The Hindu Business Line : Great Eastern Shipping: Buy

AN investment can be considered in Great Eastern Shipping (Rs 230) in the homestretch to the completion of the restructuring process. There could be value to be unlocked on the upside when the division of businesses is complete and shares of the shipping and offshore services business are listed separately.

Investors could use any price decline linked to broad markets to accumulate the stock. Investors should also get shares of both the companies and ensure that they are in the fray when the two stocks start to trade separately. Buy this stock with a one-to two-year perspective.

Going by the valuation commanded by other players in the drilling and oil-support services business, the offshore business of Great Eastern Shipping is likely to attract considerable investor support.

The shipping business may also enjoy an improvement in valuation levels, as key profitability parameters are likely to look up; the offshore business has acted as a drag on the stock as well on resources. We also believe that the swap ratio and division of cash resources have been done in a manner that ensures a fair deal for shareholders.

Great Eastern Shipping may be hard-pressed to replicate the robust growth rates it did over the past couple of years, as the freight market may have limited room on the upside. Given the buoyant demand for commodities such as iron ore, coal and oil, freight rates are likely to settle at higher average levels as compared to what prevailed a few years ago.

Great Eastern Shipping is well placed to maintain earnings at levels that would be attractive from a valuation perspective. At current prices, markets have also priced in a decline in earnings or a period of flat growth rates. The stock still remains an attractive dividend-yield play. These aspects coupled with further appreciation linked to the demerger cushions the downside risk.

The company is also well on track to expand and possesses a contemporary fleet without any notable expansion in the equity base. Shareholders are likely to benefit from the scaling up of revenues that is likely as fleet expansion plans gather momentum over the next couple of years.

The principal risk to our recommendation is a sharp slide in freight rates.

S.Vaidya Nathan

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