Essar Shipping Ltd:

CMP-->Rs.24.85.

Recommendations: Buy. Price target Rs.37 and Rs.54.

Essar Shipping Ltd is a flagship shipping company of the erstwhile Essar Group which has interest in various fields, starting from steel production to shipping. AN INVESTMENT in the Essar Shipping Ltd stock at Rs.24.85 may be considered. As there is likelihood of sizeable scaling up of revenues and earnings, the stock holds potential for considerable appreciation in value. A favourable industry environment in terms of freight rates, an expanded fleet, the contemporary nature of the fleet( comparatively young fleet) that ensures compliance with the increasingly stringent International safety norms that fetches higher charter rates, and the emerging presence in the very large crude carrier (VLCC) space are likely to drive earnings growth. Essar Shipping Ltd(ESL) is one of the world’s leading integrated sea logistics companies, with a special focus on transportation solutions for the global energy business. It has an unblemished track record of over two decades in the transportation of crude and bulk cargo. A strong management team of experienced marine professionals steers the company, maintaining customer focus, world-class operations, an impressive safety record and a consistent financial performance. Its fleet accounts for almost 14% of India’s shipping fleet and it owns the country’s largest VLCC (Very Large Crude Carrier), which is also India’s first double hull, double bottom VLCC. As an end-to-end sea logistics provider, ESL serves customers across the value chain- from ‘rig to refinery-and beyond’; offering services in the areas of bulk transport, supply chain management and storage and distribution. It is a global experts in the energy business, with over 20 years of oil-handling experience.

ESL operates in three main business areas:

1.First, its energy transportation group provides sea transportation management services to the global energy industry, including US, European and Indian oil companies. A key advantage is that it is one of the world's largest independent owners/operators of Suezmax tankers. In March 2004 it acquired India's first and largest double-hull double-bottom VLCC 2. Second, ESL's integrated bulk/petroleum product transportation services group offers supply chain management services for the sea transportation of bulk cargo and refined products. This group services steel, power, cement, fertiliser and petroleum companies in South East Asia and India, for clients such as Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum. ESL also handles 5 million metric tonnes of coastal dry bulk cargo annually. 3. Third, to complete the integrated solutions chain, its crude oil and refined products handling and storage group provides storage and distribution services in India. ESL is a truly global company, deriving nearly three-quarters(75%) of revenues from international business. The fleet is modern, sophisticated, and fuel-efficient and one of India's youngest, with an average age of 14 years against a world average of 19 years.

World -class standards:

Essar Shipping is one of the world's lowest-cost operators, with an exemplary safety record. It is the first Indian shipping company: a) to obtain the International Safety Management (ISM) code for its fleet of bulkers and tankers in July 1995, three years ahead of the International Maritime Organization's (IMO) deadline. b) to voluntarily comply with ISO 9002:1994 standards and have now upgraded to ISO 9001:2000 standards. Its vessels received the US Coast Guard's AMVER award for high maritime safety standards. c) to operate oil tankers in the highly competitive Atlantic region, especially to the US, which has stringent environment laws and heavy liabilities for failure.

d) to transport crude from the forbidding North Sea - Canada route, one of the more difficult routes in the international tanker trade It is among the first shipping companies in the world to comply with the International Ship and Port Security (ISPS) code. It is one of the first companies to progress towards providing optimum logistics solutions than just shipping. Its policy for an astute mix of long-term and spot contracts gives us a vessel utilisation rate of around 95%. Since trading assets wisely is crucial in the shipping business, ESL has invested consistently during recessions to be able to profitably encash assets during revivals. ESL is publicly listed and has remained financially strong even during periods of industry volatility, with consistently strong revenues and profits.

Restructuring of operations:

Essar Group has recently consolidated its shipping and logistic business under its overseas investment arm, Essar Global Ltd. Essar Global’s Cyprus-based subsidiary, Essar Shipping and Logistics Ltd will manage the business. Essar Shipping and Logistics Ltd(ESLL) would have three operating companies—Essar Shipping, Essar Logistics and Vadinar Oil Terminal. Earlier this year Essar Shipping Ltd in June,2006, sold Vadinar Oil and Essar Logistics to Essar Shipping and Logistics Ltd (ESLL) for $215 Million( Rs.968 Cr approx). It is worth noting that Essar Shipping & Logistics Ltd. hold 77% in Essar Shipping. Essar Shipping Ltd owns a modern fleet of 27 vessels, including VLCCS, tankers and bulk carriers. The Company has long standing relationships with major global and Indian oil companies like Shell, Exxon Mobil, Chevron BP Aramco, Texaco, Bharat Petroleum and Indian Oil Corporation. The Company is ISO 9000:2000 and ISO 140001 certified and has been recognized as the "Safest Indian Shipping Company" by DG Shipping, India in 2004. The freight market — tankers and dry cargo — has revved up over the past few months after slipping earlier this year from all-time high levels. The improvement in freight rates will be reflected in the subsequent quarter’s earnings of the company. The firm trends in freight rates and the expansion of the fleet are likely to be reflected in a more pronounced manner in the revenue streams of the next couple of quarters. The strength in the crude oil market suggests that the higher tanker freight could continue to be a growth driver. The acquisition of VLCC has come at a time when freight rates in this segment have been buoyant. The various shipping indices viz - Baltic Freight Index, Baltic Dry Index, Baltic Panamax Index have gone up by between 20-25% over the past 2 months are are likely to sustain at these levels as per analyst tracking the sector. The firm undertone in commodity prices — especially metals and ores — is likely to support the dry cargo freight market, as it indicates the underlying strength in demand. Last month, the Essar group was paid around Rs 3,825 crore to ramp up its holding in two group companies, Essar Shipping Ltd and Essar Oil, by buying out global depository receipts from international investors. In March, Essar Shipping acquired a very large crude carrier (VLCC) with a cargo capacity of 2,81,396 dead weight tonne (DWT) for Rs 550 crore. With this acquisition, Essar Shipping's fleet size increased to 27, with the total tonnage rising to 1.3 million DWT. Industry sources estimated the deal between Rs 525-550 Cr. The company plans to acquire more vessels, including Suemax, Panamax, mini bulk carriers, handymax, bulk carriers and barges. The company targets a young fleet with a mix of medium and large-sized tankers with sufficient bulk tonnage too. Essar Shipping derives almost 65% of the revenues from energy transportation, with the firm having long-term relationships with international oil majors such as Shell and Mobil. The balance coming from the dry bulk business. Since Essar Shipping derives almost 65% of the revenues from energy transportation is expected to get major benfit from the rise in crude prices and also due to shooting up of international freight rates. Essar Shipping Ltd said in June that it had sold Vadinar Oil and Essar Logistics to Essar Shipping and Logistics for $ 215 million. The last quarter results of the company were not that rosy due to the fall in the freight rates...and a number of other reasons. Hence, it registered a decline of 66% in its net profit to Rs 36.97 crore (Rs 110.37 crore). Net sales during the period rose 24% to Rs 279.57 crore from Rs 224.63 crore. Next why the revenues fell in the last quarter as compared to the same quarter last year of this higly undervalued company.......visit this site........www.pkblogs.com/sumanspeaks in the afternoon or evening.....

Caution:

Even as the macro-environment appears encouraging, it is the sharp rise in the debt burden that could affect earnings growth. Healthy cash flows from operations could lead to a pruning of debt levels over the next couple of years. Concerns regarding corporate practices and the risk of de-subsidiarisation are also cause for concern. But this aspect appears to have been largely priced in at the present valuation levels. According to sources the freight rates are expected to rise another 30 % to 40% by March, 2007. Also in May,2006 there was a bulk deal of 1 Cr shares of the company at an average price of Rs.36.80. If the investors were willing to pay such high price in May,2006, when the shipping rates were not that strong, I do not think there is any reason that such investors will not throw in more money to acquire the shares of Essar Shipping after so many happenings in the company. Also can anyone imagine the share price of a company having a fleet size of 27 ships, most of them young, having a total tonnage of 1.3 DWT trading at a mere price of Rs.25. This looks absurd to me. Next mini-research reports on Samkrg Piston and Rings, Garnet Construction Ltd and Zenith Computer Ltd. etc will be presented here. And why is Monnet Ispat rising......????!!!! Best wishes, Suman Mukherjee India. http://finance.groups.yahoo.com/group/SumanSpeaks/