Executive Summary

GESCO, like others in the industry, was affected by the fact that FY99 was one of the worst years for the dry bulk shipping segment as a whole. Both vessel earnings and values fell with severe pressure on profitability. Operating profits was lower on account of a fall in number of vessel operating days. Moreover, there was a general decline in the tanker and LPG markets thanks to the continuing effect of the SouthEast Asian crises, which resulted in lower volumes in Asia. The offshore vessel division of the company was also affected my declining oil prices which made any exploration and production project unremunerative. The property development division’s operating profits fell by 17.3%yoy as the property market remained largely inactive for most of FY99.

The domestic shipping industry is made up of a few large players. In the past it operated in a fairly insulated environment. Overseas activities dominate Indian shipping, due to attraction of foreign exchange earnings and also slow development of coastal shipping. Indian fleet of 7.08mn gross registered tonnage (GRT) of 501 ships and with an average age of about 14.2 years, comparing favorably with the global average of 17 years. But its competitiveness is eroded by the higher dependence of Indian foreign trade, removal of tax benefits and comparatively lower fiscal and financial support vis-a-vis competing nations.

Though operating in a regulated industry, the GESCO management has done well to record an above average RONW. Entry into real estate business, is in line with most international companies, and provides a good avenue to deploy temporary cash surplus. Management has also been shareholder oriented, by disclosing division wise operational profits, discussing, elaborating and justifying at length various apprehensions of the shareholders.

GESCO is fairly insulated from the swings in Baltic Freight Index (BFI) as almost half of its tonnage is on fixed price contracts. This held true for FY99 too. The recent economic turmoil in ASEAN countries has reduced global trade traffic and has also pinned down the BFI. However, in the last few months the BFI has touched the level of 1300 and this is positive news as far as GESCO's future earnings are concerned. With the oil refining sector being thrown open to private participation, many projects are expected to come on-stream from next year onwards. With the existing shortage in tanker capacity, GESCO has done well to purchase four new crude oil tankers in order to strengthen its fleet. However, there is concern that higher interest and deprecation and lower treasury income will offset earnings growth from increased tonnage. Withdrawal of tax concessions, reduced cargo support by Government and scrapping tanker cost-plus freight rates also act as a damper.