ATAL BIHARI VAJPAYEE- INDIAN INSTITUTE OF INFORMATION

TECHNOLOGY AND MANAGEMENT GWALIOR-474015

Great Eastern Shipping Company Limited

(Case Study)

Submitted To:- Submitted By:-

Dr. Vishal Vyas Abhishek Chaurasia
(2017IMG-002)
Ques 1) How has GESCO performed in the past? What is its financial structure, and how has it
changed over the years? Examine the current dividend policy of GESCO. How does this
compare with the dividend policies of Varun Shipping Company and Chowgule Steamship?

Performance of GESCO in the past can be seen from the financial stats, which are there in
Exhibit 3 [ Financial Statements ] and Exhibit 4 [ Operating Income and Revenue by Divisions ] of
the study.

Administration Expenses: It tends to be seen that the organization has expanded use in the
organization by 2.4 times as of the year 1990-91 in the year 1993-94 to give better organization
administrations.

Operating Expenses (direct): In the years 1990-91, it was 93.83 crore Rs, yet in 1993-94, the
organization diminished it to 72.85 crore Rs which represents a 22.36 % decrease. This shows
that the organization decreased its roundabout consumption costs, which implies the
organization has discovered a few other options or substitutes or more ideal arrangements on
the lookout.

Income: We can see that absolute income has expanded from 289.06 crore Rs in 1990-91 to
530.44 crore Rs in the year 1993-94, which is 1.835 occasions. This increment in income isn't
too large however is huge and shows that the organization is attempting to expand its income in
order to improve benefits.

Operating Income by Division: It tends to be seen from Exhibit 4 that Tanker, Offshore, Real
Estate, and Trading had seen an increase in opening income throughout the long term, while
Bulk Carrier's working income had decreased from 44.22 crore Rs to 25.22 crore Rs which is
roughly 1.75 occasions. This implies that the Company's benefits from Bulk Carrier tasks are
diminishing throughout the years in light of contenders or some other explanation.

Profit After Tax: Benefit after tax is additionally seen as a proportion of an organization's
productivity after the entirety of its costs have been deducted and completely used by the
organization to direct its business. Investors are likewise delivered profits from this sum. PAT of
the organization had expanded from 37.14 crore Rs in the year 1990-91 to 136.78 in the year
1993-94 which is around a 268 % increase.

Financial structure alludes to the blend of obligation and value that an organization uses to fund
its tasks. This piece straightforwardly influences the danger and worth of the related business.
The financial structure can be advised depending on the obligation to-value proportion, which is
determined by isolating all out liabilities by equity.
D/E ratio of the year 1990-91: 0.9
D/E ratio of the year 1991-92: 0.45
D/E ratio of the year 1992-93: 0.418
D/E ratio of the year 1993-94: 0.395

It very well may be seen that throughout the long term D/E proportion has diminished.

An organization that pays for resources with more value than obligation has a low influence
proportion and a moderate capital structure, prompting lower development rates.

Profit strategy of GESCO: they mean to limit the profits. They perceived the recipe for-profit
strategy to restrict it to a level of net benefits after tax since they need to hold as much benefit.

Year Cash Dividends (Rs) No of Shares Amount paid (Rs crore)

1989 1.20 68,065,371 6.68

1990 2.00 68,065,371 13.61

1991 2.40 71,315,371 17.12

1992 3.05 85,578,445 26.10

1993 3.25 171,244,246 31.02

It tends to be seen that the profit per offer and number of offers over which profit is paid had
expanded throughout the long term.

Company 1990 1991 1992 1993

GESCO 13.61 17.12 26.10 31.02

Chowgule Steamships 1.22 2.46 2.46 3.63

Varun Shipping 2.40 2.95 8.06 9.97

GESCO competitor’s dividend policy: They utilized until now the strategy of estimating their
privileges at the least expensive conceivable worth.

These are the profits paid by GESCO and its two rivals throughout the years in Rs crore. Also, it
has expanded by 2.28 times for GESCO, 2.97 times for Chowgule Steamships, and 4.14 times
for Varun Shipping throughout the long term (from 1990 to 1993).
Ques 2) Despite the moderate growth in earnings after tax, why is the company proposing to
reduce the current year’s dividends? What constraints will the management face in drastically
changing the dividend policy of the company? What are some of the unintended consequences
of this change?

In spite of the reasonable improvement in income after paying the taxes, the organization is
proposing to diminish the current year's dividends. Each Rs 100 the organization delivers in
profit, the investor gets Rs 95, so there is an absolute loss of assets in moving cash from and to
the organization.

As indicated by them, an organization's expansion would be quicker in the event that they
remove less from it in dividends. There are a few factors that influence dividend policy, the most
significant of which are the accompanying:
(a) legal rules,
(b) liquidity position,
(c) the need to pay off debt,
(d) restrictions in debt contract,
(e) rate of expansion of assets,
(f) profit rate,
(g) stability of earnings,
(h) access to capital markets,
(i) control
(j) tax position of shareholders.

Because of the progressions in dividend policies, the firm's share prices likewise respond to
changes in dividend policies. As needs be, the shareholders take the choice based on the
company's dividend policies. At whatever point firms change their dividend policies,
shareholders settle on their speculation choices in like manner.

As per Chaabouni (2017), dividends have a flagging impact as dividend installment gives the
data about the organization to the market. In real they give the sign to the market. As the
organization's dividend has been declared, it improves the firm share prices. Based on dividend
declarations, shareholders, investors, and potential investors anticipate the situation of the
organization with regard to profitability. Then again, when organizations cut their dividend
installments, it contrarily influences the organization's standing, gives negative signs about the
organization to its investors and diminishes the share prices.
Ques 3) Discuss the Chairman's statement. Discuss the competitive environment of this
company and how do this influences the dividend policy of the company. What options
has the Chairman listed to raize the funds?

In Exhibit 1 of the Case study, the Chairman of Great Eastern Shipping Company, Mr. K.M. Sheth,
is trying to make a statement that not paying the dividend is in the Company's favor, and he is
later trying to justify it.

GESCO is mostly in the shipping field. Shipping is a type of business that requires a lot of
capital. In this field, rates of freights and cost of ships fluctuates very frequently. A shipping
company should always be cash wealthy, and to improve its equity, it must reduce its
borrowings. The shipping business has seen a shipping capacity growth because of the bigger
cargo that was built during the 1980s. In the 1970s average cargo ships were 1000-2000 TEU’s,
but the capacity grew to 4000 TEU’s till mid-’80s and up to 7000 TEU’s till mid 90’s.

(A TEU or Twenty-foot Equivalent Unit is an exact unit used to measure cargo capacity for
container ships and container terminals).

The shipping industry is mostly dominated by private ship-owners and contractors, due to which
they look at their investments with a medium to long approach. If they are independent, they
need not worry about paying the dividends and ensuring immediate return on equity. Thus all the
earnings can be retained for the company’s growth.

The competitive nature of the industry requires GESCO to upgrade or procure fresh capital to be
able to compete in the business with the private ship owners. And as suggested by the
Chairman, the best way currently is to retain the earnings. This investment will be beneficial for
all in contrast to paying dividends. He explained with an example that if the company pays a
dividend of Rs.100, the shareholders receive Rs.95. During the transfer, there is a loss of capital
and cost of other resources that will be involved in transferring. The total loss is significant.

The four main sources of funds for GESCO as discussed by the chairman are:
1) Retaining earnings (by not giving dividends)
2) Raising fresh capital from existing shareholders via a rights issue.
3) Raising capital from investors outside the existing shareholders.
4) Borrowing from banks and other financial institutions.

Of these sources 1st and 4th, i.e, retaining the earnings and borrowing from banks, are the least
disturbing; the other involves issuing fresh capital that will permanently alter the company’s
structure.
Ques 4) Analyze the Chairman's view on the disadvantages of paying dividends. Do you agree
with them? Do you agree that the distribution of dividends is an ineffective way of maximizing
the shareholder’s wealth?

The Cons of paying dividends as discussed by the chairman:

● Competitive role: For the dividend that is not paid, it will be used in the growth and
expansion of the company which in the long run will make fortunes for the shareholders.
● High Tax Rates: From the example that was given by the chairman, for every rs. 100 of
dividend, the tax will be of Rs. 30. Instead of taking the dividend, investing it in the capital
will certainly be more profitable for the company. To pay the dividend Company needs to
incur the cost and resources for initializing the transaction, which can be removed if not
paying dividends.
● Structural Changes: If the company is to pay the dividends, it will have to raise fresh
funds from either existing shareholders or external investors. If raising funds from
external sources, then there will be permanent structural changes in the organization,
disturbing.

The loss due to high tax rates and expenditure on resources is not very pleasant because it
involves loss on each facet and leads to waste of resources. Shipping is a competitive industry
where private ship owners and other competitors build cargo ships with greater capacity. To be
able to be in business, GESCO needs funds. Using the earnings and profits from fiscal year
92-93 will help the company much more than trying to acquire fresh funds.

Stability or Regularity is an essential factor of control of most businesses out there.

Shareholders prefer substantial and regular dividends rather than fluctuating ones. A reduction
in dividend is considered a loss in revenue. Low dividends aren’t the first choices of investors
who look at making some quick profits.

Whenever a business makes a profit, generally, it has to pay business enterprise tax. Dividends
are rolled out after paying the taxes. When dividends are received by the shareholders, they have
to pay the taxes, which ultimately results in double taxation. Shareholders should realize the
actual quantity of profits from their portfolio by selling some amount of stocks every year.
Dividends don’t provide that flexibility as they are rolled out on the basis of proportion, due to
which some of the investors receive more profits than they want.

To conclude, paying dividends to the shareholders for GESCO isn’t the most effective approach
to growing profits and expanding the company because paying dividends to incur losses at
various stages. A smart investor always thinks of long-term profits of decreased dividends and
they can always generate more profits by dealing with the portfolio smartly.