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Due Diligence of GE Shipping

Due Diligence of GE Shipping. 51% acquisition by Essar Ltd. Group 2 Abhishek Paronigar PGP-05-041 Mansi Tandon PGP-05-066 Soumyadipta Dey PGP-05-083 Richa Gupta PGP-05-092 Rohit Kanuga PGP-05-098. Overview of the presentation. Global Perspective of Shipping Industry

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Due Diligence of GE Shipping

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

  2. Group 2 Abhishek Paronigar PGP-05-041 Mansi Tandon PGP-05-066 Soumyadipta Dey PGP-05-083 Richa Gupta PGP-05-092 Rohit Kanuga PGP-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

  8. Trends in Bulk Segments

  9. Trends in Container Segments

  10. Offshore Business

  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 6th largest Oil Consumer (112mt per annum) 2nd largest growing market (10 yr CAGR at 6.1%) 7th 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

  19. Ships Dry Bulk Carriers: Used to transporting bulk Cargo items such as ore, grains

  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 3rd, 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 16th 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 business Offshore business Wholly owned subsidiary Greatship (India) Ltd. Tanker Dry Bulk 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 Crude Oil Carriers (14) Product Carriers (16) LPG Carriers (2) 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  VLCC (1) Panamax (2) Panamax (1) Suezmax (5) Medium range (8) Handymax (5) Aframax (8) General purpose (6) Handysize (3) Fleet (41) 2.96 mn dwt 13.1 yrs Tonnage Avg.Age

  26. Time Charter Yields Time Charter Yields (TCY) ($/day)

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

  28. Employee Cost

  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 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. Market gives a better premium to Offshore companies owing to their strong earnings potential

  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. Apart from looking at the market factors, the Sales projections have been made considering the Vessel Delivery Schedules of GE Shipping and its Subsidiary. 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.

  46. Valuation Forecasts 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. 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 Average Yields:

  47. DCF Valuation 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

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