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• Brief Snapshot of GE Shipping (GES)• Analysis of Fleets, assets, employees• Past Financials• The Shipping Industry • Investment Perspective• Valuation

The Shipping IndustryGlobal Perspective On

Shipping Industry

Shipping Industry

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

Trends in Tanker Segment

Trends in Bulk Segments

Trends in Container Segments

Offshore Business

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

The Shipping IndustryIndian Shipping Industry

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

Indian Shipping Fleet Growth

Indian Tonnage Vs World

• Introduction of tonnage tax to boost Indian tonnage

• Share of Indian ships in Indian overseas trade at 15%

Indian Fleet Vs World

India Vs world - Summary

Ships

Crude Oil Carriers:capable of transporting

vast quantities of liquids

Class Tonnage (dwt) Description

Panamax 60,000 – 80,000 Capable of fitting through Panama canal

Aframax 80,000 – 120,000 based on the Average Freight Rate Assessment (AFRA) tanker rate system.

Suezmax 130,000 – 160,000 Capable of fitting through the Suezcanal

VLCC 240,000 – 320,000 Very large crude oil carrier

ULCC 350,000 – 500,000 Ultra large crude oil carrier

Ships

Dry Bulk Carriers:Used to transporting bulk

Cargo items such as ore, grains

Class Tonnage (dwt) Description

Handysize 10,000 – 40,000

Handymax 40,000 – 60,000

Panamax 60,000 – 100,000 Capable of fitting through the Suezcanal

Capesize 100,000 + Too large to traverse through the Suez or Panama canal. These go round the Cape of Good hope

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

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

Great Eastern Shipping Corp

GE Shipping : Company Profile

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

Business Profile

The Great Eastern Shipping Company Ltd.

Shipping business Offshore 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

Fleet – Asset profile

Fleet (41)2.96 mn dwt

13.1 yrs

TonnageAvg.Age

Time Charter Yields

Time Charter Yields (TCY) ($/day)

2006 - 2007 2005 – 2006

Q1 Q2 Q1 Q2

Tanker - Crude 26,582 32,015 26,922 19,847

- Product 19,908 20,834 19,437 20,293

LPG Carrier 16,386 16,386 16,505 16,386

Dry Bulk 15,487 15,231 22,590 15,545

Employees

Before Demerger

Onshore staff

Floating Staff

No. of Employees

174

529

After the Demerger 80 odd employees were shifted to the Offshore business

Employee Cost

2006

( USD)

2005

(INR)

2006

(USD)

2005

(INR)

Wages & Salaries 99151 4386440 105485 4738386

Social Security Cost

10470 463193 11212 503643

Other Pension Cost

39183 1733456 53173 2388531

Total 148804 6583089 169870 7630560

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

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

Industry Drivers for Shipping Industry

Drivers for the Shipping Industry

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

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

Financial HighlightsFinancials of GE Shipping

Financial Highlights

The Last Five Years…

* Residual Company

Cash Flow Statement

Balance Sheet

GE Shipping De-merger

Demerger of GE Shipping

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”

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 Offs

hore Activitie

s through subsidiary

Great Ship In

dia Ltd. Is poised to

benefit fro

m the in

crease in E&P

activitie

s. Investin

g into GE Shipping at it

s current lo

w valuations is an

attractiv

e proposition.

GE Shipping De-merger

Valuation of GE Shipping

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.

Revenue Forecast Assumptions.

New Building Order Book Position Offshore Support Vessels Platform Supply Vessel Apr-06 Q2 FY09 Platform Supply Vessel Apr-06 Q3 FY09 Anchor Handling Tug cum Supply Vessel Aug-06 Q3 FY08 Anchor Handling Tug cum Supply Vessel Aug-06 Q4 FY08 Anchor Handling Tug cum Supply Vessel Sep-06 H1 CY09 Anchor Handling Tug cum Supply Vessel Sep-06 H1 CY09 Anchor Handling Tug cum Supply Vessel Sep-06 H1 CY09 Anchor Handling Tug cum Supply Vessel Sep-06 H1 CY09 Exploration Rig Jun-06 Q4 CY09 Offshore Support Vessels Platform Supply Vessel May-06 H2 FY07 Platform Supply Vessel Sep-06 Q2 FY08

Source -Company Data

Month of Contracting

Date of Delivery

Category

Greatship (India) - Vessel Delivery Schedule

Vessel Hull Dwt Delivery

MR product carrier Double 47400 Feb '07

MR product carrier Double 47400 March '07

MR product carrier Double 47400 Aug '07

MR product/chemical carrier Double 37000 Feb '07

MR product/chemical carrier Double 37000 April '07

LR-1 product tanker Double 74500 end 2008 LR-1 product tanker Double 74500 end 2008 LR-1 product tanker Double 74500 mid 2009 LR-1 product tanker Double 74500 mid 2009 Suezmax Double 147834 3QFY07 Source -Company Data

GE Shipping - Vessel Delivery Schedule

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.

Valuation Forecasts

FY07F FY08 F FY09F FY10F

VLCC 59400 59400 50490 50490

Suezmax 48438 48438 41172 41172

Aframax 30348 30348 28527 28527

Product tankers 22427 22395 20533 20532

Dry-bulk 20666 20834 18923 18923

Average yields (US$/day)

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:

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%.

GE Shipping De-merger

Relative Valuation

Comparable Company Profile

Competition Analysis

Company Sales Mkt capPromoters holding D/E Beta

Essar Shipping 678.81 1438.02 47.25% 0.53 1.3

GE shipping 1934.77 3181.68 27.26% 0.86 0.6654

Mercator lines 621.86 613.01 43.08% 2.14 0.8464

SCI 3531.02 4433.52 80.12% 0.35 0.7122Varun

Shipping 642.93 875.18 45.29% 2.35 0.9184

Comparable Multiples

Company EV/EBIDTA P/BV

Essar Shipping 8.41 0.67

GE shipping 4.37 1.33

Mercator lines 6.27 1.27

SCI 2.71 1.02

Varun Shipping 5.61 1.35

Industry Average 4.44 1.11

Price per share (Rs) 228 233

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

Market Vs. Book & NAVMarket Price Performance Vs. BV and NAV

0

50

100

150

200

250

300

350

400

Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Q1 07

BV NAV Market Price

•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.

Valuation Assessment

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

GE Shipping De-merger

Investment Case for GE Shipping

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

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

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

GE Shipping De-merger

Essar Shipping

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

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

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

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)

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

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

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

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

Questions