27.35 towards the closure of the buy-back. The companys cash outflow was to an effect of Rs.1750 million and the company issued preference shares for Rs.950 million close on the heels of first round of buy-back.

Company Performance

GE SHIPPING, like others in the shipping industry, suffered during the South East Asia crisis and also when the dry bulk shipment was facing its worst years during 1999. Its earnings from the vessels and values fell affecting its profitability and also the vessels operating days. The South East Asia crisis affected its earnings from tankers. The decline in oil prices affected its offshore vessel division. The company saw upturn during the last quarter of FY2000 when the shipping industry saw upturn in dry bulk shipping and vessel transportation following revival in South East Asian countries and increase in production of oil by OPEC countries.

Exhibit 10: Company Revenue Performance 2003-05

Source: www.greatship.comSeeing the business opportunities in offshore business, the company began focusing on the fleet expansion and modernization of its assets for greater international exposure. The company also focused on de-risk strategies against the risks technical and commercial arising from market. The shipping cycle in upturn for the last two years due to increase in freight rates due to increase in demand for crude oil carriers, the company in the year 2002 went for its capacity expansion. The company marked Rs.7000 million towards capacity expansion over the next two years. Earlier in 2001, the company purchased two 1996 built double hull product carriers at a cost of US$47 million. The company also began focusing on tanker business. The company, in 2002, set aside a substantial fund for buying out government stake in Shipping Corporation of India, the government owned public sector shipping company. But when the disinvestments program did not takeoff, in 2003 the company decided to move towards more investment program, investing in new and old ships and concentrating both on shipping and offshore division. The company unveiled a mega expansion program of $170 million in 2004 for acquisition of new and old ships. The company also planned to utilize its huge cash reserves of Rs.6100 million kept aside for buying out SCI. Speaking on its expansion program, the Managing Director of GE Shipping Mr. Bharath Sheth said An aborted bid on Shipping Corporation of India (SCI) forced us to have a huge cash reserve.

We were saving every penny for the divestment for nearly a year. We did not embark on any expansion program during 2002 and with the disinvestments process delayed, the company is actively looking at shipping market for purchase. Vijay Sheth, the Managing Director of offshore division defending the companys earlier decision of keeping huge reserves said, Shipping is opportunistic, and one needs to move quickly when the opportunity strikes. The company utilized its reserves for financing Rs.1000 million during the Iraq war and it is very difficult to raise funds during the war time.

Exhibit 11: Company Revenues and Profit After Tax and Dividend Payouts


The company in the current fiscal year 2006 drew up long-term plans for its offshore business. With the oil prices soaring high and more oil exploration taking place, the company finds an opportunity to increase its earnings from its offshore services. The company intends to capitalize on the discovery of new found gas reserves on both east and west coasts of India. The company is focusing on acquiring new vessels and has place, new building order. The company, to focus more on offshore business, has devised to restructure GE Shipping through demerger.

De-Merger Plan

The Board of Great Eastern Shipping on 15 September 2005 approved a demerger ratio of 80:20 for the proposed demerger of its offshore business. The new entity is christened as Great Offshore Limited (GOL) and will be lead by Vijay Sheth who was earlier managing the offshore business. After the board approval, the GE Shipping was split into Shipping and Offshore divisions in the ratio of 80:20. As per the scheme approved by the Board, all shareholders will receive one fully paid share of GOL of Rs.10 each for every five shares held and GOL will be listed on Bombay Stock Exchange and National Stock Exchange. As a consequence of the split, the shares held in GE Shipping will be re-organized to four shares of Rs.10 each for every five shares held currently.

According to Bharath Sheth, the Deputy Chairman and Managing Director of GE Shipping, who will be leading GE Shipping said the new entity GOL will have 31 offshore vessels comprising of 17 Offshore Supply Vessels (OSV), 2 drilling rigs, 1 construction barge and 11 harbor tugs. GOL will also be buying 7 more OSVs as part of its fleet expansion plan. The new firm GOLs business now consists of drilling services, marine logistics, marine construction and port/terminal services.

The restructuring of GE Shipping was undertaken on the recommendation of Deloitte Haskins & Sells and Kalyaniwalla & Mistry. According to the company reports there would no change in overall shareholding pattern, as all shareholders will be issued shares in GOL on proportionate basis. According to the company, the paid-up share capital of Great Offshore will be Rs.381 million, and that of GE Shipping will be Rs.1523 million, against the existing Rs.1903 million. The net worth of GOL as on April 1, 05, would stand at Rs.4461 million and that of GE Shipping will stand re-organized at Rs.17.41 billion, against the existing Rs.21.87 billion. On the day of announcement of the demerger, the shares of GE Shipping fell 1.5% to Rs.211 from Rs.214. Soon after the announcement of restructuring of GE Shipping, CRISIL placed GE Shippings Rs.3,835 non-convertible debenture issues on Rating watch. The non-convertible debentures were earlier given AAA/Stable.

Exhibit 12: Split-up Financials of the Two Companies

Post Merger (Rs. million)GE Shipping Great Offshore Ltd.

Equity1,523.00381.00

Networth17,410.004,461.00

Debt18,598.0002,200.00

Interest Cost719.00110.00

Cash as on 1st April 20059,865.00500.00

BV per ShareRs.114Rs.117

NAV per ShareRs.282 on June 30Rs.45

EPS pre TaxRs.44Rs.72

ROCE (%)5-7%>10

Source:www.indiainfoline.com

While some analysts consider that the restructuring is split between the family businesses, a few analysts from the industry sources believe the demerger will bring stability in offshore business. As said earlier, shipping business is closely correlated with business cycles, movement in freight rates compared to offshore business; industry sources believe that the offshore business will get more amount of resources than being along with GE Shipping. Prior to demerger, the company has lined up an expenditure of US$250 million for up to August 2007, of which US$160 million was designated to shipping business and the rest US$ 90 million for offshore business.

Industry sources expressing optimism over the demerger point out that while the leverage for offshore division stood at 0.5x,whereas the company leverage stood at 0.9x. Some Analysts point out that though offshore revenues formed 20 percent of the total revenue of the company, only about 9-10 percent of the revenue is from stable source and other part is earned from the OSVs business, which continues to be Volatile. And moreover the companys drilling rig Kedaranath capable of operating in water depths of 300 ft and 20,000 drilling depth was dry-docked for refurbishment and its other jig Badrinath capable of operating in water depths upto 600 ft and 20,000 ft drilling depth required repairs as its sustained damages as a consequences of bad weather. As a result, the offshore division for reported lower revenue in Q1 of 2005-06 and also its harbor tugs.

With the demerger approved by the shareholders and the business prospectus for both shipping and offshore business looking bright due to increase in freight rates, despite a slow down in the month of July and August in 2005, the company expect there would be no loss of synergies as customers to both the newly formed entities are different. Moreover with the growing demand for transport of crude and petroleum products and growing offshore exploration in the country, the company expects to reap profits in near future.

Annexure I

World Merchant Fleet by National and Foreign Flag 1995-2004

Source: www.imo.org

Annexure II

National and Foreign Flag Registered Ships by Division of Age and Ship type as of January 1st, 2004

Source: www.imo.org

Annexure III

World Tanker Average Sport Earnings

Source: www.imo.org

Annexure IV

World Dry Bulk Average Sport Earnings

Source: www.imo.org

Annexure V

Company Share Price compared co BSE Index

Source: ICFAI Research Team.

Annexure VI Capital Structure of GE ShippingGESHIPPINGMar-95Mar-96Mar-97Mar-98Mar-99Mar-00Mar-01Mar-02Mar-03Mar-04Mar-05

Authorised 5000.005000.005000.005000.005000.005000.005000.005000.005000.005000.005000.00

Issued2797.602882.302882.302882.302882.302594.102183.401908.702594.102183.401908.70

Paid-up Equity2789.402875.402875.602875.602876.002588.402177.801903.402588.402177.801903.40

Preference0.000.000.000.000.000.00950.000.000.0095.000.00

Bonus Equity388.20388.20388.20388.20388.20388.20388.20388.20388.20388.20388.20


Annexure VIIEquity PatternNo. of Shares% of Total SharesNo. of Shares% of Total SharesNo. of Shares% of Total Shares

Promoters Holding4,55,05,01823.914,54,90,31823.904,61,55,80424.25

Indian promoters#4,55,05,01823.914,54,90,31823.904,61,55,80424.25

Private Holding 4,55,05,01823.914,54,90,31823.904,61,55,80424.25

Govt. Holding 0.000.0000.0000.00

Foreign promoters / collaborators0.000.0000.0000.00

Non-promoters Holding14,48,34,95776.0914,48,52,08776.1014,41,86,60175.75

Institutional investors6,53,49,03834.336,43,97,68633.836,70,99,05235.25

Mutual Funds and UTI2,00,10,23110.511,92,04,46910.091,46,49,7917.70

Banks, FIs, Insurance Cos.2,48,58,06713.062,62,17,49513.772,54,37,71313.36

FIIs2,04,80,74010.761,89,75,7229.972,70,11,54814.19

Others7,94,85,91941.768,04,54,40142.277,70,87,54940.50

Private corporate bodies 1,39,35,0947.321,47,55,2257.751,33,56,7307.02

Indian public6,28,31,81433.016,36,66,34233.456,18,04,34432.47

NRIs/OCBs27,19,0111.4316,26,9600.8515,25,1010.80

Any other00.004,05,8740.214,01,3740.21

Total equity holding19,03,39,975100.0019,03,42,405100.0019,03,42,405100.00


Annexure VIII

Financial Report of GE Shipping Corporation1995-961996-971997-981998-991999-002000-012001-022002-032003-042004-05

PROFIT & LOSS A/C

Revenues:

Income from operations72,384 78,122 88,102 92,896 91,464 108,068 117,243 95,547 135,194 204,920

Profit on sale of ships3,383 956 1,693 54 4,795 3,598 58 1,598 860 2,475

Other income7,357 8,729 6,615 5,090 3,187 3,836 2,234 3,570 6,581 4,528

83,124 87,807 96,410 98,040 99,446 115,502 119,535 100,715 142,635 211,923

Expenditure:

Operating expenses49,237 48,546 49,508 53,951 57,242 60,808 60,798 48,438 61,318 84,395

Administration expenses3,911 3,962 4,844 5,894 5,361 7,297 8,259 7,004 7,317 11,623

Operating profit (PBIDT)29,976 35,299 42,058 38,195 36,843 47,397 50,478 45,273 74,000 115,905

Interest & finance charges4,533 6,906 6,504 5,782 6,081 7,174 5,027 3,900 4,695 8,287

PBDT25,443 28,393 35,554 32,413 30,762 40,223 45,451 41,373 69,305 107,618

Depreciation9,031 12,251 15,581 16,470 18,117 20,082 20,173 16,798 20,121 28,500

Provisions & Capitalizations(1,278)850 500

PBT17,690 16,142 19,123 15,443 12,645 20,141 25,278 24,575 49,184 79,118

Tax:

Current2,450 2,500 2,700 2,800 1,600 2,400 2,600 850 2,700 2,200

Deferred1,928 2,074 (263) (4,738)

PAT15,240 13,642 16,423 12,643 11,045 17,741 20,750 21,651 46,747 81,656

BALANCE SHEET

What the Company owned

Net Block117,487 132,254 134,190 165,911 168,043 152,352 168,076 167,258 232,852 287,418

Ships under construction4,477 7,522 10,643 5,163 - 9,192 12,950 15,002 22,343 32,715

Investments & net Current assets60,385 58,691 55,213 41,572 43,193 37,644 46,065 56,430 59,938 106,148

Deferred Taxation (Net) 406

Total182,349 198,467 200,046 212,646 211,236 199,188 227,091 238,690 315,133 426,687

What the Company owned

Secured loans71,705 64,536 62,161 73,405 80,488 69,347 79,485 88,553 145,900 207,975

Unsecured loans19,037 21,014 20,067 20,047 13,292 13,908 13,533

Deferred Taxation (Net)10,072 12,739 12,476

Total71,705 83,573 83,175 93,472 100,535 82,639 103,465 114,825 158,376 207,975

Shareholders' Funds

Equity Share Capital28,754 28,756 28,756 28,760 25,884 21,778 20,256 19,033 19,033 19,034

Preference Share Capital9,500 17,000 7,500 7,500

Reserves & surplus83,019 87,104 91,141 92,334 86,927 87,320 88,031 98,425 130,693 199,870

Misc. Expd. (to the

extent not w/off) (1,129) (966) (3,026) (1,920) (2,110) (2,049) (1,661) (1,093) (469) (192)

Total110,644 114,894 116,871 119,174 110,701 116,549 123,626 123,865 156,757 218,712

Debt. Equity ratio (times)1 1 1 1 1 1 1 1 1 1

Eaming per Share (in Rs.)5 5 6 4 4 8 9 11 24 42

Dividend per Share (in Rs.)2 3 4 2 2 3 4 4 7 9


Annexure IX

Fixed AssetsParticularsCostDepreciationNet Block

As atApril 1, 2004Additions forthe yearDeductions for the year (Note 4(b)As at March 31, 2005Upto March 31, 2004Adjustments in respect of Assets sold/discardedFor the year Upto March 31, 2005Impairment Upto March 31, 2005 (Note 4(d)]As at March 31, 2005

Fleet352689878398872431656128135282227714153027278629

2735279771918557352689114938621119408128135224554

Plant & Machinery:

Rigs and Barges4418441843447344171

Others441844184344434474

320581238782292372278600

128796732011799661622991

Land437144448154815

(Freehold & Perpetual Lease) 43881743714371

Land (Leashold)55114

55114

Ownership Flats and Office Premises*46201172444914708014615361352778

4497494371462013736916614703150

Furniture, Fixures and Office Equipment26672627728522363722472538314

338291806266727667933902363304

Vehicles801238188851497171248574277

7731209280141862141497304

Sub-Total369891893659332449924137039316828500162371135287418

2922779842420810369891125019810120121137039232852

32715

22343

320133

255195

Ships under construction/Capital Work-in-Progress

* The Ownership Flats & Office Premises include Rs.13,020 (Previous Year Rs.15,770), being value of shares held in various co-operative societies.

Previous year figures are in italics.


References1.DNV Classification News on Maritime Industry No.4, September 2005.

2.Review of Maritime Transport Report 2004, Report 2005, UNCTAD.

3.www.angelbroking.com, 2005 report on GE Shipping.

4.www.balticexchange.com

5.www.ifsl.org.uk Maritime Services, October 2005.

6.www.imo.com (international maritime web site).

Business Line September 16, 2005.

Dead weight tonnage is a measure of ship, which is the total weight including cargo, fuel, water, engine, crew and stores which the ship can carry when immersed to a load line called summer load line. Gross Tonnage is a measure of the carrying capacity of the vessel and 100 cubic feet of capacity are equivalent to one gross ton. The gross registered tonnage includes space for cargo and space occupied by machinery, bunkers, water ballast and crews.

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