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Investment can be considered for the stock of Great Eastern Shipping, as a significant scaling up in earnings appears likely in FY 05 from the high base of the past couple of years. Freight rates in both the dry cargo (ferrying of iron ore, coal and grains) and tanker (transportation of oil and oil products) segments are expected to remain at higher levels.

The freight markets had cooled off after a bullish phase that culminated in record highs earlier this year. But there has been a rebound over the past couple of months that has left tanker freight rates at record highs; dry cargo rates are between 10 and 15 per cent shy of their peaks.

The Chinese demand for commodities and higher growth rates in other economies have boosted prices as well as transportation rates. The anticipated slowdown in the Chinese economy — there has been a moderate decline in growth rates over the past few quarters — may not play party pooper unlike in the mid 1990s.

The decline in growth rate in the Chinese economy is expected to be gradual and it may still be in excess of 8 per cent. This should be adequate to support a firm undertone in freight rates. As the ships on order are delivered over the next couple of years, Great Eastern's tonnage is likely to expand and augment revenues. This is likely, as the process of modernisation — replacement of old tonnage to ensure a more contemporary fleet — has been largely completed. Its offshore business is likely to get a fillip from enhanced oil exploration activity.

We have several buy recommendations on the stock over the past two years at prices ranging between Rs 46 and Rs 160 (the latest was in January this year). We remain bullish. Returns are ikely to be of a sedate nature; the gains may not be of the magnitude obtained between early 2003 and now. The stock trades at a price earnings multiple of six times its likely FY 06 earnings. Buy with a one-to-two year perspective.

S. Vaidya Nathan

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