Brief Summary of Business
GESCO’s primary business is the operation its ships on short and long-term leases to third-parties, many of which are based abroad. As one employee explained to me - It’s no different from an individual who owns 10 Innovas which are then put to use. Some of them are operated by the individual for short trips with the fare paid at the end of the trip. Some others are rented out to the customer for a month or longer. Similarly, GESCO owns ships and offers some of them for lease either on a per-voyage basis (e.g. transport crude oil from the Middle East to Europe) while others are leased out to customers for longer periods.
A secondary but related line of business is that of Off Shore Supply where the company operates a fleet of smaller ships transporting supplies, manpower and other support to off-shore oil rigs.
For all the kinds of ships operated by GESCO, the lesee can choose to use GESCO’s crew and maintenance (wet lease) or provide their own crew and maintenance (dry lease) - Wet leases offer higher margins.
GESCO has a decent-sized fleet of tankers, bulk carriers and a single LPG carrier. They do not operate any container ships. The tankers almost always carry crude oil though they can be converted to carry other forms of oil with minimum expense & time. Bulk carriers carry bulk goods in dry form (e.g. coal, iron, wheat etc. that are not packaged into boxes or sacks). LPG carriers are basically floating gas tanks which carry refrigerated LPG fuel in sealed & pressurized tanks.
For off-shore support, the company also owns several small ships and drilling rigs.
- The company’s focus on ships that only transport basic raw materials (crude oil, bulk cargo) has allowed it to survive the current downturn in the market with decent results. On the other hand, shipping companies which have a large proportion of container ships (i.e. carrying finished goods) have been badly affected.
- The company is very aggressive in looking for opportunities to sell ships when they get good offers. These can later be easily replaced when other opportunities to buy ships cheaply comes along. For example: FY 2011-12 acquired 5, sold 6 and sold 1 under construction, FY2012-13 acquired 4 and sold 1, FT2013-14 ordered 1, FY2014-15 acquired 3, sold 4 and ordered 3
- GESCO consistently keeps a large amount of liquid assets to allow them to quickly act on attractive investments or attractive deals on ships. They frequently lend funds to other companies as short-term loans (few days to a month duration) at attractive rates of interest.
- The promoters are very active and recognized in the industry lobbying groups and councils.
- The company operates a training center at Lonavala which trains new cadets providing a ready pool of employees of a consistent quality. The school is recognized as one of the top-tier schools in its field in India.
- A large proportion of the earnings are in Dollars which is beneficial in the current situation.
- The current government is actively encouraging the growth of the shipping industry. While the bulk of the government’s focus is on coastal shipping where GESCO does not operate, the improved infrastructure and goods movement over water will definitely have a beneficial influence in this sector.
- The bulk of the operational profits comes from tanker leases. This is very dependent on the quantum of production of oil by OPEC. A cut in drilling to stimulate prices will reduce margins.
- Bulk cargo profit margins are already very low.
- The current low oil prices are detrimental to their offshore services arm.
- Senior crew are hard to find and expensive - as an Indian flagged shipping company, employees have to pay income tax in the top slabs which they would not have to pay when working for an international steamer line. As a result the company has to pay higher rates for quality senior personnel.
- Overall, the management is above average and is committed to the company as their primary business (other businesses are very small).
- The middle-generation (Bharat Seth & Ravi Seth) is taking over the reigns with the partial retirement of KM Seth. The transition should go smoothly since Bharat Seth has been taking an increasing share of the operational responsibilities for quite some time now.
- Below the director level, the management is extremely capable and experienced.
Other Points To Consider
- The revenues of GESCO are linked to the rates of the Baltic Dry Index which indicates the worldwide trend of ship charter costs. Currently the BDI is at one of its lowest points. I cannot make any predictions on when it will improve since that depends on macro-economic conditions, but I will say that GESCO’s revenues will trail the performance of the BDI by a few months. e.g. If the BDI increases (worldwide average charter costs increase) then as the existing leases expire, the new leases take effect at the higher rates then prevalent.
- The shipping industry is one of the few where the layman can easily track how well the assets of the company are utilized. I use http://www.marinetraffic.com/ to search for the current position of the ships in the fleet. A ship in port most of the time indicates poor utilization. Since ships have a very high fixed expenses (you can’t ‘turn off’ a ship like a car or aircraft) every hour in port is expensive. On the other hand the same ship running between the same port pair indicates that it has most probably been leased out. With leasing, the expenses of running the ship are usually the lesee’s responsibility.
- Most of the analysis here has come from my observations and interactions with GESCO and its middle/senior management over several years. I am otherwise not affiliated with them in any way.
- I have purposely avoided talking about financials since that is not one of my strengths and I am sure others can do a better job than anything I can do in that matter.
- I have a small position (< Rs.20k) in the company and am looking to stay invested over a long term.