Investors with a two-year plus perspective can consider buying the shares of The Great Eastern Shipping Company (GESCO), the country's largest private sector shipper.

At its current price of Rs 274, the stock has fallen nearly 30 per cent from its high in November last year, and trades at a steep discount (35 per cent) to its consolidated net asset value.

Its trailing 12-month price-to-earnings ratio (around nine times) is also lower than that of global shipping companies.

Much of this poor show flows from the continued weakness in global shipping freight rates, thanks to an oversupplied market overshadowing improved demand dynamics in both the bulk and tanker categories – a scenario likely to continue for a year or more. This saw GESCO register a 38 per cent decline in profits in the recent March quarter, if one leaves out an impairment charge on sale of vessels.

That said, GESCO's efforts to hedge its business model with an increasing focus towards the high-margin offshore business, and a solid financial position should see it emerge from the turbulence, bruised but still in good fighting shape.

Fairly firm trends in crude oil prices, which provide an incentive for increased exploration activity, bode well for GESCO's offshore business, which is equipped with a modern fleet and commands better rates. This segment in which the company has ambitious expansion plans should help offset, at least to some extent, the weakness in the shipping segment.

In 2010-11, the offshore segment accounted for around a third of the company's revenues but almost 44 per cent of its operating profits. This contribution is set to increase further. Buoyancy in rates has also resulted in margins in the offshore segment improve strongly, from around 24 per cent in 2009-10 to 37 per cent in 2010-11.

Also, freight rates in the currently out-of-favour shipping segment may have bottomed out, given that they are close to average historic lows. Besides, GESCO with its strong financial position (cash balance of more than Rs 1,300 crore and debt-to-equity ratio of around 1) has enough financial muscle to capitalise on further decreases in asset values in the shipping segment.

This will help the company when the cycle turns. GESCO has also been a consistent dividend paying company, with dividend yield of around 3 per cent even in tough years.

The key risk to our recommendation is a major deterioration in the global economy which can keep shipping freight rates depressed longer than expected.

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