Is GESCO Sailing In Or Out Of Trouble?

STRATEGY
Is GESCO Sailing In Or Out Of Trouble?

Ironically, its decision to focus comes just as the shipping business heads for its worst-ever global downturn.

By Chhaya

Bharat Sheth, MD GESCO It's the Great Eastern Shipping Co. (GESCO) way of becoming strategically shipshape. And shipping is the shape. After the All Fools' Day separation of its property-development business into a new company, GESCO is, by and large, sticking to its core. The irony is that GESCO is getting out of the diversifications it made to protect it from the downturns in the shipping industry. Just when the shipping industry is entering a downturn.

Avers Ravi Sheth, the 35-year-old Executive Vice-President at GESCO: "There are lot of things to be done. The company is restructuring. The demerger is the beginning of a series of initiatives to re-engineer the balance-sheet and improve shareholder value." As a first step, GESCO will gradually withdraw from the commodities-trading business, which contributed Rs 106 crore to its Rs 915 crore of income in 1997-98. Explains Sheth: "As margins in this business are not more than 1-2 per cent, we have decided to get out of it completely."

Also, BT learns that GESCO is planning to offload its 20 per cent equity stake--worth Rs 15.40 crore--in the merchant banking firm, Prime Securities, which made net losses of Rs 23.60 crore in 1997-98. However, the Sheths claim that they are not "actively looking" for buyers of their investments in either the financial services or the media businesses that they have ventured into.

Still, shipping it is for GESCO. Unfortunately, the notoriously cyclical industry is going through rough weather, with the downturn shrinking the demand for the transportation of commodities such as iron ore, coal, and steel, which drive the bulk carriers sector. Predicts K.M. Joseph, 55, Director (Bulk Carrier-Tanker Division), Shipping Corporation of India (SCI): "The dry bulk sector is in the doldrums, and is facing a historic low. The situation will remain gloomy for another year or so." And the tanker sector too may feel the pinch. Points out Srinivas Rao, 27, Shipping Analyst, HSBC Securities: "Imports of petroleum products will come down because of the significant increases in domestic refining-capacity."

However, GESCO is cash-rich, reporting net profits of Rs 164.23 crore in 1997-98; its reserves and surplus stand at Rs 104.38 crore. Moreover, the withdrawal from other businesses has been going on for 4 years now. For instance, the income from trading has been steadily brought down from Rs 295.33 crore in 1994-95 to Rs 106.18 crore in 1997-98. Adds Tabassum Inamdar, 31, Shipping Analyst at Jardine Fleming: "It is good that GESCO is reducing its interests in other businesses, and focusing on its core strengths. But what worries me is that the shipping industry is entering a downturn."

Nonetheless, the Sheths are upbeat. Says Bharat Sheth, 41, who will jointly manage GESCO with his cousin, V.K. Sheth, taking over from K.M. Sheth and his nephew, S.J. Mulji: "In 1991, when we diversified, GESCO was, principally, into bulk carriers, and it had a small presence in offshore service vessels. Today, we are reasonably diversified in shipping itself." In 1991, GESCO's bulk carriers chalked up 70 per cent of the shipping business, with 29 per cent made up by product tankers and less than 1 per cent by offshore vessels. Today, the mix has changed to 57 per cent (bulk carriers), 41 per cent (crude oil and product tankers), and 2 per cent (offshore vessels), respectively.

Claiming that GESCO is the country's largest offshore services-provider--and possesses the most diversified fleet--Bharat Sheth proclaims: "We are no longer dependent on a single cycle. We have also hedged ourselves, with a judicious combination of spot business and medium- to long-term charter business." Since GESCO deploys its tankers and offshore vehicles in medium-term charters; its bulk carriers in spot- and medium-term charters; and the drilling units are in long-term contracts of between 1 and 2 years, the mix is, indeed, judicious.

However, the outlook for both dry bulk and product tankers remains grim. While the Sheths are trying to address this issue by selling off 2 tankers (GESCO has 17), on the other hand, they are taking advantage of attractive prices to buy bulk carriers (28). All told, the Sheths clearly believe that they are in a business they know best; after all, GESCO is now 51 years old. Unfortunately, the storm has struck just as the Sheths have thrown their sea-sickness pills overboard.

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